Frances McMorris, editor-in-chief of On Wall Street: How has retirement planning changed since this economic meltdown hit full force last fall?
Pat Daxon: Well, first, clients are reevaluating their current positions and the likelihood of being able to retire, especially those clients who [had] a very short time frame until retirement. Even the statistics of individuals [more than] 10 years away from retirement are alarming. A number of [them] feel they won't be able to retire when they had planned. It will be interesting to see over the next few quarters how business owners also start to plan out or reevaluate their business viability going forward, and how that may play into their retirement plans. That's one segment we're also looking to concentrate onbusiness owners.
Rene Kim: The reevaluation and the wanting to talk to somebody [are] bigger than ever. And, of course, there aren't a lot of great answers other than just sort of being there to help walk clients through their situations and what's happening in the marketplace.
Laurence Greenberg: We see it in accounts we're opening, especially transferred accounts. Asset levels are down. We've seen applications come in where numbers are crossed out and new numbers written in, which shows you how quickly this all happened. The suddenness of it is what has created a lot of shock. There was nowhere to hide, whether you're in fixed income or in equities, whether you're overseas or in the U.S.there was just nowhere to hide.
What we're hearing from our advisors, in terms of products, is that people are really looking at alternative investment strategies. The thing that happens [most recently] is what people try to plan for in the future. Also, a lot of the buzz in our industry had been around retirement income. That's still on the burner, but we're seeing more of a movement back to the whole question of accumulation for retirement.
OWS: You anticipated my next question. There's been so much talk about distribution and decumulation, is there now going to be a long-term focus back to accumulation?
Greenberg: Well, the issue of decumulation in retirement income is clearly important, but the fact is the vast majority of baby boomers are still not retirement age, yet. They're still five or 10 years away, so they're still in the accumulation phase. Plus, people were already retiring later or retiring and switching to other jobsand they're living longer, too. So people simply need to accumulate longer.
OWS: Rene, do you see this swing back to accumulation as well?
Kim: Definitely. We've been fairly successful in acquiring new clients, but the asset levels have declined as a result of performance across all asset classes, so generally speaking I would agree that accumulation is still very important.
Daxon: I would echo both Larry's and Rene's perspectives. As we continue to poll our financial advisors on how they approach their clientele, the vast majority of them are using what I would deem a planning-based approach with their clients. And most firms have progressed down the education aspect of expanding financial advisors' knowledge bases, and [have] also tried to align product and operational aspects.
OWS: For a long time everybody talked about 65 as the retirement age. Are your advisors advising a new, older retirement age? And, if so, what is it?
Daxon: Our advisors aren't really defining a new retirement age, but they are looking at this issue of older retirement ages. And, as Larry mentioned, there's a theme: Let's call it pseudo-retirement; where there's a transition from the traditional work phase or income phase into an alternative one. How does the planning provide for that?
What Happens Now?
OWS: So much money has been lost. How are advisors addressing investor unease, and what strategies are they using to build back those retirement portfolios?
Kim: Well, the first priority is making the conversations happen. More [customers] on the retail side are reaching out than ever [have] before to say, "What do I do next?" We generally advise getting back to basics. Make sure you're still saving money; make sure you're contributing to your 401(k); look at your asset allocation; see if your risk tolerance has changed, or needs to. One of the biggest challenges is that there really isn't an asset class, outside of cash, that performed [well] during this time frame. And it's not clear how that's going to change in the future. So where do you go for safety? That one's really tough.
OWS: Larry, you said earlier there was "nowhere to hide" in 2008. What are you doing to help address investor unease?
Greenberg: This is such a rare occurrenceonce or twice a centuryreally all you can do is reassess portfolios and keep people calm. If people have allocated their money properly according to their ages, maybe they're down 20%. Reassess where they need to get to. As people start to figure out that it's not that easy to manage money [themselves], we're going to see continued growth of advice, especially fee-based advice. And, out of that, we're going to see a lot of products that are really based around packaged advice in managed accounts. That will help fee-based advisors.
Kim: I was talking to the person here at Schwab who runs our managed portfolios[the] wrap product that we offer. Our wrap product has certainly suffered in terms of performance, but when you compare that to people who are attempting to do it on their own, it's a lot better. Granted, there are losses in nearly everything these days, but self-directed clients who have been trying to do this on their own are really finding that they need help.
OWS: Pat, what kind of conversations are your advisors having on the retirement question?
Daxon: About 55% of our top-tier financial advisors were holding group meetings to help inform clients and have clients share their concerns. And that reinforced [for clients] the notion that their concerns were not unique, they were common concerns. One of the interesting parts that came out of this was [that] some clients really wanted financial advisors to [talk about] their own personal situations. And a lot of financial advisors chose to include that in their communication pieces.
OWS: So they talked about how they had suffered losses?
Daxon: Well, not down to the dollar, but sharing what they were going throughsharing the feeling that they're not alone. Like Larry said, this happened everywhere, uniformly, within our system.
OWS: Rene, are there any new products in the pipeline, or are you tweaking some familiar ones to deal with this whole retirement fiasco?
Kim: There are, some of which I can't share details on, but we're certainly looking at products that include advice in them and making sure that we've got some very good pricing. That kind of packaged advice appears to be what clients are looking for. One thing we've seen, both on the registered investment advisor side and on the retail side, is a continued emphasis on safety while still trying to extract some kind of yield. We're using existing products in many cases ... reminding our registered investment advisors about the brokered CD platform we have at Schwab and the ability to get extended FDIC insurance by buying CDs from different institutions and placing them all in the same account, things like that. Just kind of refreshing the communications that we have about many of the products and services that are already on the shelf.
New Problem, Old Solution: Annuities
OWS: Will annuities become more popular for retirees, and, if so, which ones?
Greenberg: Well, I think they will, of course. Otherwise I'd have to look for another job. Seriously, we're one of the few variable annuity companies that offers a product geared only to fee-based advisors. We don't pay a commission, and as a result, what we've essentially createdand where we think we'll see a lot of growthis a managed account for fee-based advisors. It allows you to create a structured way of managing money for a fee-based advisor. And we've built that within a variable annuity, so you get the benefit of tax deferral. That's why, for example, our variable annuity offers over 200 investment choices instead of 40. It essentially is a tax-deferred money management vehicle.
Daxon: I would say that annuities will potentially be more popular, because, as Larry said, they can combine a lot of different offerings and may address numerous risks or concerns of the client. Then it's just a question of, 'How does it fit and how do you structure it?' We see annuities playing a role in trying to provide an income floor for many clients. Advisors in a portfolio management capacity still have to address market-oriented risk factors. We still have to address clients' behavior from a spending standpoint, and invariably clients are going to live longer. They will face health concerns. So the ability of a product to address multiple risk factors will be more of a common theme and would be advantageous.
Kim: A lot of people talk about [there being] three legs to the stool. Making sure your baseline expenses are going to be guaranteed is really important, and can provide a great deal of security to people entering retirement. For that reason, I think that there's a huge opportunity for annuities. But I do worry a little bit about people's confidence in the companies [issuing them], as you see some of the issues have happened as some companies file [for] bankruptcy. That [confidence issue] is going to be important for the financial industryjust the idea of wondering if the company is going to be around long enough to actually make their guaranteed payments.
OWS: Say you're a senior executive at General Motors, where things don't look good. And now you're at retirement age. What do you do?
Daxon: Well, invariably, you have a lot of financial advisors giving guidance to individuals, especially if the individual with the pension has a lump-sum option. Our team has had a lot of [clients] who, while not necessarily approaching retirement, have been given an early-retirement-type option [that involves] leaving it with the firm, taking a lump sum currently, or rolling it over. Fundamentally, it comes down to whether you think the company's pension plan can manage it better than, say, an annuity company. And that's a valid comparison. I will say that, over the last couple of years, the risk of default has become prevalent. I agree with Rene: [Gauging] the risk of default-[based on] who's guaranteeing or who's managing those assets-becomes more and more important.
And I want to dovetail back onto a point Larry made before-the prevalence of annuities going forward. I think he hit on a very good point: the ability of the product chassis to adapt to cost concerns. I see that-the ability to provide product-being more and more of a prevalent aspect. The question is: How do you address the costs of the structure you're providing?
Long-Term Care Remains an Issue
OWS: How important is long-term-care insurance? We've had experts tell us that wealthy individuals don't need it because they can self-insure. Will this attitude change in the coming years?
Greenberg: In many ways that whole question is a bit up in the air. [President Barack Obama recently] talked about working on Medicare and Social Security as key parts of his administration in terms of controlling costs, given the projected deficits. People who have plenty of money, however you define that, may be worried less about long-term care. But if you bring into question the role of Medicare in the future, which essentially covers most of what people pay once they hit that age, I think you open up a whole new area of concern on costs. The numbers you hear could be the equivalent of several college educations coming out of your retirement fund after you've already put your kids through college. I think that potentially will be a big open question and could create a lot of demand for products that cover some of those needs.
Daxon: There has been a [decline in general asset levels], so what may not have been a major worry before, whether health-oriented costs or long-term care, has become more of a concern. One of the aspects we have looked at is making sure our financial advisors are aware of multiple ways of funding those types of risks or insuring certain components of them that would impact a client's retirement. A common theme had been looking at different ways of mitigating that risk, whether it's a traditional premium-paying policy or an asset-based approach or assuming a certain amount of out-of-pocket costs but insuring the catastrophic cost.
OWS: Some advisors say they have to clamp down on clients' spending. Has the meltdown made this easier if clients are more cautious now?
Daxon: This marketplace has been a motivator for many clients to readdress their [current] spending levels, and [reassess] what would be a viable spending level in retirement. We've seen more financial advisors look at spending levels currently and [spending levels that would be] sustainable in retirement.
So there has been a lot of communication [between] our financial advisors [and] clients approaching retirement: [deciding on] a realistic spending level, given what has occurred; adjustments in asset values; and many additional what-if scenarios. Because before this type of correction, unless you go all the way back to 2002 and 2003, many financial advisors had been doing some sort of illustrative scenario where the worst-case scenario may have been a 2% or 3% rate of return. And now we have more financial advisors looking at the sustainability of certain income levels even with a dramatic draw-down in a client's assets base.
Greenberg: I can't speak directly to client behavior, since we work with the advisors themselves. But in my experience, consumers always misjudge how much they're actually spending when they first retire. They usually underestimate their initial level of spending, and they overestimate how much money they'll need once they reach 75 to 80, when spending generally drops off a lot. Many advisors are very reluctant to address the subject. They may have models where they do simulations, but a lot of advisors feel uncomfortable when it gets down to the level of doing a budget for consumers; or [even] bringing up the discussion. It's certainly something that needs to be addressed, and it's probably not done as frequently as asset diversification and projections on asset growth [are].
Kim: I totally agree. We have those other conversations you just mentioned far more often than we have a budget conversation. A lot of it depends on what type of investment manager you're talking about, but I know that among our financial consultants in the branches, it's not the favorite conversation to have.
OWS: Should advisors now be more forceful with their clients about retirement goals?
Kim: Your responsibility as an advisor is to have those kinds of conversations. Now is a great time to check in again. So, whether you're independent or a financial consultant in the retail space, you're probably not doing your job as an advisor if you're not reaching out and saying, 'Hey, we need to have this conversation about where you are relative to goals, about what has happened to your portfolio, et cetera.'
OWS: There have been calls for changes to the 401(k) system because of the losses that have been suffered. Do you believe there's going to be much change, especially in a regulatory sense?
Kim: This is just my opinion, not Schwab's necessarily, but I think the shift from traditional pensions to 401(k)s has pushed a tremendous amount of responsibility for savings and investing on people who have never had it before and who weren't prepared for it. Even in the case of high-net-worth [clients], a lot of the people are not master investors. So I'm hopeful that before we do something completely radical in the 401(k) space, we think hard about that and about how we make sure people know what the heck to do with their 401(k) dollars and how to approach investing.
Daxon: I don't know what they would practically be able to change, or for what reason. We have seen trends in the 401(k) industry that I think are positive. As Rene said, employees were tasked with investing their own funds and they never really had a skill set for that. So you've seen things to help-like bundled products, target-date [products], funds-of-fundsthat are more turnkey for the employee. There's automatic enrollment, automatic escalation. So I'd say there's been good progress. Strides have been made that are positive for the employees [and] the end consumer, and hopefully the rate of improvement will continue.
Greenberg: There's a big issue of people not participating in their plans, which in theory would be fine because it's their choice. But if it becomes a question later of who's going to help them when they get older, it becomes more of a societal issue. There's talk about making [401(k) plans] an opt-out, not an opt-in, so automatically your money's deducted from your paycheck where you don't see it. Another issue that may come up is the notion of pooled plans. Rather than have plans by company, you could have competing national plans that are portable from company to company, to lower the cost. I have to believe that 401(k) plans are going to mirror the talk about healthcare plans; in some way you're going to look to more pooling to lower the costs. In healthcare, it's the companies. And in 401(k)s now, it's the individual. Five years from now they're not going to be the way they are today.
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