Sunday, February 06, 2011

“Money Back” Guarantees

We’re seeing a renewed focus on retirement income of late, and for good reason.

Most participants seem barely able (or willing) to deal with the most rudimentary decisions about saving, much less investing those savings; and while the industry has developed tools and approaches to better their odds, IMHO, those challenges pale before that of crafting a workable, widely accepted, and readily implemented retirement income solution.

Not that retirement income solutions don’t exist for participants. Setting aside the long-standing availability (and viability) of “traditional” annuities, over the past several years, a number of innovative solutions have been brought to market. Indeed, by my count, three more were introduced just last week.

Clearly the market for such offerings is large, and getting larger by the day—and yet, despite a great deal of time, energy, expense, and focus, well, let’s just say that plan sponsors (still) seem as confused by the variety of choices in that arena as they were (mostly) oblivious to the distinctions in target-date fund structures. And, quite frankly, they’re sceptical (if not downright cynical) in a way that they never were—but should have been, IMHO—about the ability of a fund complex to craft an investment allocation perfectly aligned with the needs of an individual’s retirement date.

Most trying to “solve” the retirement income problem presume that we already have a workable, viable product available—we need only figure out better ways to get participants into “it”. As a consequence, legislators (and some product providers) talk about things like “auto” annuitizing—the implementation of an annuity default for distributions to overcome resistance—while academics are inclined to focus on behavioral finance design modifications: better ways to “frame” or position the option, to “nudge” participants to make the “better” decision.

At its simplest, an annuity is nothing more than an investor handing over money (or a stream of money) to an entity that promises, at some point in the future, to return it to the investor, ostensibly with some kind of return, above and beyond whatever fees are taken. Consequently, at least in theory, a participant who has spent their working career saving for retirement should be able to take those savings and hand them to an entity that can return it over time as a retirement paycheck.

But that remains a big step of faith for most, particularly in the wake of the financial crisis. After all, who CAN, or should, you trust with that much money—literally your life’s savings?

Don’t get me wrong—I’m encouraged by the new product developments, the interest of regulators in helping lay out a better course, the suggestions and insights of the academic community in fostering better plan designs, and the willingness of plan sponsors to keep an open mind.

But ultimately, when it comes to spurring the widespread interest of participants, IMHO, the best product design will be one that offers them a “get your money back” guarantee (1).

—Nevin E. Adams, JD

(1) Editor’s Note: Let me attempt to stave off correspondence from the American Council of Life Insurers who, the last time I penned a column suggesting that participants might be a bit queasy about the notion of converting their savings into an annuity, wrote to assure me (and presumably all of us) that “The five trillion dollar life insurance industry, which alone can provide annuity contracts, remains a pillar of the nation’s financial system. While the effect of the nation’s economic downturn has been widespread, not one annuity owner has missed receiving annuity payments.”

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