David Macchia

Interview with Bob Kerzner: LIMRA International President & CEO Describes Benefits of a LIMRA/LOMA Merger; Cites Career Advantage of Field Experience

I originally published this interview with LIMRA’s Bob Kerzner about 3 months ago. With the organization’s Annual Meeting taking place next week in Boston, I thought now would be a good time to share this in-depth conversation with one of the life insurance industry’s most senior leaders. Readership has more than doubled since its original publication so many may have missed the interview the first time it appeared:

rkBob Kerzner
is a passionate advocate for the life insurance industry. Since 2004 he has been the President & CEO of LIMRA International, a world-wide organization dedicated to providing its nine-hundred member companies research, value-added marketing and distribution expertise. As Kerzner describes it, over its ninety-year heritage LIMRA has become the repository for all of the life insurance industry’s knowledge and research. Kerzner offers us some valuable insights in this wide-ranging interview including comments on the insurance industry’s future role in Boomer retirement.

Macchia – To begin, Bob, and before we jump into the LIMRA discussion, I think people would be interested in knowing about Bob Kerzner, the executive. Would you be kind enough to talk about how you came into the financial services industry, how that began, and the steps that led you to your current position as President and CEO of LIMRA?

Kerzner – Sure. Actually when I graduated from college, David, I said that I would do anything except sell life insurance. It was the only thing that I had absolutely indicated I wouldn’t do.

And yet an opportunity came my way that I absolutely found fascinating. It was, in fact, an opportunity to sell life insurance in a different way, working through independent agents and working with their best, wealthy clients. Once I got into it, I found out that I loved it—that it was an intense business and one that would allow me to be creative in helping people find solutions to complex problems using a unique financial tool. I worked for one company for 30 years–working my way up from the lowest field sales position to field management and ultimately running the entire life insurance division with both top-line and bottom-line responsibility. I really had a wonderful career.

After I retired, I decided that it was time for a change, to do something different. Being CEO of LIMRA allowed me to use my 30 years worth of knowledge in a very different way and allowed me to do something bigger for an industry that I’ve grown attached to.

Macchia- Your answer reminds me of something, perhaps because it’s reflective of my own background. But I’ve always believed that people who entered the business through the door of sales, people who have had real experience at the retail level, who understood the dynamics of prospecting and presenting to retail clients and all that that implies, that such people obtain what amounts to a life-long advantage in terms of how they are able to apply their knowledge and skills of the business no matter where their careers may take them. I wonder if you buy into that?

Kerzner- Unequivocally. My experience in the field–having the experience of actually sitting across a table from a potential customer and trying to convince them that our product could solve a problem –gave me a unique perspective when I was running the division many years later. I don’t think that there’s any other way that you get that kind of perspective.

And frankly, one of the saddest things today is that very, very few of the most senior people – the CEO roles in our industry – are coming from the field. We’re certainly seeing less and less. And I do think that you get a very different point of view, as you say, that stays with you forever.

Macchia- A relevant analogy can be found, again, in terms of my own experience in which I describe my having had a leg in each of two separate and distinct ponds. Meaning, the different experiences of the world of agents and distribution, the salt water pond, and another set of experiences having to do with he business challenges of product manufacturers- the fresh water pond.

I observe that it’s rare that these two ponds meet and the water becomes brackish. And because they do not meet well, it’s seldom that there is genuine understanding of each other’s challenges and frustrations and it’s rare that meaningful communication exists between the two populations. Do you agree with how I see it?

Kerzner- Well, from my viewpoint I see it slightly different. We’re creating a product in our business that’s very technical. It must be passed through 50 different states, often the SEC, and the NASD, which will care about how you sell it. During the development process, it’s easy to get wrapped up in the complexities and lose sight of the consumer’s needs.

I think that having the experience of facing customers eyeball-to-eyeball, face-to-face gives you a perspective to step away for a moment from all of the technical parts and say, “OK, how is this going to play out at the kitchen table.”

Macchia- Let me ask you about LIMRA. LIMRA is an organization with a long history. It has a high profile, and it’s well thought of. For readers who may not be familiar with the organization’s mission and activities, would you describe them?

Kerzner- The first thing, to your point, is to explain that LIMRA is ninety years old. If you think about how few companies make it ninety years, I think that will tell you that there’s something about what we’ve done that is significant.

First and foremost, LIMRA is about research. For ninety years we’ve been the repository for of all the industry’s knowledge and research. Generally speaking, when somebody reads a report about insurance or suggests that somebody’s number one in the industry, they’re usually referring to LIMRA’s benchmarking of the industry.

We also do a lot of the forward-thinking research about where the business is going. We’ve certainly been conducting more consumer research to try to understand how people see our industry, and think about our products; and what motivates people to buy or not to buy our products.

A leading strength has also been in the distribution area. We’ve trained many managers throughout the industry. Most of the industry’s senior people were products years ago of LIMRA training.

We’ve expanded abroad. We’re now in 64 countries worldwide with more than 800 member companies. We’re now training in emerging markets in Eastern Europe, as well as throughout Asia, on ways to modernize distribution and increase productivity to help companies be more successful.

Macchia- That’s certainly a broad array of activities LIMRA is involved in. But I want to ask about the organizational structure. LIMA is chartered as a non-profit organization, I believe?

Kerzner- Yes. We are owned by our members. They fund all of the research, but I should mention that we also have businesses that are not part of our 501 C(6). We have a wholly-owned subsidiary that provides an array of services to the industry. For example, for 65 years we have done the testing for companies to determine who is most likely to become successful as a producer. Today, we do similar testing for a number of fortune 100 companies, including leading stock brokerage firms. We’ve become significant in the compliance business. We help provide shared solutions to the industry designed to address real problems companies are facing.

Beyond the research, we conduct an array of other activities, such as consulting, with a strong practice in compensation planning. And, David, I think I’d be remiss if I didn’t mention one more thing that is really at the core of LIMRA, and that is networking. We run a broad spectrum of conferences and committee meetings throughout the year where people who share the same roles and responsibilities can talk about and share best practices, share ideas and really get to know one another. That’s a really important aspect of LIMRA. It’s where the industry meets.

Macchia- Sort of a vortex for the insurance industry.

Kerzner- I like your word better than mine.

Macchia- Let me ask you about another issue which may become very important in LIMRA’s future, and that is the idea of a merger between LIMRA and LOMA. I presume that the decision to combine LIMRA and LOMA comes out of an analysis that defines synergies and benefits arising out of such a combination. Will you talk a bit about LOMA’s work and then describe the benefits you see resulting from such a merger?

Kerzner- This is really an idea whose time has come. It’s been looked at in the past and for a variety of reasons, the timing was not right. LOMA is clearly in the education business. While we have educated the field, LOMA has been the major educator of the Home Office staff. Their FLMI designation within the back offices of companies is really the designation, the gold standard. It is the training, the broad knowledge that industry professionals want. Both, because of the depth and breadth of that training and because it actually helps them do what they do better.

LOMA runs conferences just as we do, but often there’s more of a technology or efficiency focus. So while we do many of the same things, we do them in different parts of the organization. Coming together helps us take care of the totality of these education needs.

A combination is also greatly complementary. They have built a great e-learning platform. We have not done that. Why should the industry pay for two e-learning systems? The benefits of merger are that the industry could have, for the same capital outlay, a much broader capability to serve the entire life insurance company. So, those are just a few of the highlights.

Macchia- Bob, I’d like to shift to some challenges and opportunities facing life insurers. As you know I am a creature of the insurance business having begun in 1977 as an agent at the lowest rung. I very much value the 30 years I’ve been associated with this industry. I’ve had opportunities and financial rewards beyond anything I could have hoped for including an excellent education. So as someone who has gained a lot from the industry I’m an advocate for its best interests in the future, especially in terms of the Boomer retirement opportunity.

I often times think, however, that life insurers are not likely to reach their fullest business potential unless and until some of the most intractable challenges and problems that hold back its growth are first identified, and then dealt with and eliminated so that the industry can set itself up for robust growth.

I wonder if, at a high level, this is something that you think about? And if it is, perhaps we can explore some subsets of this?

Kerzner- It’s something that we think about a lot. In fact, what I can tell you is that in large measure our annual meeting, which is our most senior and largest conference of the year, is really aimed at these very topics. This year’s theme is about execution.

In my opening remarks, I will take a clip of a comment made last year by the president of a major mutual fund company who charged that the life insurance industry is going to blow the opportunity because they have not been very good at execution. Ironically, that mutual fund company is owned by a life insurance company. So, I thought it was a particularly interesting statement. We took it seriously enough that we built this year’s program around the concept of execution. What does our industry have to do to capture their fair share of that opportunity that everybody knows is the biggest in history?

A couple of the things that are important to look at: First, many companies are too siloed to look at the total needs of the customer–we don’t spend enough time as some other parts of the financial services industry to really understand what the customer wants, how they think. Although, we certainly think that LIMRA can play a role in that piece.

Second, there’s a lot of discussion about whether we take too much of a product focus. The industry often takes a manufacturing view. Is that the best approach? Third is an issue that LIMRA talks about—it’s part of who we are, our fabric— and that’s distribution. The number of producers continues to decline in terms of career agents. The number of new agents continues to decline. So, will there be enough distribution to meet these needs? And, if not, which we believe is a certainty, what will the new avenues be to get our products in front of people more often?

So, these are some of the key issues that will be focused on at our annual meeting. I might mention that our special guest will be Alan Greenspan, who will certainly tell us about some of the macro-financial issues that we need to be thinking about.

Macchia- What’s you’ve articulated here is in my day-to-day wheelhouse. Let me begin this by telling you that one of the reasons that this blog was started was to try to galvanize the attention of industry leaders to some of the very challenges you’ve just mentioned. One of the issues that I’ve written about extensively is reflected in my own experience where 30 years ago I entered the business at the end of the rate book era and then saw that the introduction of the PC began to change things rather dramatically.

It became easier for agents to assess the relative benefits of different companies’ products, whereas previously they may have been focused exclusively on a single company’s products. And this led to a major shift in the way producers work which has led to today’s reality that most agents are independent agents.

As this change took root the insurance companies tended to revert to a stance where the concentration was increasingly on manufacturing products rather than developing producers. The intensive training and education that was once routinely provided was in many cases eliminated, and agents transitioned from career agents to what might be termed “free agents.” And I would argue that this is one of the most significant reasons that the industry is plagued by a poor public image and poor sales practices. I wonder if you buy into that historical chain of events and its leading to some of today’s problems?

Kerzner- Yeah…. ah… unfortunately, I think that there’s a missing piece in what you’ve suggested. We have created a model that actually talks about the natural events that occur as a market emerges. What I can tell you, David, is that virtually all countries begin with a very strong career agent system and over time, alternate distribution begins to enter. Part of the issue is that somewhere along the line, products begin to become much more sophisticated, producers may well not be trained adequately, sales practices become aggressive and issues emerge around mis-selling. Now I should be clear that this even occurs in alternate distribution.

So, it’s not just agents. Those practices tend to invite tighter and tighter regulation. There tends to be a scandal resulting in poor public image and then, ironically, it tends to become more difficult to recruit more people because now the job is harder. Anyone today, who has to go through the myriad of 30-page proposals, 200-page prospectuses and all of the rest, can certainly see what happens as products become more complex like they do in a mature market. But you can’t just lay that at the company doorstep. In fact, unfortunately, the actions of producers, whether they are career agents or people working for financial institutions, help to create this problem.

Macchia- You know, I think that’s fair. But don’t you also think there’s something more? As career agents have increasingly become independent, they have also become more increasingly underproductive than they were in the past. For instance, when I was a young agent I was expected to achieve at least one sale of life insurance per week. And some of the veteran agents completed two or even three sales each week. This is phenomenally more productive than today’s agents achieve.

As low productivity has taken root among the agent ranks there’s a natural tendency to seek out products which pay higher levels of commissions on each individual sale. And so you have the emergence of a viscous cycle where companies are more reliant on independent agents to a greater extent than ever before, and they attempt to placate the agents’ desire for higher and higher compensation, which leads to less and less consumer value in the products and to an ever-increasing negative public image. This creates a vicious cycle which is difficult to interrupt. Do you see that?

Kerzner- Well, yes, but once again let me cite some LIMRA data. In fact, over the past 30 years, the number of policies per year sold–hence the number of families we touch–has consistently declined every year, proving your point that agents have become less productive. However, producers at the same time are selling a total amount of life insurance premium that continues to escalate.

So what I would suggest the data says that, number one, agents have gone upscale and have continuously moved more up-market, selling fewer but larger face-amount policies. Second, as you are well aware, agents are selling a much broader array of products than 30 years ago. They can sell annuities, mutual funds- and life insurance. So some of that decrease in productivity has to do with the producers’ ability to get to their income objective by selling investment products, which are easier. Certainly when I was President of the broker-dealer, I saw that when annuity sales skyrocketed, life insurance sales often went the other way. So I think, David, that today producers can get to their desired income level in different ways.

Macchia- I agree with what you say but I would also argue that simple inflation over a 30-year period would account for a large increase in the size of the life insurance policies sold.

Kerzner- You’re absolutely correct, in fact when you look at the industry on the life insurance side, in constant dollars we’ve actually been declining rather than increasing as the numbers suggest. That’s a fair point.

Macchia- Let me jump into another assertion I make which may be off-putting to some, but it’s something I believe to be true after many years of personal observation. And that is that the life insurance industry- somehow- simultaneously develops both the world’s finest sales people and the world’s worst marketers. And that the poor quality of marketing accounts to some extent- and maybe a large extent- for many of the industry’s contemporary challenges. Would you agree with this assertion?

Kerzner- I think that there’s been a history of us doing a good job on one-on-one sales but a far less effective job at building corporate images of marketing as other have done in other sectors of the financial services industry.

I actually am optimistic in that in the last 12 months I’ve seen a difference here. If you look at a number of companies and how they are positioning themselves in today’s environment, you see improvement. I even played segments of a number of companies’ commercials at one of our conferences last year to show how I felt that they were doing a far better job of marketing, on image, on outcome, and on getting people to think about the kind of retirement and lifestyle they want. I think that they are doing a much better job than a couple of years ago. There’s even one company that’s doing an outstanding job of creating emotion around our products, getting to the core triggers of why someone buys life insurance. So I think that the companies are getting better at marketing.

Macchia-I’m glad to hear that because I believe that to a great extent, the emotion component has been what’s missing from so much of the industry’s marketing initiatives. I’m happy that this is starting to happen now as the Boomer retirement opportunity begins to unfold. And I’d like to move our conversation in that direction, if I could.

Kerzner- Sure.

Macchia- One of the products that has emerged in recent years and has morphed considerably since its introduction is the variable annuity contract. The variable annuity is beset today with its own negative perceptions which, I would argue, derives from historically ill-conceived marketing strategies and poor positioning.

I say ill-conceived marketing and positioning because over recent years the VA product was showcased as an alternative to other investments such as mutual funds. This invited criticisms over comparative cost structures not to mention unfavorable income tax comparisons.

Now with the recent refocus on guaranteed withdrawal riders, it seems the variable annuity product can be re-characterized, repositioned as what it really is- an insurance vehicle capable of delivering a set of benefits that can be extremely beneficial to people needing a guaranteed baseline retirement income.

I wonder if you see the issue this way, Bob, in terms of my belief that there’s been an historical mistake made over the product’s positioning, and that now there’s an excellent opportunity to re-focus the insured aspects of the VA contract? And that these insured benefits have costs which are justifiable? I guess what I’m saying is, do you see this as a timely opportunity to correct past mistakes and set the stage for growth in the VA line?

Kerzner- I think that there are a lot of complexities in that proposition. Let me go at it this way. I was in the field. I used to talk with a client about the two lives of an annuity- the pay-in period and the pay-out period. I tried to make absolutely certain that clients understood that one of the significant advantages was the tax preference during the build-up years, and that they really understood why that was a benefit. And in the early years, that certainly was a key component of what got us the attention–the fact that you could get those gains in the market, you could supplement your retirement savings … and it was a good forced savings vehicle.

We spent hardly any time regrettably—and this is where I think we made the mistake— in talking about what annuities do best in terms of the pay-out phase. When we hit the downturn in the market, many were concerned that variable annuities would suffer a precipitous drop in sales. And here’s where I would take a slightly different perspective and say that I think the industry did a great job of determining what it is that the consumer really wants. LIMRA data suggested that more absolute certainty is what the consumer wanted. What people love most about our industry is our guarantees.

A lot of very creative people, David, did a great job in saying, “how do we make this product, which is about risk and upside in the market, how do we take some of that sting out of it?” Many of the riders we have today grew out of that.

But also during that period, I believe, companies—because of the downturn—did a much better job of making people understand that the death benefit really was extremely valuable. I’d agree, however that there was a period of time that we didn’t sell that benefit well and didn’t make people understand its true value.

Let me conclude with this. The industry has enjoyed seven consecutive quarters of record-breaking sales of variable annuities. That’s in large measure due to the creativity, to the improvement in positioning and the creation of these riders, which gave American consumers more of what they said they wanted.

Macchia- Well I agree with much of what you say. And you should know that I’m a strong advocate of the variable annuity. I believe it’s underutilized. But I would… not challenge… but remind you of the fact that while sales growth has been obvious, there are still inherent weaknesses in those results in the sense that approximately two-thirds of those sales derive from 1025(a) (1035?) exchanges, and we still have a situation where four fifths of advisors shun the variability annuity contract.

And to me this goes back to historical ineffectiveness on properly positioning the product. This is the challenge going forward, in my judgment. We’re talking about a unique type of product with a solid and valuable benefit structure, but minds have to be changed. And often the insurance business doesn’t get the benefit of the doubt…

Kerzner- And I think, David, we absolutely agree, and I’m not suggesting we can’t do much better—that there isn’t tremendous upside opportunity, and that there doesn’t need to be some different alternatives made available—to get those other advisors in the game. We also have to do a better job of using the product with younger clients in their forties, as a systematic tool for savings.

You’re right. But I can’t buy into “ineffective: which suggests that they did everything wrong. But I certainly concur on a lot of the issues you’ve raised. We could do a lot better. That would be where even more growth could come from.

Macchia- Yes, and you could argue that given the amount of money that’s going to be moving in the future, that, wherever VA sales are today they could be five times greater in the future.

Kerzner- And that actually gets to the next topic of Boomer retirement, where the ultimate war will be won or lost by each segment of the industry. It is about retaining the asset. That is the next battleground and frankly, the one for the next 20 or 30 years that really matters a lot. Clearly, annuities’ offer the potential to provide periodic payouts like no other financial vehicle can. And therein lies one of the great opportunities and still unresolved challenges for our industry: can we be the one to really get the income phase right? To take advantage of the unique structural, financial leveragable opportunities- and all that we do best- to really capture our share of the assets in the payout phase?

Macchia- That’s the key question. I think you’re exactly right. There are many elements to answering that question. Communications is a big part of it, technology is a part of it, competition is a part of it. Let me focus on competition. In the current issue of National Underwriter there’s an article written by Norse Blazzard and Judith Hasenhauer which talks about copycats eying the development of variable annuity type features. Here’s a quote: Most likely, every major investment firm is busily working on providing a GMWB to customers by mutual funds, managed separate accounts and even hedge funds, all without requiring the clients to become involved with a VA.”

I also recently noted an article which addresses the growth of structured products. And I’ve written myself about structured products and the fact that large asset management firms which have traditionally aimed structured products at the institutional markets are now aiming them increasingly at the high net worth market and, potentially, the mass market, with intention of replicating some of the core benefits found in traditional annuity contracts. In a recent interview at this Blog I asked Professor Moshe Milevsky about this very issue. Moshe predicated that within two years we may see a dozen major, new players- in terms of major asset management firms- coming to market with structured products for consumers that target what is inherently and traditionally the insurers’ playing field. I wonder if this is something that you and LIMRA think about and what the impact of new competition may pose in the way of challenges for life insurers?

Kerzner- Yeah, it’s a great question and it’s something that we think about a lot. We have begun working on what we call Phase Five, which predicts the future of the industry. And, in fact, what we say that it is highly likely that there will be other new players—different forms of competition—than exist today. We also did another study with a group called DSI, which is linked to Wharton, and we looked at four possible future scenarios of what the life insurance industry could look like in 2016. The two major axes that we thought would alter most the future of the industry were first, “will there or will there not be high demand?” And second, “what will the environmental climate for competition be?”

In the last five years, we’ve begun to use dynamic hedging. We’ve used financial tools from other large financial institutions that have made many of these guarantees that we’ve associated with our products possible and have made their success. Others, who accumulate assets are envious of our success and will look to emulate what we’ve done successfully to broaden their offerings. Americans have demonstrated that they are willing to pay an extra charge for that guarantee. So I do think that you are going to see new forms of competition from non-traditional sources. And as I say, this is one of the things that we are talking about and predicting. It’s highly likely.

Macchia- Bob, next I’d like to delve into one of my favorite topics and that is the issue of communications. Basically, I ask everyone I interview the same question on this topic. And I’m interested in the various responses I receive.

I believe quite strongly- and have stated publicly- that the high stakes business opportunity wrapped around Boomer retirement will prove to reveal winners… and losers. And to an extent-not exclusively, certainly- but to arguably a significant extent- the winners will not be those with the so-called “best product”, but rather will be those which excel at compliantly communicating their value to a large and fluid marketplace. I wonder if you agree with this assertion?

Kerzner- I’m not at all suggesting that’s not important but I think there are a couple of other issues. Number one, I believe that innovation is important. If you look at the leaders, you’ll note that they are often very early to market with major innovations and are constantly innovating. The bigger companies that are well positioned and are innovative, will be the most successful. That’s one of the things that will remain important.

I still believe that distribution is critical. The companies that have the best distribution will have one of the important keys to success. And finally, this issue we talked about earlier- execution- is important. Who will be able to put all the pieces together and deliver across a platform?

I’m not suggesting that communications isn’t crucial because, as you pointed out, more of the producers are independent. You’re going to have to communicate why you’re better, how you’re bringing more value. Not just to consumers but also to other distribution channels—and in a way that’s superior to competitors.

So I think you’re right, it’s one of the elements but to say which is most important is difficult.

Macchia- I think that’s very fair. I want to ask you about a quote that I saw recently from Mark Timergien of Moss Adams, who made some comments indicating that there’s going to be far too many consumers for the amount of available advisors. He also stated that 70% of the industry is made up of solo practitioners who don’t want to grow. I wonder what changes you envision that may have to emerge for companies to get to the effective distribution that you just described as being so important?

Kerzner- In fact, we just completed and released joint work with Mark and Moss- Adams on this very subject last week. We believe distribution will have to be substantially different in the future. That doesn’t mean that existing distribution goes away—but I will talk at length at our annual meeting about why we believe that technology is a game-changer. We expect technology will have a material change on how distribution could look in 5 to 10 years.

Just like we couldn’t have envisioned the impact that the iPod would have on the music industry, I think we could see distinctly new forms of distribution because of technology. Technology that makes the ability to purchase our products easier, as well as technology that allows us to get our message to consumers in new and different ways.

Macchia- OK, you know that I agree with that.

Now I’d like to end by asking you a couple of personal questions. And the first is this: If you were not the CEO of LIMRA but instead could have any other occupation in any other field, what would you choose to be?

Kerzner- I tell you, I ask that question when I interview people. I’ll be very candid with you. I’m enjoying this immensely and as corny as it may sound, there’s nothing I’d rather be doing.

Macchia: Last question. I want you to visualize your own retirement in its most ideally, perfect form. Where would you be and what would you be doing?

Kerzner- Retirement for me in its totality will be an oxymoron if I have good health. I need to be engaged, I need to be doing something. Retirement, as most people think of it, is an end point where I begin a different lifestyle without any responsibility. It’s hard for me to conjure up.

Macchia- I want to thank you for your time and your answers. This has been great,

Kerzner- I’ve enjoyed it, David.

Macchia- Thanks, Bob.

©Copyright 2007 David A. Macchia. All rights reserved.

Interview with Dallas Salisbury: President & CEO of EBRI Offers Fascinating Historical Perspective on Today’s Retirement Security Challenges; Reveals Preference for Mandatory, National Retirement Savings Program in Addition to Social Security

dsOne of the most enjoyable and enlightening conversations I’ve ever experienced occurred recently with Dallas Salisbury, President & CEO of Washington-based Employee Benefit Research Institute. For someone like me who is “hooked” on everything retirement income, listening to Salisbury’s answers caused me to reexamine many of my own strongly-held views on retirement-related issues

Salisbury offers both a fascinating historical perspective as well as a vision for the future that contains views that may surprise some who work on contemporary retirement income solutions. He’s a font of knowledge, experience and keen judgment, a voice for change, motivation and action designed to address America’s retirement security challenges.

Macchia – Let me begin at the beginning, Dallas, and ask you if you’d be kind enough to describe to my readers the history of EBRI, as well as your present role and responsibilities in the context of heading-up the organization.

Salisbury – Well, EBRI has been functioning since December 4, 1978. That was the day that we opened the offices. If one has to say who is responsible for the creation of EBRI it’s really former President Jimmy Carter because President Jimmy Carter announced that he was appointing a Presidential Commission on Retirement Policy, which he did, which was chaired by the then Chairman and CEO of the Xerox Corporation, Peter McCullough.

The founding organizations of EBRI at that time were 13 large employee benefit consulting firms, many of whom in the 1960s had been asked by the Kennedy Commission on Retirement Policy to do studies. They, all thinking that they were the only ones that had been asked, diligently did their work and then found out that a whole lot of duplicate work had been done since they were all doing it for free. EBRI was a way for all of those firms to assist the new Commission with data and studies but only pay for it once. So, EBRI came about as an enterprise that was not to advocate, it was not to lobby, our bylaws and incorporation documents actually have a prohibition against doing either of those things, and to do data, to do basic research and education and to build databases over time that would allow anyone that had an interest in retirement programs to be able to track the effectiveness of those programs, what those programs were, what they were doing.

Initially it was principally focused on retirement, and then about 1982, after the commission had finished its work and the decision was made to definitely keep the institute going, that was the point in time when we made the commitment to extend our work to the health area and broaden our work to include employment based health benefits, general health costs and health management issues and research on the Medicare program. We’ve been doing all those things now since then and maintain two websites, www.ebri.org, where all of our research since 1978 can be found, and www.choosetosave.org, which fulfills the other piece of the original incorporation mission which was public education and worker education on what these programs were, how they could benefit from employer involvement and the ways in which individuals should be considering their own health and financial futures.

Macchia – When you mentioned Jimmy Carter, Dallas, it reminded me of my entry into financial services in 1977, through the insurance door. I can recall back then that to a great extent life insurers were the custodians of a vast amount of pension assets and that defined benefit pension plans were quite popular and typical. It occurs to me that since EBRIs formation in 1978 you’ve had a view, a consistent view, over a set of phenomenal changes that have taken place in the landscape of pensions and employee benefits, generally. You’ve seen and studied the transition from Defined Benefit to Defined Contribution, the emergence of 401k programs, all the way to today’s level of popularity, and now the effort to institute Defined Benefits into DC plans. I wonder if you see a cycle that’s emerging. How do you view this phenomenal transition that’s taken place since EBRI’s founding?

Salisbury – Well, you asked about my role in all of this. I was the first employee of EBRI and have been the Chief Staff Executive since we started. I came to EBRI from two years with the Pension Benefit Guarantee Corporation, which is principally a Defined Benefit oriented entity, and two years before that with the US Department of Labor in what is now the Employee Benefit Security Administration where I set up their first Office of Policy and Research. I’ve basically been doing on some level the same type of work since late 1974.

To your point, the original EBRI board was principally made up of people whose background was as pension actuaries. Those firms role in the retirement area was overwhelmingly related to Defined Benefit retirement plans and actuarial work for Defined Benefit retirement plans. There were obviously in many companies thrift savings plans and profit sharing plans on the side, but for the vast majority of what would have then been the Fortune 100 and even the Fortune 500 had a Defined Benefit plan as their primary retirement vehicle. And the only thing they did as a retirement plan was a Defined Benefit plan.

You had a handful of exceptions, Procter and Gamble stands out as a company that has always been a profit sharing and Defined Contribution company, and I mention them because if one talks about design of programs that would do what the good old fashioned DB plan did, you’d have to look at somebody like Procter and Gamble where essentially year in and year out the contribution to Defined Contribution accounts has ranged between 15% of pay and 25% of pay, as I stressed year in and year out. Procter and Gamble still does that. Procter and Gamble provides investment options in spite of a fairly heavy emphasis on Procter and Gamble stock.

There’s always been the alternative of people taking the lifetime income annuity if they did not want to take a single sum distribution. Because it was a profit sharing plan where the employer was putting money in regardless of what the employee did, that plan always basically assured 100% participation of everyone in the workplace which is one of the other traditional features of a Defined Benefit plan. So, a healthy enough contribution so that people can retire with an adequate retirement income, a set of managed investment options aimed at allowing people to build enough up over time with that substantial contribution and the opportunity for life income security protection through a pooled annuity arrangement if people did in fact want to know that they wouldn’t run out of money before they ran out of life.

If one takes that transition to what we’re seeing in the work world today as Defined Benefit plans have morphed themselves you really have to go back to the late 70s when Atlantic Richfield Company amended its traditional Defined Benefit pension plan to offer single sum distributions. That led the Internal Revenue Service to do something that in hindsight was a very significant decision. Atlantic Richfield had added single sum distributions for a participant with high income. If your pension is not more than $35,000 per year then you have to take the first $35,000 a year as an annuity. That was the late 70s and so the vast majority of people weren’t going to have that big of a pension and could not take a single sum distribution. One might say it was a balanced policy that would assure workers a base income for life on top of social security. The Internal Revenue Service went into Atlantic Richfield and said, “All get a single sum or none can have it.”

As I recall, the Chief Actuary at the IRS, at an Actuarial Society meeting said, “And we know that Atlantic Richfield will choose none, and so there will not be lump sum distributions.” They didn’t understand that CEO very well who wanted a single sum distribution and Atlantic Richfield says fine. The IRS says we have to let all of you have a single sum distribution. Now, some decades later nearly 55% of Defined Benefit plans that still exist offer a single sum distribution at the point of retirement. Essentially out of that Defined Benefits system of those 55%, generally a minimum of 80% of the participants take a single sum distribution. Generally you end up with a maximum of 20% taking a life income annuity. In many cases it’s only 4 – 5% that takes a life income annuity. In some Defined Benefit retirement plans of large employers and small employers no one takes the life income annuity.

The notion of Defined Benefit plans that I was introduced to in 1974, frankly, began to be deserted by the largest Plan Sponsors in the United States before we’d even turned the corner into the 1980s. By 1984 when Kwasha Lipton, then a consulting firm, one of the founding firms of EBRI, in a consulting relationship with Bank of America, moved Bank of America to what is popularly known today as a Cash Balanced Defined Benefit plan. A second trend moved forward because part of that transition included a standard reversion of assets to the Plan Sponsor. A process of workers seeing very small balances upon the conversion relative to what they thought they ultimately were supposed to be getting out of that pension plan, and the decisions which Congress and PPA just finally dealt with after the IBM suits.

It took until 2006 for some resolution in 2007, of essentially issues that began to be implemented in the Defined Benefit system in 1984. You then add on top of those combined actions the total restructuring, if you will of the largest enterprises in America. Microsoft didn’t exist in 1974, and today it’s one of the nation’s largest employers. Outside of the state of Arkansas Wal-Mart did not exist in 1974, and today it’s the largest single employer in the world. We have basically seen a growth of enterprises dominant in marketplaces, Starbucks didn’t exist in 1974 that have grown up as Defined Contribution only companies.

Those Defined Contribution plans have another very different mix than what the profit sharing plan than Proctor and Gamble did. In those plans the employer automatic contribution has always been diminumus. Large percentages of workers have not chosen to participate and even when they did participate the amount that the employer would contribute has generally been quite small relative to what we can describe as the Proctor and Gamble standard. If we then go to the final, if you will, today’s transition point as very large American companies, the IBMs, the Verizons, the Lockheed Martins, that were originally tradition Defined Benefit companies and have gone through a morphing process and are now at the final stages of essentially saying that we will no longer have Defined Benefit plans. In the case of IBM, no one will be in those plans post 1/1/08. For companies like Lockheed Martin and Verizon there will be continuation for some that were already there and just transitions for new workers. So, we’re seeing different varieties, but what we’re seeing when they put in the Defined Contribution plan that goes to your comment of “making them look like Defined Benefit plans”, I stress that they don’t in any way, shape or form look like traditional Defined Benefit pension plans, if you will, my father’s Defined Benefit plan.

Pop died in July months short of turning 94. He retired in 1978. He wasn’t given a single sum annuity option; it was a final pay plan, etc, etc. This transition is that we will have automatic enrollment, but you can still opt out. The result found in the data is that between 10 – 30% do opt out, even with the automatic enrollment. We might do automatic contribution escalation. So far that data is that a minority of firms will do that. We might do an automatic employer contribution. A very small percentage of firms are doing that. Those that are doing it are doing it generally with an employer based contribution of 2 – 5%. For most individuals that will not be enough, even if the employee contributes the same amount. If they started saving at 20 the needed rate would be at least10%, and if they didn’t start contributing until 35, the required annual amount would be closer to 23% per year.

So you end up having gone from a Defined Benefit and in a Proctor and Gamble case, a profit sharing plan where the employer was putting in enough money to provide a full career worker with true retirement income adequacy, to what has come to be termed a Defined Benefit/Defined Contribution system where most employers automatically put in nothing, where a large portion of employees can fail to participate and where still only about 20% even offer an annuity, life income annuity situation. Essentially none require a mandatory annuitization.

If we look at the experience of the last 30 years where Defined Benefit plans have offered the option, very few people will chose to do what my father had to do, which is take that life income annuity. It’s the morphing that changed over that 30, nearly 35 years has been dramatic and I think so dramatic that we really do need to underline that even with all of the changes that are now being talked about and undertaken for Defined Contribution plans, that even if all of those changes take place those programs, in the absence of aggressive individual savings that exceeds anything individuals have done in modern history, will never accomplish or achieve what Defined Benefit plans did, or what profit sharing plans of the Proctor and Gamble variety did. That says, even with that redesign that the principal shift of all of this is that even the best off workers will have to do far, far more for themselves than was the case under those old systems.

Macchia – You know that’s a fascinating historical perspective that explains the implications of many changes over the past 30 years. It reminds me of the countless seminars I’ve presented over the years to audiences of consumers. I can recall about 10 years ago making comments about the transition to the 401k plan that 401k essentially was one of the greatest financial foibles ever foisted on the American public. Back then I might have said that the transition away from DB was motivated by greedy corporations that wanted to improve their balance sheets and free themselves of long-term obligations. I wonder if there’s a more sophisticated answer to that, and I wonder if your dad’s own experience offers the pristine example. Where having retired in 1978 and now still receiving benefits at age 94, if that singular example crystallizes the larger phenomenon, that it’s simply impossible for those types of plans to be financially viable over the long term.

Salisbury – Well, to respond to two pieces of that. Maybe people today would stop and say the Employee Retirement Income Act of 1974 did great things without commenting on whether that’s true or not on a net net basis. The greatest unintended consequence of that law has been the demise of Defined Benefit pension plans and the rise of Defined Contribution plans. Because one of the principal issues, and I’ve gone back and read all of the prehistory and there’s a very fine book that was published some years ago, a couple of years ago, on the history of the enactment of ERISA called “The Employee Retirement Income Security Act of 1974.” It was a history, a political history written by a guy named Jim Wooten and published by the University of California Press. It was telling in a cover quote by a guy named Dan Halperin, who was a tax staffer at the time that ERISA was passed and is now a Professor of Law at Harvard, when he said, “This book is a wonderful, detailed, intensive description of the history of an important piece of social legislation.”

The social legislation, part of that legislation was that leading up to ERISA all of the focus was on the absence of benefit portability. It was a focus on these programs doing amazingly positive things for people like my dad who did spend 30 years with one company. But there was a lot of analysis in the 60s about so-called portability losses and one of the most intense debates and also reasons for ERISA was to put into the law vesting standards and to say that these programs that only pay benefits to people that have been there for 20 or 25 or 30 years, well, that’s wrong. As you know the most recent legal changes, there are cases now that go all the way down to 3 year vesting and immediate vesting. The moment you went with that change you assured a shift in plan design as you fundamentally changed the cost equation. There is a notion and a mythology out there that in the good old days everybody used to work for one company for a full career, yet, if that had been true, you would not have needed faster vesting. You would not have had portability losses.

When my dad retired in 1978 at that point in history 16% of all workers in the private sector and going into retirement, 16% had been with one employer for 25 years of more. At the most stable, the very most stable companies, you will find of the oldest workers today, maybe 25% of the oldest cohort has been with the company for a full career, but when you look at 1952 to present median job tenure the total labor force has always been about 4 years. That’s a long way of saying that we’ve always been a very high turnover society and a long way of saying that very few of us have ever spent one career, had one long career with any employer. Put that in the sense that you’re describing.

Pre-ERISA if 12% of the people that I ever hire will retire from me and I’m doing a Defined Benefit plan and I’m promising 60% income replacement if you spend a full career with me and I fund it over time and everybody that leaves, meaning over time 80 plus percent of the people leave, every dime that I in theory contributed for all of them is going to pay the benefits of that small group that stays. ERISA comes along and says all those people that are leaving and not getting anything are losers and that’s wrong. The economist entered, bless them, and said this is a denial of deferred compensation. These plans are deferred compensation which isn’t how the companies ever thought about them in any individual worker sense, only in the aggregate. The companies thought about them as something to make sure that people that are still with us after a full career can afford to retire or we can retire them and it’s an expense and we’re paying people over here and over here on the side, if we do well with investment returns we don’t have to make any contributions, so how can there be an ikndividualized deferred wage?

But Congress keeps bringing down the vesting period and what do you keep on doing? More and more and more of the money that’s going in is being paid out in small lump sum distributions to this huge number of people who leave between 3 years and 15 years or 20 years, the vast majority of the workers. So the majority of the money in a post-ERISA world, particularly a post-GAT amendment 1990s world, and the vast majority of the money going into a Defined Benefit plan gets allocated to short service people. It is not that my dad lives to nearly 94 or that somebody else lives to 100 that makes a Defined Benefit plan a financing, if you will, problem. If the money going in is going in to pay for those long service people the contribution cost can be low, but if I have the kind of leaking problem that fast vesting introduces, then I end up with a real challenge which requires higher contributions or a reduction in future benefits. That ends up when you think of 1984, the movement to cash balance, that the legislative decision to move the system to fast vesting, essentially imposed on an employer a career average type of contribution with a so-called final pay design. By moving to cash balance and defined contribution or lower benefit formulas cost could be kept low, the money was spread to more people, and the long service worker of the future would get a lot less.

Suddenly I say, well what’s that interpret into? For an old fashioned pension plan for somebody who’d been with me for 25 years and was approaching retirement age, if I were to actually put enough money in this year to pay for this year’s additional accrual, I’d be contributing 25-30% of their salary in their final pay formula. In this new world of equality you go to 1984 we’ll just tell everybody you’re all going to get 4.2% and you’re going to get 4.2% each and every year. Here’s the account and we’re going to tell you that’s what it is. We’ve got very fast vesting, and we need to put in money for everybody, and there’s very little redistribution of money from the leavers to the stayers, so there is not reward for tenure. Why not just do a Defined Contributions plan rather than all of the expenses and legal requirements tied to the Defined Benefits plan.

So, as opposed to the notion that this change has taken place due to greed or anything else, I look at it backward over my 33 years of involvement and say basically what we’ve done with the law is we’ve simply designed something legally that is totally and completely in conflict with what the plans were originally intended to do, which was to provide lifetime income security to the people that were still working for you at retirement age. If I was to put that in a contemporary debate, it is the equivalent to the contemporary debate that President Bush has been most vehement on which is changing part of Social Security from Defined Benefit to Defined Contribution which is the equivalent of saying we really aren’t interested in lifetime income security being achieved at the lowest possible cost thorough a group pool that redistributes across individuals depending upon life expectancy.

We’re interested in capital accumulation and at the end of the train we want to hand the individual that capital accumulation and give them individual choice and ownership and basically say you decide. This is no longer about lifetime income security in the sense that if we’re going to make you take an annuity so there is no conceivable way that you can run out of money before you run out of life. We’re saying instead we’re going to give you money and you can spend 100% of it in the next 12 months and have 30 years where you’re living off of supplemental income and Medicaid, your choice. I don’t even view it as a corporate ideology issue if I put it on the President, what we’re talking about, has been a general movement away of a theory of community and risk pooling and if you will the redistribution that is implicit in an insurance type of arrangement which is what a traditional DB plan was.

Moving to the individual fight, at this point, in that sense if the only true Defined Benefit plan to be pejorative is the traditional old Define Benefit plan that was an annuity only plan then essentially at the moment there are no Defined Contribution plans that are attempting to mimic the true Defined Benefit plan and in fact a growing proportion of the remaining Defined Benefit system is no longer made up of true Defined Benefit plans. It is made up of hybrid programs that in most cases will produce single sum distributions and will put the decision risk of whether money runs out before life or vice versa on the individual as opposed to that being institutionally protected. You then add a component to that which is what I was getting at with the new company phenomenon. If ERISA had been in effect in 1950 traditional Defined Benefit plans never would have come into existence. The huge growth of Defined Benefit plans that took place in the 50s and 60s would not have occurred because if ERISA’s funding standards, most particularly if one were to say what if PPA, the PPA amended ERISA had been in effect in 1950 there would be no Defined Benefit system.

It wouldn’t have happened because what the genesis of those Defined Benefit plans was the ability to take people who were at retirement age and give them past service credit of 10, 20, 30 years, accept a huge unfunded liability, and to be able to amortize that unfunded liability over an almost infinite time period and to be able to manage exit of a large number of people, so the people coming back from the war could take jobs, and doing all of it with borrowing against the future cash streams of the firm. Today’s PPA would say to those companies, you do that and you’ve got to fund it off within 7 years and within 7 years you’ve got to be 100% funded. The economic capacity just would not have been there…wouldn’t be there today. If you take that environment and say what started happening in post-1974 and you start looking at those enterprises now on the Fortune 100 and 500 that came into existence post 1974, and I don’t mean by renaming or merger, I mean companies that actually grew and came into being through new technology, those companies basically to overstate it, it didn’t even occur to them to put in a Defined Benefit plan because they didn’t have the primary motivation of the 50s which is a whole lot of existing older workers that we want to entice out the door with a pension.

Macchia – This is again a fascinating historical perspective which is very helpful. I’d like to go back to Social Security for a moment if I could, Dallas, because that is a Defined Benefit structure that is fraught with challenges, as you know. We’ve seen clearly in terms of President Bush’s efforts to introduce privatization and other conversations around Social Security in recent years that any talk of changing that system becomes immediately highly political and polarizing. I wonder what you feel will be the implications of politicians not being able to transcend that, continuing to arguably show a lack of political will, what happens if there isn’t the capacity to address some of Social Security’s inherent weaknesses?

Salisbury – If we limit Social Security as you’re using the words to the retirement program, totally separate and apart from Medicare and the health side of it, the reality which is recognized by the administration and is documented by the actuaries is that the social security retirement program has very little problem. The change in payroll tax that would be necessary to have the program be fine for 75 years is di minumus. The change in benefits that would be required of the change in retirement age, the changes that would be necessary to have the current program sustainable into infinity, are minor changes.

Macchia – Can I just stop you there and explore one aspect of that. If the Social Security surplus is being invested in long term treasuries isn’t there a sharp implication for the future in terms of redeeming those and potentially having to lower benefits and raising taxes?

Salisbury – You’re describing a general fiscal issue as opposed to an issue of Social Security.

Macchia – But aren’t they interlocked to some degree?

Salisbury – The degree to which I personally don’t believe that they are ultimately interlocked is that ultimately Social Security benefits being paid on a continuing basis is going to be the difference for almost every working American of whether they watch their parents or their grandparents continue to live decently. Or, they welcome their parents and their grandparents into their home and they start supporting them directly. Then adding a second component. In the last Presidential election, approaching 45% of all votes cast were cast by people over the age of 65. By the next Presidential election it will be pushing 50%. By another 2 – 3 it will be nearly 60% of all votes cast in elections will be cast by people 65 plus, unless ounger voters start voting at much higher participation rates. Older voters and one looks at the polling, older people even less than their kids don’t want to be dependent upon their kids, they don’t want to move back in with their kids.

You end up with this dynamic of will there be the political will even with all of the balancing, will Social Security benefits be paid? Call me an optimist or pessimist or fatalist even with the Social Security trust fund being federal debt securities is I believe that those benefit promises will in fact be paid just given the dynamic of the population and the implications of them not being paid. Especially, and I underline the especially since relative to other issue areas, and I’ll use medical as the example, is everybody and it’s the majority, about 95%, everybody gets a Social Security check.

Listening to a Congressional hearing yesterday 6% of Medicare beneficiaries account for 50% of Medicare spending. If you end up in a dynamic, a political dynamic of the overage 65 population and their children being put up against the wall and the choice is we can continue to promise you health benefits in the event you get sick or we can continue sending you a Social Security check. Which do you want? Income or a promise of health benefits if you get sick? That’s like my trying to convince my employees to take no salary and to take health benefits. Do they want health benefits on top of salary? Absolutely, but if the choice is between income or health benefits, base income, they take income. This year 38% of the nation’s retirees have on single income source, it’s called Social Security. 64% of today’s retirees have a primary income source.

More than half of their income is called Social Security. Retirees 85 plus 62% of their income on average comes from Social Security. If one looks the old curves of health expenditures and health benefits is if you’ve put it in the terms you’re putting it in, ultimately the ultimate trade off decisions of the government, let’s assume they were going to filch on the dead, but can we filch on the benefits. If given what the options are, now defense is important to me, but is it more important to me than bread on the table. The health insurance promise is important to me, but am I willing to live in the gutter or in a box in order to have health insurance? No, I’m not, thank you very much. Putting it starkly in your push comes to shove type issue, relative to honoring the Social Security benefits promise, could Congress at some point end up saying okay, beginning 44 years from now benefits will be axed. Conceivable. We’re going to raise the retirement age, we’re going to match it to life expectancy, and we’re going to have CPI minus one. It’s what I mean by the issue that the adjustments they could make are relatively minor that would secure the program. I’ll use President Bush as the example. If President Bush wanted to secure Social Security as part of his legacy, he could get that through Congress before the end of this calendar year if he was willing to accept changes that did not include individual accounts.

Macchia – By doing what?

Salisbury – By simply going to the hill and saying no individual accounts, no fundamental restructuring of the program, here’s the list that we all agree from the Social Security actuaries are the things that we just have to basically fill a shopping cart off of in order to make the adjustments. Retirement age tied to increases in life expectancy, slight adjustment in the benefit formula for high income individuals will move the maximum wage base from roughly 100,000 to 125,000 or 150,000. Pick your level. Oh gee, we only had to do four things and the program is fine forever. Great. Done. Let’s go home. Let’s go worry about the big issue called Medicare. But because the actual Social Security problem is so small, there is not a feeling of true necessity to fix Social Security, therefore one can spend all one’s time having an ideological argument about I want Defined Contribution, I want fundamental change.

Macchia – Let me take us back into the commercial pension world where we have obviously a voluntary system. Do we need to have a universal mandate for, say, 401k?

Salisbury – It all depends on what the objective is. I was moderating a panel yesterday at a conference that looked at just that issue and what was striking from panelists from the right, the Heritage Foundation, and then the left, the Brookings Institution and Pensions Rights Center, along with the person that was there speaking from the World Bank. If you’re objective is individuals definitely having income in retirement and not being able to run out of the money before they run out of life, the consensus along that ideological spectrum was: that can only be achieved with mandates, it can only be achieved with mandatory contributions, it can only be achieved with mandatory rollovers or basically you can never borrow and spend the money, and it can only be achieved with mandatory life distribution.

I choose life distribution versus annuity because there are different ways to get there, but it’s a guaranteed payout over your lifetime. That represents a whole bunch of changes that everybody at the panel table that I was moderating agreed were the components that would be necessary if your objective was real income security in retirement. Every single one of them then said: none of those changes are politically feasible. This is the descriptive versus the normative. The descriptive is what you see happening in the private sector today in planned design decisions. It’s what defaults are all about. But it is a default rather than a mandate because of he fear of backlash. Do we know what we would have to do with these programs to have them actually achieve the objective of lifetime retirement income security? Yeah, we all know that. Are we willing to do that? No, because we don’t want to be dictatorial.

We think a lot of people would be upset with whatever the list of issues is. Everybody is trying to do it with defaults, with tricks, with incentives, you name it, but what we know at this point based on at least the 35 years that I’ve been in this field, for any bit of research that anybody’s done, regardless of their perspective, is that in the absence of that type of structure, which pejoratively speaking is the traditional Defined Benefit pension plan, the true one, or a slight modification of the Proctor and Gamble profit sharing plan, meaning the company putting in plenty of money, and then paying life income annuities indexed for inflation, to get to the objective, or in a governmental sense Social Security setting aside a method of true advance funding. Those are the things ultimately that will be needed if we want people to be able to retire and we don’t want to be back in the 1930s where most elderly Americans are in poverty.

Macchia – You recall that a couple of a minutes ago I mentioned years ago commenting in seminars on 401k plans. In another series of seminars I commented about the relatively low personal savings rate in the US. At the time about 4% in contrasting to Germany’s 8% and Japan’s 12.5%, and we’ve seen in the US that the personal savings rate has consistently come down and down and down. We also have another behavioral issue where people make poor investing decisions based upon emotions. We have seen the ascendancy Defined Contribution plans to a state where many would agree that participation levels are insufficient and deferral levels are too low. We have this confluence of facts that together, arguably, serve to substantially reduce retirement security.

In my commercial life I all the time think about the fact that the key to changing behavior and helping people make better decisions that more appropriately serve their long term financial interest is that we must to a much better job communicating around these issues in a world that’s very complex, in an industry that has its own jargon and can seem unfriendly. I often liken it to medicine where if I’m listening to a conversation between two physicians that are talking about my health or potential health problem it’s very hard for me to understand their conversation because it’s got its own unique vocabulary and I think that some of that analogy carries over to our business where we can communicate in a way that is not easy for people to understand. I’m wondering if you agree with me that communication is a big part of helping people make better decisions and ultimately strengthen their retirement security?

Salisbury – I think that communication is a key component, but I’ll then put in the caveat that we published earlier this year an issue brief on the role behavioral finance and behavioral economics. David Leibsonson from Harvard did a luncheon presentation yesterday on those topics. Most of the behavioral finance experiments that have been done to date end up documenting that at the margin, meaning with the best intended, best educated, highest income people, education and communication can be shown to have success. But all of the research that he was going over from the behavioral economist is that with the bulk of the population it’s largely lost on them no matter how much effort goes into it and how good a job an enterprise tries to do. One on one counseling has the best results, but that is both expensive and limited. If one uses the health field as like a case manager, if you use this field it’s then like everybody having a truly objective and independent financial manager, planner that is actually worrying about everything and doing everything and budgeting for you.

You only have to talk to the planner twice a year and we know that when an enterprise will do that, the people they do that for, it leads to a pretty high success rate. When I want to be optimistic about this and the changes that are taking place what I frankly focus on is the reality of the world that is what led to the concerns when ERISA came into being. The year that ERISA was enacted, the first year that we have good data on after that was 1977 and of everybody that was retired over the age of 65 in 1977 could come out of private sector employment less that 10% of them were getting pension income. 90% were not. 2001 was as good as it ever got coming out of the private sector.

Just under 24% of those over age 65 in 2001, the high point; just under 24% had income coming from a private pension plan. That’s now come down. By 2005 it was approaching 23%, we see it’s going to come down progressively at this point. The dynamic of the existing system, the reality of the system is that when we historically suggested everything’s okay because we have Defined Benefit plans, that system was still not doing anything for 75% of the people in the private sector, yet they all had this notion that they read in the press and they heard on TV that everybody works a full career, everybody gets a gold watch and a pension. You look at old survey data and people believed that they would eventually get a pension.

Now we know from the data, the historical stuff we do for a living at EBRI, it never really was the case and the reality of today’s world what people read about, they think, they say, well, I’ve got to worry about myself, the fact of it is that most of them always did. If you then look at it and say, okay, in the good old days 10% had pension income, meaning pre-1977 the really good old days. In the somewhat good old days, the period through 2001, coming out of the private sector less than a quarter did, three quarters didn’t. We’re morphing forward and from the existing voluntary system it looks like it’s going to stay below a quarter fr some time unless we make some fundamental changes in the system that go beyond frankly what anybody right now is advocating, whether Democrat or Republican, Liberal, Conservative.

Macchia – Let me ask you this. If we know that the idealized notion of retirement of years spent lounging by the pool was never quite true, then knowing all that you know about what’s happening and how you conceive the implications of all of this for the future, at the gut level do you find yourself personally optimistic or pessimistic or perhaps vacillating between the two?

Salisbury – I guess that depends on what I’m being optimistic or pessimistic about. Take your communications point. I subscribe to anybody that says transparency is what people need. I subscribe that communications, the way where communications can be most effective is if it’s transparent communication that says to people, most people won’t get X, most people won’t get Y, most people aren’t going to have pension income, most people won’t have retiree health benefits, most people, most people, most people. The fact is that could have been said for the last 100 years, it just wasn’t being said. So, transparency and that communication is going to take everybody and put them in a mode of thinking that says, good gosh I wasn’t going to think about this until I was 50, maybe I’d actually better think about it at 25 or 30 or 35, hoping that the sooner they wake up the better.

Macchia – What you’re implying is that transparency equals candor.

Salisbury – Transparency equals candor by all parties.

Macchia – One of my big frustrations as somebody whose life’s work is in communications is that at least in the initial phases, the advertising for instance that we see from big financial services companies has framed retirement in this idealized manor. You’re 65 and now is the time to learn to parachute or snowboard. And we’re going to help you take you through this delightful, ideal, next 35 or 40 years.

Salisbury – I think to your point that the huge challenge to the degree this imaging is imaging that to use your phrase comes from the financial services industry; the financial services industry for very understandable business reasons is focusing all of that advertising on a small number of people that have money. If one looks at the population demographics and the number of people who actually have anything resembling a meaningful amount of money you’re down in the single digit millions. All of that is directed at that single digit millions of people that from whatever set of sources have reasonable assets.

All of those financial services companies are competing for the attention of that small number of people. In essence for the bulk of the people that don’t have the means and I know friends that are in the focus group business who pull people in and check this, the people that don’t have anything know that’s not going to be what they are talking about. It’s one of the reasons that the most recent date year from the Bureau of Labor Statistics is 2006 and in 2006 of those between 65 and 69, 34% still had income from earnings.

In 2006 of those 85 plus, 8% still had income from earnings. In the last 7 years for the first time we’ve seen a straight move up the percentage of individuals over 60, 65, 70, 75, the proportion of those populations continuing to work is going up. Ironically this combination of transparency in communications of what you may not have, what you need to double check maybe if you go confirm, you have it or you don’t have it. Then you see this picture from the ads and you say well, I know I’m not going to have that. What George Bush has managed to do, along with many others, over the last 20 years, is convince Americans under the age of 40 that they are not going to get Social Security.

So, in this communication they have convinced people that the floor won’t even be there. What that’s interpretation into in the surveys is more and more and more younger people saying, well, I know that I’m going to have to keep working. So where’s then the challenge? The challenge then is the number one financial problem the Social security program does have. It’s called a disability income program. It’s called the explosion of disability claims and it’s the 40% of those that retire before they wanted to that retire because of health reasons that keep them from working. That’s the component of this that is the other need for transparency in education which is he no ability to work and earn risk for people.

Macchia – I don’t even know where to begin to complement you on the insights. If I may I’d like to transition to a couple of questions that are personal in nature. Here’s the first one, Dallas. If I could somehow convey to you a magic wand, and by waving this wand you could affect any two changes, anything at all that you’d wish to change particular to the financial services industry, what two changes would you make?

Salisbury – Well, the financial services industry would end up being secondary to my two primary changes. They would, however, be dramatically affected by them. I’ve been doing what I’ve been doing for 35 years because what I believe in is the whole notion of a retirement system as a retirement system that on some level assures that people run out of life before they run out of money. It’s why I took the job; it’s why I’ve stayed with the job. That’s my normative objective and EBRI is not in the normative business, but you’re asking me a personal question. If I were King we would have a system like some have proposed in the past, the first one from the private sector was one of my founding trustees, the late Bob Paul, who at the time was running the Segal Company, and that’s a notion of a national mandatory savings requirement where there is savings where that money is in fact invested in the private sector, but it’s invested on pool basis on a very, very low fee basis, on a default diversified investment basis, but I’ll repeat, very low fee.

It would have a mandatory annuitization on a life income survivor benefit inflation index basis where the measure is not “adequacy” which for most is never achievable, where the measure is a fully prefunded supportable supplement on top of Social Security. That creates a pool that allows the entire financial services industry to go about doing what they are doing at the high end if you will, but it would for most working Americans that system would end up absorbing money that they are now putting into IRAs and frankly in many cases that they are putting in 401k plans and other places. It would be at a di minimus fee level compared to what many financial service providers now charge in that system. If what I just described happened it would have some fairly dramatic implications for the financial services industry, what they offer, the nature of how they offer it, and the nature of what they are able to charge for it. It would clearly primarily benefit the low cost provider.

Macchia – Your answer reminds me of when I entered the insurance business in the 70s, the very first thing that I was taught was the great importance of the notion of forced savings. Of course, the cost structure of the products back then was very different than what you describe.

Salisbury – My very first job was at the age of 14 and I worked for a savings and loan organization. One of the things that I went out and “marketed” by handing out brochures was their Christmas club.

Macchia – I remember Christmas clubs.

Salisbury – My grandfather was the second person in the United States to get the Certified Life Underwriter (CLU) designation, so while this is only 35 years for me, the notions of financial security, the notions of protection against risk, are something that between my dad having spent his whole career in different realms of insurance, my grandfather having spent decades in the insurance business, it’s something that I’ve had sort of water dripped into me if not genetically then by every other means my entire lifetime.

Macchia – Let me ask you another personal question. If you were not the head of EBRI but instead could have any other job in any industry or field, what would you choose to do?

Salisbury – Can I become a dictator for about 6 months? If I can become dictator for 6 months then I’ll just fix all of this stuff and then I’ll retire.

Macchia – I like your answer. Speaking of retirement, and because retirement is central to the last question, I’d like you to imagine your own retirement in its most idealized form. Where will you be and what will you be doing?

Salisbury – The thing I’ve always, and it’s advice that my family has given me since very early ages, is always try to find something that you love doing and that every single day you’re having fun. That’s why I’m still doing what I’m doing because every day I come and do this and I still have fun doing it and I still find it interesting and challenging and energizing. Whether I’m going to EBRI or “retired” or whatever, it will be just that, it will be to have fun in what I’m doing, what I’m thinking about, what I’m writing each and every day. It’s never been possession oriented, it won’t be possession oriented. It’s never been toy oriented, it won’t be toy oriented. It will be just trying to do things where I feel like I’m contributing and I’m having a good time doing it.

Macchia – I would say there’s no question that you’re contributing and you’ve certainly contributed to my understanding of the issues we’ve addressed. Dallas, is there anything that you’d like to talk about that I have neglected to mention?

Salisbury – Just the one component that we’ve only slightly touched on is I guess a closing note on the level of what people should have before they make the retirement decision and it’s just, I think, the degree to which if there was a single notation that the financial services industry could do as an extreme public service, we try to do this through our choose to save public education and public service announcement program, is just to absolutely convince people don’t sign up for Social Security benefits the day you turn 62, and don’t make the fateful decision to retire, unless you’ve sat down alone or with someone that’s an expert and worked through whether it’s the intelligent thing to do.

With life expectancy and all that it is, and as you’ve noted the long term issues of what will happen to Social Security, what will happen to Medicare, what will happen in job markets, etc. it’s a decision that most people spend almost no time thinking about. The majority of people in surveys report that the basis of the decision was, I’m eligible. A minority of Americans still ever report by the time they retire ever having done even a calculation of how much they needed in order to retire. In setting aside how much you need to save or investing or anything else if we could just manage to get people to at least not retire until they have sat down and made sure that they actually should be doing it would be the single greatest public service anybody could do.

Macchia – Here, here.

Salisbury – Good to talk to you.

Macchia – I can’t thank you enough. This conversation has been illuminating and rewarding, Dallas. Thanks a million.

Salisbury – Good to talk to you. Take care.


©Copyright 2007 David A. Macchia. All rights reserved.

Interview with Phil Eckman: President & CEO of Transamerica Retirement Management Cites Lack of Insurance Industry Progress Despite Years of Intense Product Focus; Calls for New Communications Strategies

philipeBack in April when readership of this magazine was much less than it is today, I published this interview with Transamerica’s Phil Eckman. Because many may have missed the opportunity to gain from Eckman’s vision and insights, I thought I’d share it with you today:

In this wide-ranging interview, Phil Eckman, CEO of Transamerica Retirement Management, talks about Transamerica’s view concerning the importance of the Boomer retirement income business as evidenced by the company’s decision to create an entirely new business unit. Eckman also addresses the challenges arising out of the inherently greater degree of complexity of insurance products, and stresses the need to develop superior, consumer-facing communications strategies in order to overcome that complexity.

Macchia – Phil, let me begin by asking you about your work. Please begin by telling us your title, your role and your responsibilities.

Eckman - My title is President and CEO of Transamerica Retirement Management, which is a new business unit that we’ve created within the AEGON USA/Transamerica Companies. My responsibilities center around building a new business unit that is solely focused on the unique needs of the boomers as they move into this transition called retirement. We’re leveraging what we have to offer from our various companies across AEGON/Transamerica family to help with these unique issues that folks are facing.

Macchia - Okay. I understand. Now, the progression of developing a retirement income solution at a large company can sometimes, if not often times, get bogged down with conflict among silos. Sort of the belief system that it’s my solution…no it’s my solution…no it’s my solution. Is what you’re doing at Transamerica an effort to cross silos in an effort of incorporate the best of all silos?

Eckman - Exactly. I believe that while it may not be an explicit objective, I think implicitly as we build out our group, we will cross silos and take ideas that have been working in one area of the company and have them cross over that line and bring them forward in another part of the company to reach a new consumer base. So absolutely, practically what’s going to happen is we will be taking ideas across silos and exposing them to mew markets that otherwise would not have the opportunity to see them.

Macchia - In terms of Transamerica Retirement Management and how it was developed, what thought process led to the creation of this entirely new business unit?

Eckman - Our CEO of AEGON USA, Pat Baird, about 2 ½ years ago challenged the management team of the organization to look ahead, think forward about this large retirement market that’s going to be coming upon our industry; to think hard about how we as a company can best serve the group, putting aside some of the typical issues around silos and short-term business objectives. A task force was put in place to look into these questions. One of the recommendations was to start a new business unit.

Macchia – And I gather the decision to start a new group implies that the entire retirement income business is deemed to be something of a very high strategic priority for the corporation.

Eckman – Absolutely. It has not been a cultural business strategy within the AEGON group to start new business units like this. We have strong, autonomous growth targets and we have a history of acquisitions, so to start a new group like this was entirely new.

Macchia - Phil, would you describe the introduction of Transamerica Retirement Management as an incremental change to the existing business model, a moderate change to the existing business model, or even, potentially, a large change?

Eckman - I think it’s a potentially large change. If we wanted to take an incremental approach, we would get working groups together, we would have senior management from the different divisions collaborate and then go back to their day jobs.

Macchia – As I observe it, Phil, distribution strategies seem to be evolving along somewhat philosophically- based lines. I often liken this to religions, in the same manner that we have various religions in the world. So, we have religions of distribution planning popping up, such as the religion of systematic withdrawal programs, the religion of laddered strategies, the religion of time-weighted strategies, the religion of lifetime annuitizatioin. Do you buy into this description what’s developing in the marketplace, and if you do- or if you don’t- explain how you see it, and where Transamerica Retirement Management might play in this context.

Eckman – You and I have talked about your description of this sort of religion analogy, and I think it’s a pretty good one. Each manufacturer or advisor is going to have a core philosophy around income management. Just like there are many ways to invest and accumulate assets, there are many ways to convert these assets into income. Some are simple, some are complex. Some are product based, some are planning based. Some offer guaranteed lifetime income, some do not.

We generally believe retirees should build two income streams. The first is guaranteed for life and is made up of Social Security, pensions, and some form of lifetime annuity income. This income stream covers the basic living expenses around food, housing, health care, etc. As retirement may last over 30 years for some couples, they have the piece of mind knowing that these essential expenses are always covered. The second income stream is not necessarily guaranteed and made up of a systematic withdrawal strategy, possible ongoing employment and possible home equity release strategies. This income stream covers the discretionary expenses of travel, entertainment, etc. Of course, the art is working with the customer first to build a plan that meets their unique situation and, second to support them over time to execute and tweak the plan. I guess you could say this is our religion.

Macchia –I did some searching on the internet and read where one of the missions that Transamerica Retirement Management has undertaken is to leverage AEGON’s extensive network of internal and external distribution partners in order to deliver solutions. Is that, in fact, true? And if it is, can you comment or go a little bit deeper into the strategy?

Eckman – Sure. We have to prioritize the opportunities before us as we build this group and march it forward. We’re starting in terms of distribution by connecting with our pension organizations, Diversified Investment Advisors and Transamerica Retirement Services. We are bringing product development, marketing strategies, and an advice platform to these organizations that leverage some of the capabilities across AEGON.

Macchia – I can look back over the period since I came into financial services inn 1977 through the insurance door, and I can remember that the pension business back then was pretty much owned by life insurance companies. Over the course of my career, during the last three decades, we’ve seen life insurers cede away that business to the mutual fund complexes. I wonder if when you look at the distribution opportunity, you see insurers as ready to or potentially able to take back those pension assets, or do you think that there are some fundamental challenges that insurers face that will conspire to hinder their progress in reaching that goal?

Eckman – I think your premise is true. The asset management industry certainly has done a fantastic job serving customer needs within the 401K and general savings space. It’s not surprising because the primary need through the working years is accumulation and investing. But as these investors age and get closer to what we call the third stage of life known as retirement, their priorities and needs change. While investing and accumulation is still important to them, they need to understand the new risks associated with income planning such as longevity and healthcare.

Those sorts of issues obviously play into insurance industry strengths, and our capacity to build solutions to help these folks manage these risks that now have come and moved up the list of priorities as they have moved along in their own life. The insurance industry is in a position to certainly help folks with these important issues.

It’s going to be a lot of work for us, particularly on the marketing side and on the education side. These types of issues, these risk management issues, by their nature are more complicated. So, how can we help people understand the issues and questions? How can we help them make the right choices? Those are going to be the key issues that will determine how the insurance industry, as a whole, and how individual insurance companies will succeed in this opportunity ahead.

Macchia - I think that’s a very insightful observation. You indicated that the very nature of the products that are going to have to be distributed and explained in the future are more complex by definition. Does this make you think that new strategies for communication are going to be in order, and if it does, where does technology play into that? How important do you think technology will be in the coming months and years? How do you see the whole customer communications issue fleshing out in the future?

Eckman – I think it is going to more complicated and it’s going to be challenging. Whether we in the insurance industry are trying to come up with new ideas to help advisors carry the load and get this point across with their customers, or, whether we’re talking to a customer directly. We have to make it clear, transparent and understandable.

Trying to reach people differently, trying to leverage technology to help explain products is definitely an opportunity for the industry. The other point that we haven’t talked about are the compliance issues. With the more complicated suite of products that need to come of the fore, we need to make sure that advisors are able to clearly explain what they need to with their customers. We must have the right tools in place to deliver compliant, clear presentations so that customers fully understand the issues and the options available.
Leveraging technology to help with this challenge is a real opportunity. Video, electronic presentations, those sorts of things, by their nature, can be controlled more effectively.

Macchia – Phil, when I think about the role of consumer-facing technology in the future, one of the issues aside from compliance, and aside from consistency in message- and a myriad of other advantages- when you get down to the very basic question, you realize that there are gigantic numbers of individuals that are going to need to be contacted and provided guidance in the distribution phase of their lives, with a relatively small base of advisors to reach them. Is this something that you at Transamerica Retirement Management have thought about and if it is, what do you foresee as potential strategies that you may use to address this very issue?

Eckman - It is something we’ve thought about and wrestled with. We are like a lot of companies in our position. We have a large advisor community that we distribute through, and they are always looking for help in good, compliant presentation and educational programs that allow them to bring value to their customers.

We’ve got work to do with some sister groups to put that type of tool together in the short and long term. I think that companies like us are going to have to be very successful on that front if we are going to get the time and the attention of the advisor base moving forward. Beyond the advisors there is certainly an opportunity to more effectively reach those individuals that either are not working with an advisor today, or prefer to just do it themselves.

There’s a chunk of the Baby Boomer population that are going to want to do it themselves, and providing more avenues for them via the web and other technological tools so that they can understand, become educated and ultimately make the right decisions for themselves, is going to be an opportunity for the industry, for sure

Macchia – Phil, I’d like to ask you next about products. In our industry there is no end to the talk about new types of products that are being developed, may be debuting in the near future, and may transform the way that products work. It’s stated by many that these new products are going to be very important in meeting Boomer needs.

There is another philosophy that’s sort of out there in parallel that says- and this was reflected to me most recently in an interview that I hadwith Jeremy Alexander- that we’ve got longevity insurance, we’ve got lifetime annuitization, we have products that guarantee principal and simultaneously provide upside potential, we have lifetime annuitization products, and guaranteed withdrawal riders. We have mutual funds, we have equities, we have bonds. In other words, the products are already there. It’s a matter of figuring out how you package them to work synergistically to deliver good long term results for the consumer. I wonder how you feel about this issue.

Eckman – I would agree with it. The product innovation on behalf of the insurance industry is never going to stop, and I don’t know if it will ever slow down. But I think we’ve seen, looking back over the last five years or more, that most of us in the industry are not terribly happy with the results that we’ve had in really driving the growth in all of the income product innovation that’s taking place.

We’re making progress, but in the big picture of things, relative to the mutual funds and other more traditional accumulation focused investment solutions, I don’t think any of us are comfortable with where we’re at. Which then leads you to the question as to yes, products are important, but is it the communication, is it the method or context in which we’re describing them. Do we need to look harder at that?

Macchia – You bring up something that I’ve talked about and written about a great deal. In fact, I’ve said quite publicly that the winners in Boomer retirement are not going to be those companies that necessarily even have the best products, but rather will be those companies that are the best at communicating their value to a large and fluid market place. Does this strike you as true?

Eckman - It does. I’ve heard you say it a couple of times and every time I hear it it rings very true to me. It’s something that is easy to say, harder to do, but the more I think about it the more I realize we must become better communicators.

I think this is coming back to us as feedback from a lot of advisors that we work with in this organization. They want to be more effective in the way that they communicate to their end customer. Let’s not over complicate the product so that we can’t clearly explain its value and ability to solve a customer’s need.

Macchia - When you look forward in the context of your position of heading up this business unit, what do you define as your greatest challenges?

Eckman – I think there’s an inherent education gap that we as an entire industry need to focus on. It’s making a connection between savings and income. In all of the focus groups we’ve done, every consumer understands the notion of a nest egg.

But, when you start asking questions about, “How are they going to put that nest egg to work to replace an income stream or how will they develop an income plan to manage a 30 year retirement?” They have no answer. They have not thought about it. We, I think, have a big job to just close that educational gap and help people to think about income earlier on as they approach this transition so they can start to plan and really understand the issues at stake, and sort of change their way of thinking. They’ve got to begin to think, “Now, I need to move into more of an income management and financial risk management mindset.” That’s a big task.

Secondly, I think it really gets back to your communication point that our products within the insurance industry are going to be more complicated, making it even more critical for us to succeed on the communication front. Finally, we have to understand that to the end consumer, retirement isn’t in their minds primarily a financial event. We come from the financial services industry, so we think of it as a financial event, but they don’t. First and foremost, it’s a life event to them.

We need to understand that reality, and help them with this whole life transition, and help them understand how the financial part of it is certainly an important component, but it doesn’t start with that. When they come to a meeting with an advisor, when they are talking with an advisor on the phone, or when they are going online to a website, they are coming to that meeting or they are coming to that website not wanting to jump right into financial planning, but to just get some general perspective around this life event that’s coming their way. Once this context is laid, it’s easier to weave in the financial aspects of the transition.

Macchia - That’s a very… reality-based take on the issue. Which reminds me of advertising. The advertising that’s been done to date to the Boomer audience has struck me as very odd and, arguably, disingenuous. On the one hand you have all manner of statistics that indicate that the typical Boomer is not well positioned to generate a significant retirement income over a retirement that may last a very long time. Social security is uncertain in terms of what may happen to it in the future, the national savings rate is very low, and typically Boomers have more debt than net assets.

So this is a mixture of facts that doesn’t bode well for mass market retirement security. At the same time, we’ve seen advertising that consistently describes retirement as a time to enjoy all of the exotic activities that you’ve never been able to previously enjoy; that retirement is the time to learn to snowboard, for instance, or parachute, or take an around-the-world cruise. I’m wondering if you feel that financial services companies, thus far, have been real and candid? If you feel that the current trend in advertising is misguided? I’m wondering how Transamerica Retirement Management will view the issue in terms of its own advertising?

Eckman - Within our organization we have made it a point to be realistic with all of the content and images we use in our literature and on our website.

It’s possible to be both realistic and optimistic. From a planning standpoint, our group is committed to helping the middle market/mass affluent retiree understand how Social Security, possibly a pension, supplemented by some other form of ongoing lifetime income, and, realistically for a lot of people, some sort of ongoing employment on their terms, can all work together to form a sound income plan.

Let’s face it; the typical picture of the couple on the yacht or in front of the second home on the beach is not realistic for a lot of people. Nonetheless, these folks have the potential, if they do the right kind of planning up front, to have an incredibly fulfilling and financially secure retirement, which is what it’s really all about.

Macchia - Phil, I’d like to ask you three questions that are entirely personal in nature. I’m going to, starting with this interview, include these questions in every interview going forward. The first one is this: if I could somehow convey to you a magic wand, and by sweeping this magic wand you could instantly institute any change that you want to see occur in this industry, what are the first two changes you would make?

Eckman – that’s a tough one. So any two changes within the industry…

Macchia - Anything, this is virtually the power of God I’m describing.

Eckman - Other than tripling everyone’s investible assets to put towards retirement, I presume that’s off the table!

I think number one….I just think a general increase in awareness of the issues and risks- and I don’t mean risks in that scary, negative sense- but just an awareness of the issues that people need to be thinking about when it comes to retirement.

If we can wave the wand and implant that knowledge in peoples’ minds, I think that obviously would be an enormous benefit for all of us.

Secondly, I think there are a lot of things, clarifications that need to be addressed from a regulation standpoint between the groups that govern equity products, insurance products and pension products. There’s a lot of confusion and red tape that needs to be resolved, that slow us down from putting the right kind of education and solutions and guidance in place to help people. So, if I could wave the wand and clarify a lot of issues and get some consistency across all of these different regulatory organizations that govern the various parts of our business, I think that would ultimately be a big help to the end consumer.

Macchia - Good answer. Next question: If you were not CEO of Transamerica Retirement Management but you could have any job at all, in any other industry, doing anything you wished, what would it be?

Eckman – I think that I look back at my career and experiences, some of the most rewarding work I’ve done involves working individually with people on their own issues. Honestly, if I could actually get into the chair of the advisor and truly help individual retirees successfully plan and make this transition into retirement, I think that would be incredibly rewarding.

Macchia - Lastly, I would like you to imagine your own retirement in its most conceivably perfect form, where perfection is anything you want it to be. Tell me what you’d be doing.

Eckman – I think I would be engaged with my kids’ and grandkids’ growth and lives, hopefully in a very active way. I would be enjoying, certainly, time with my wife doing the things we like to do together. I think I would also be engaged in some kind of ongoing professional endeavor or volunteer work.

Macchia - Sounds like a pretty nice vision. I want to thank you for your time and for your answers. I’ve enjoyed it.

Eckman – I have too, David. Thank you.

©Copyright 2007 David A. Macchia. All rights reserved.

Part Two: A Deadly Cocktail? The “Extreme Makeover” of Annuity Agents into Registered Investment Advisors

pitchBased upon the number of responses it elicited there clearly was no shortage of interest in Part One of this series. I can understand why. Many annuity agents have been thrust into something of a netherworld by events largely beyond their control.

Annuity agents are experiencing a continuing disruption of their traditional sales practices that began with the issuance of NASD (FINRA) NTM 05-50. For agents it can seem as though everything they once viewed as stable has come under assault including their public image, the products they sell, the advice they provide, the seminars they use, not to mention the comparatively lax suitability and compliance standards from the recent past. It’s no wonder that many agents wish for a quick and easy end to the pain. But pain relief comes at a cost than can be significant.

Scare tactics are clearly not out-of-bounds when used by those pitching annuity agents on the Registered Investment Advisor “answer.” “REAP THE REWARDS OF INDEXED ANNUITY SALES WITHOUT THE FEAR” is a prominent theme of the “pitch.” But is becoming a fiduciary advisor really the answer?

In Part One of this series I argued that the RIA option may not prove viable for many annuity agents. The reason is that for the RIA transition to be successful, an annuity agent must be willing to undergo a radical transformation in terms of allegiance (in both a practical and strict legal sense) and in the manner in which he or she is compensated. How many will sign-up to undergo such a dramatic transformation?

It was advertising directed to annuity agents that I characterize as exploitive that first got me interested in this subject back in April. I saw print and video advertising designed to convey both overt and covert messages. The thrust of the advertising- the “pitch”, if you will- seemed to convey that it’s possible for annuity agents to retain their customary sales and marketing strategies and compensation model while also operating as a Registered Investment Advisor.

This assertion was and is the “rub” as far as I’m concerned. I’m all for swelling the ranks of RIAs. However, I also believe it is grossly unfair to lead annuity agents to conclude that they can continue to legally represent the best interests of insurance companies, continue to rely upon rich, first-year compensation, and, act as a fiduciary all within the framework of a single client relationship.

Why Do the Ads Neglect to Mention the Heightened Responsibilities Fiduciaries Assume?

Why is there is no mention of fiduciary responsibility in the ads for the “pitch?” Or, for that matter, any mention of the “rewards” for consumers? Is it because the purveyors of the “pitch” believe it is possible for an individual to act as an indexed annuity agent and a fiduciary at the same time with the same client? Or, is it that they simply prefer to avoid mention of the substantial and complex responsibilities that come with acting as a fiduciary advisor?

In Part One I attempted to demonstrate through the comments of experts including experienced RIAs that the “pitch” is dangerous if not bogus. Attempting to induce annuity agents to believe that they can easily side-step broker-dealer compliance is a disservice to the very people the proponents of this approach claim they are serving.

So let’s now examine what can happen when an individual producer seeks to operate as both a traditional annuity agents and a Registered Investment Advisor at the same time.

Do RIAs Receive Extra Protection? Can $2,000,000 in Indexed Annuity Commissions Get You Noticed?

Meet Mark K. Teruya, president of USA Wealth Management L.L.C.

tenuyaMark Teruya’s story seems to be a sad one. I don’t know him but I’d bet he is a decent person who is liked by his clients. I doubt that Mr. Teruya ever imagined he’s be in all kinds of trouble. He is by all accounts in a great deal of trouble. He is also a registered investment advisor based in Honolulu, Hawaii.

Judging by some of his published articles Mr. Teruya was a very effective marketer. He wrote numerous articles for newspapers in Hawaii that were focused on providing pro-consumer financial advice. As an example, click here to read one of his articles in which he blasts high mutual fund expenses. I suspect that authoring such articles was integral to his overall annuity marketing strategy, i.e. cultivate a well known and strong pro-consumer identity in order to create a favorable prospecting and selling dynamic. This is not an unusual marketing strategy for annuity agents to pursue.

On September 10 the online version of National Underwriter highlighted a story on Mr. Teruya, a Hawaii-based RIA. The first paragraph of National Underwriter’s piece included this:

“The U.S. Securities and Exchange Commission is accusing an investment advisor of using free lunches to persuade older consumers to shift money from existing investments into equity indexed annuities.”

The story also contains this:

Both state and federal regulators have accused Teruya and his firm of using breakfast and dinner seminars to attract retirees, then arranging for one-on-one follow-up meetings.

What? Did you hear that? Using seminars to attract retirees? And make appointments with them? I don’t know whether to laugh or weep. These are usual and customary marketing tactics have been a relied upon by thousands of successful annuity producers.


seminar-teruyaMr.Teruya has been charged by both the SEC and the Hawaii Securities Commissioner. The SEC is seeking “disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.”

If you don’t know what “disgorgement” means it refers to the repayment of ill-gotten gains that is imposed on wrong-doers. Teruya may be forced to refund the $2,000,000 in commissions he earned- plus interest… and also be forced to pay substantial penalties, to boot. I hope he’s been a good saver.

Where it Breaks Down

Just reading the headlines tells you that it’s simply not viable for an annuity agent to observe traditional sales practices while acting as a fiduciary advisor. Could it be more plain?

“The U.S. Securities and Exchange Commission is accusing an investment advisor of using free lunches to persuade older consumers to shift money from existing investments into equity indexed annuities.


Teruya committed fraud, …”when he failed to disclose that he was an insurance agent in a position to collect large commissions on the purchase of EIAs.” the complaint said.

Destroying Careers at Digital Speed

The annuity industry has been far too slow in utilizing digital content and web-based communications strategies to help its agents reach more annuity prospects in a compliant manner. The price for this delay is being paid on a daily basis. For example, we’ve observed the fallout from agents and IMOs placing non-compliant presentations on the Internet (for more see my article in the September issue of Broker World magazine called “Dangerous Trends In Annuity Marketing Put Industry And Brokers In Jeopardy“). I know this particular article resonated with many annuity agents based upon the number of phone calls I’ve received from agents since its publication.

In the case of Mark Teruya we can see how an agent’s reputation can be damaged and his career potentially destroyed at digital speed:

September 7
Teruya is accused of fraud by the SEC.

September 11
Teruya’s SEC charges make the front page in the same newspaper he previously his columns had previously appeared.

September 12
The SEC posts the results of its seminar sweeps (likely heralding a sea change)

September 12
Major newspapers across the U.S, produce stories about the SEC action and, or, Teruya. One example: In Tampa, Florida both major papers produce front page, non-syndicated, locally authored articles discussing seminar abuse.

You Can Run But You Can’t Hide

The “pitch” says to annuity agents that they can seek shelter under the umbrella of RIA status. Don’t believe it. It didn’t shelter Mark Teruya. I’d bet money that he is now facing penalties that are far more severe than what the state insurance department might have sought. And he is facing these harsher penalties precisely because he is a registered investment advisor.

According to Joseph W. Maczuga, a Certified Fee Insurance Specialist from Troy, Michigan, “Those who are recruiting agents into the ranks of Registered Investment Advisors under the premise (fiduciary and annuity agent at the same time) that you have shared are, in my opinion, fraudulently presenting erroneous statements as fact. They do not appear to be knowledgeable about the provisions if the Investment Avisors Act of 1940, or the court decision and its basis in the case of the Merrill Lynch Rule. Unless, that is, they have developed a mischievous “end around” process that they feel will shelter them from clear and concise regulatory language. Our industry has a history of creating circumventing concepts to move product.”

How Far Indexed Annuities Have Fallen

The fallen reputation of indexed annuities is a tragedy of grand scale. The underlying value proposition indexed annuities provide- safety of principal combined with upside growth potential- is not only legitimate it is vital to millions of Americans as they approach retirement and enter the Transition Management phase. Unfortunately, what has played out over the past decade, “The Process” – in which the activities of good and decent people leads to sub-par results- has zapped the industry of its vitality at a critical moment. Rome really is burning. And lots and lots of very decent people are being hurt.

Not too many years ago it was an accepted belief that seniors were the most qualified purchasers of deferred annuities. Now it is generally believed that seniors require protection from deferred annuities. It’s not difficult to imagine business school students in the future studying the disastrous decline in public perception of an important industry as an example of how not to conduct business.

This sad state of affairs will not be repaired until fundamental reform occurs, technology comes to the forefront and the focus on consumers’ best interests becomes everyone’s top priority.

©Copyright 2007 David A. Macchia. All rights reserved.

RIIA Holds Annual Meeting, Communications Conference & Awards Dinner; Professor Zvi Bodie Cited for Lifetime Achievement

Apologies to OppenheimerFunds’ Kathleen Beichert, Chair of RIIA’s Research Committee as well as to RIIA’s research partners, Elvin Turner of Turner Consulting, and Larry Cohen of SRI-BI. Also, my sincere apology to JordenBurt’s Joan Boros.

A cut/past error earlier caused the contributions of these individuals at RIIA’s Annual Meeting to not be mentioned in yesterday’s article (I create these articles in Word and them past them into the blog application). Please see the section I’ve added in the text below.

On Monday of this week the Retirement Income Industry Association (RIIA) held its Annual Meeting and Awards Dinner. Over the course of a long but stimulating series of presentations attendees were left with a vivid sense of the unique value RIIA brings to the retirement income industry. Where else does the cross-silo retirement income conversation take place?

RIIA’s Founding Chairman, Francois Gadenne, kicked-off the day with a presentation summarizing RIIA’s mission and goals including a report card on the substantial progress that has been made in achieving them.

The various morning sessions offered specific insights into the important work being undertaken by RIIA’s various committees. Laura DeFraia (Wachovia), Laura Varas (Financial Research Corporation) and Elmer Rich (Rich & Co.) highlighted results from RIIA’s Employment Survey.

Rick Nersesian, formerly Director of Retirement Income at UBS and now a private consultant, discussed ongoing efforts to expand RIIA’s membership ranks.

Royal Bank of Canada’s Ron DeCiccio, Chair of RIIA’s Education Committee, was joined by Retirement Learning Center’s John Carl, in a presentation about the expansion the curriculum that will lead to the awarding of the professional designation, RIIA Retirement Income Expert (RIE).

Kathleen Beichert, Chair of RIIA’s Research Committee, invited Elvin Turner and Larry Cohen to describe RIIA’s latest research efforts. Larry and Elvin delivered a concise overview of RIIA’s next research report addressing, in part, the number of financial relationships consumers in different market segments maintain and the implications arising out of a shrinking of that number as retirement draws near. Like, the first research report in this series, the new report will provide completely new insights.

Russell Investment Group’s Richard Fullmer, Chair of RIIA’s Methodologies Committee, introduced RIIA’s Statement of Principles. These principles govern software used to illustrate retirement income projections. Larry and Elvin delivered a concise overview of RIIA’s next research report addressing, in part, the number of financial relationships consumers in different market segments maintain and the implications arising out of a shrinking of that number as retirement draws near. Like, the first research report his series, the new report will provide completely new insights.

Next, Joan Boros of JordenBurt LLP delivered a presentation on the organization of RIIA’s Compliance Committee including an overview of the Committee’s goals and future value to RIIA members.

Matthew Greenwald (Matthew Greenwald & Associates) delivered the lunchtime Keynote address entitled, “The Inevitable Grassroots Change”. Greenwald presented a moving and candid analysis of US retirement security in the context of real life examples.

In the afternoon it was my privilege to Chair RIIA’s Communications Conference. I began with remarks detailing the reasons why I believe that, for retirement income businesses, success is synonymous with excellence in communications.

The program then shifted to multiple presentations from elite financial advisors – “Income Pioneers”- who have already made a successful transition to income generation oriented practices.

Phil Lubinski, CFP® and Briggs Matsko, CFP®, demonstrated their communications techniques and financial strategies for income generation. Rick Miller, Ph.D., CFP®, talked about the impact of technology on fiduciary advisors and nimble product providers.

Harold Evensky, CFP, ®, summarized how financial advisors should be preparing to meet the retirement income needs of the Boomer generation. Evensky provided helpful glimpses into the strategies he has used to manage clients’ expectations across volatile market conditions.

The financial advisors’ presentations were enormously insightful and really drove home the point that the genius of successful advisors is due, in part, to their genius as effective communicators. I concluded the Communications Conference with the observation that Lubinski, Matsko, Miller and Evensky are members of an elite minority of advisors, and that the real challenge for the industry will be in introducing the educational tools and communications technologies needed by the 95% of advisors who have yet to acquire equal income planning skills.

RIIA’s Lifetime Achievement Award Goes to Professor Zvi Bodie

The next part of the program was the presentation by Research Magazine Editor, Gil Weinreich, of RIIA’s Lifetime Achievement Award to Professor Zvi Bodie of Boston University. Bodie is the Norman and Adele Barron Professor of Management at BU. He was selected for the award for his many achievements in applied research. Bodie holds a Ph.D. from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT’s Sloan School of Management.

Professor Bodie’s textbook, Investments, is the market leader and is used in the certification programs of the Financial Planning Association and the Society of Actuaries. His textbook Finance is coauthored by Nobel Prize winning economist, Robert C. Merton. Professor Bodie’s latest book is Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals.

Prior to the RIIA Excellence in Communications Awards Dinner there was a cocktail hour which included a book signing opportunity with two noted authors, Terry Burnham (Mean Markets & Lizard Brains) and Harold Evensky (Retirement Income Redesigned).

The Keynote Address was presented by Professor Bodie. His talk, entitled “Encouraging Adaptation” was funny, motivating and highly insightful. Bodie has a unique capacity to both simplify complex issues and pummel conventional wisdom. For instance, I’d bet money that his comments on Target Date mutual funds caused many audience members to re-examine their views on these popular investment vehicles.

After Professor Bodie’s address it was time to present the RIIA Excellence in Communications Awards in the categories of Best Advertising Award, Best Retail Communications Award and Best DC Communications Award.

RIIA’s media sponsors selected the various award winners from the many entries submitted. Armee Lee chaired the Investment Wires Committee that selected Nationwide Financial as the winner for its “Life Comes at You Fast” campaign. AXA was runner-up for its “800-pound Gorilla” campaign.

Evan Cooper of InvestmentNews presented the Retirement Income Communications Award in the New Media category to Morningstar for its Retirement Income presentation, part of Pincipia Presentations & Education module. Runner-up went to Jackson-National Life for the “But What if I Live” DVD presentation.

In the print category, Columbia Management took the top honors for its Columbia Management Retirement Learning Center. Securities America Investments was runner-up for “Imagine Your Life without Limits.”

Allison Cooke
of Sponsor of PLANSPONSOR presented the DC Advisor Award to Genworth Financial for its “ClearCourse Personalized URLs.” Receiving the runner-up award was Pacific Life for its “Destination Independence” piece.

Francois Gadenne closed out the eventful day with a gracious thank you to all that participated.

In thinking about the RIIA event I feel that attendees gained tangible value, and that RIIA may have exceeded the expectations of some. Important insights emerged that could only have come out of a meeting where multiple silos across multiple industries are brought together in a single conversation. That’s both unique in the retirement income industry and very much needed.

©Copyright 2007 David A. Macchia. All Rights Reserved

Inconsistent Odds in Monte Carlo! Developing Needed Standards for Retirement Income Planning Tools

Since the formation of the Retirement Income Industry Association (RIIA) a number of initiatives of genuine importance to its members have been launched. One of the most important is an effort to develop sound principles for the creation of industry-wide standards for the development of retirement income calculators, tools and illustrations that promote various retirement income products and strategies. On August 10 RIIA issued a press release on this subject but the effort is deserving of additional attention.

Led my Russell Investment Group’s, Richard Fullmer, CFA, RIIA’s Methodologies Committee has crafted and introduced a Statement of Principles to provide needed guidance in this critical area. Other members of the Methodologies Committee that assisted in the development of the Statement of Principles include Moshe Milevsky (IFID Centre), Anna Abaimova (IFID Centre), Peng Chen (Ibbotson Associates), Ben Williams (Retirement Engineering, Inc.), Phil Edwards (Standard & Poors), Pirooz Vakili (Boston University), Kazi Ariff (Bank of America), Kim McSheridan (Symetra Financial), Lowell Aronoff (Cannex Financial Exchanges), Bob Padgette (Klein Decisions) and Thomas Idzorek (Ibbotson Associates). The Methodoligies Committee will deliver a presentation on its work at the upcoming RIIA Annual Meeting and Awards Dinner to be held in Cambridge, Massachusetts on September 16-17, 2007.

Says Fullmer, “A significant number of retirement income projection models have been introduced into the marketplace over the years, and RIIA believes that many of these models may need improvements in disclosing key underlying assumptions or limitations. In addition, the output of various projections differs widely even with consistent input. This may lead to confusion among the public which threatens a loss of confidence in the financial services industry.”

Because of these concerns and inconsistencies, the RIIA Methodologies Committee took on the task of establishing a Statement of Principles as the first step in creating industry standards for developing illustrations, calculators, and other materials
necessary for retirement income planning and promotions. The Principles seek to promote the use of clear and effective modeling techniques, explanation and communications through complete disclosure of assumptions and the use of consistent terminology. To view the Statement of Principles, go to www.riiausa.org.

RIIA’s Methodologies Committee also intends to provide:

A set of guidelines to these Principles which will provide guidance on meeting the RIIA standards.

A set of “calibration points” by which model developers can compare their assumptions and results against.

“As the baby boomers march into retirement, their shift from focusing on accumulating retirement savings to creating a secure retirement income makes consistency, clarity and understanding of income modeling more urgent that ever,” contends Francois Gadenne, Founding Chairman of RIIA and CEO of Retirement Engineering, Inc. “RIIA is an organization that succeeds because of its members’ active leadership and participation. The members of our Methodologies Committee felt strongly that RIIA take responsibility for improving projection models because a failure to do so is a disservice to both the retirement income industry and the clients we serve. It is gratifying to see the early results of their important work,” says Gadenne.

A full report on the Statement of Principles as well as updates from the other RIIA Committees will be provided at the upcoming RIIA Annual Meeting and Awards Dinner on September 17, 2007 at the Royal Sonesta Hotel Boston in Cambridge, MA.

To learn more or register for the event, please go to www.riia-usa.org.

Part One: A Deadly Cocktail? The “Extreme Makeover” of Annuity Agents into Registered Investment Advisors

Earlier this year I published an essay on the burgeoning effort to recruit annuity agents into the ranks of Registered Investment Advisors. While I haven’t written about this issue since that time I’ve thought about it a great deal. So have a lot of other people including some who see an opportunity to create lucrative new businesses by disrupting independent agent distribution. I’m all for free enterprise. But I’m opposed to initiatives that may seek to exploit agents who are frustrated by challenges they didn’t’ ask for or expect.

Today’s article is the first in a series devoted to the agent-to-RIA conversion “pitch.” The more I delve into this the more concerned I become. One of my goals with this series is to help protect annuity agents by providing them a balanced perspective on the RIA option. It’s my hope that a thorough understanding of the risks and potential rewards will lead to good decision-making.

Back in April I expressed caution about the pitch to annuity agents that urges them to become registered investment advisors. My early caution has crystallized into a strong belief that for most annuity agents the RIA option is, well, unsuitable.

Opting to become an RIA may be a viable course of action for annuity agents willing to submit to a truly extreme makeover in terms of their stated allegiance and compensation model. How many agents will be willing to drink the fiduciary cocktail and take on the related responsibilities that come with observing a fiduciary duty once they understand all of its ingredients?

What’s in the Fiduciary Cocktail?

Ahh, fiduciary duty! That’s the key issue, isn’t it? I checked Wikipedia’s definition of fiduciary duty and this is what I found:

“A fiduciary duty is the highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person (the principal) to whom they owe the duty. They must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust.”

“When a fiduciary duty is imposed, equity requires a stricter standard of behavior. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.”

The very last sentence, “A fiduciary cannot have a conflict of interest” would seem to crystallize the key challenge: how can an individual simultaneously act as a fiduciary and an agent for an insurance company within the framework of a single client relationship?

It’s not possible in the opinion of Rick Miller, a Certified Financial Planner from Cambridge Massachusetts and a member of the National Association of Personal Financial Advisors. According to Miller, “An annuity agent who is simultaneously a fiduciary sounds like a contradiction in terms at the most basic level. As a fiduciary the advisor must act in the best interest of the client. As an agent, the advisor must act in the best interest of the insurance company. I wouldn’t want to be the advisor who has to attempt to resolve that conflict.”

The website for Miller’s firm, Sensible Financial Planning, states: “We accept no commissions or any other payments from any financial product or service provider. We work only for you.” That description stands in stark contrast to the way annuity agents typically operate.

The August 2007 edition of Investment Advisor Magazine contains an article written by Bob Clark that stated, “The inescapable conclusion for anyone looking at the financial services industry and its marketing machine is that financial consumers—middle class and affluent—are completely ignorant of the fact that their stockbrokers or insurance agents are not fiduciaries, and have no legal obligation to put their clients’ interests ahead of their own or their firm’s.”

Some annuity agents may not fully understand the legal structure of the “principal-agent relationship” that governs their obligations to the insurance companies they represent. In the same manner that stockholders of a corporation (the principals) hire managers (the agents) to act in their best interests, the insurance company (principal) hires agents to act in its best interests. The fact is, under this relationship framework the primary duty an annuity agent undertakes is to represent the insurer’s interests, not the client’s.

There’s No Escaping Regulation

I sought the opinion of Joan Boros, who is a friend and a well-known expert in securities law. Joan, an attorney with the prestigious Washington, D.C. law firm, JordenBurt LLP, had this to say about agents contemplating registration as investment advisors:

“Agents should be aware that registration as an investment adviser carries its own set of burdens and vulnerabilities; there are always trade-offs. At a minimum, agents are subject to a whole new regime of regulation in each state where they operate. On a more challenging level, plaintiff’s lawyers and regulators have asserted the view that as an adviser the agent owes a fiduciary duty to the prospect or customer. While that may not be the outcome, threading through fiduciary duty obligations makes suitability determinations seem like a walk in the park.”

Yet the advertising coming at annuity agents sounds like the RIA makeover is a walk in the park. “End broker-dealer harassment and haircuts” goes the RIA pitch. To annuity agents who have seen their businesses impacted in ways they view negatively since the issuance of NASD NTM 05-50, it’s a powerful message. Is “harassment” a code word for rigorous broker-dealer compliance when used in the context of the RIA pitch? I suspect it is. And what annuity producer doesn’t want to earn more money by eliminating broker-dealers’ commission “haircuts?”

Annuity agents who have seen broker-dealers disapprove their relied-upon annuity advertising and sales presentation materials including letters, seminar presentations and display ads, will surely be attracted to the notion of becoming their own compliance officers. But how many annuity agents possess the knowledge and experience to develop compliant advertising in the context of a registered advisory practice? And what of the longer-term consequences following biennial audits of registered investment advisors’ practices including their advertising? Could annuity agents be setting themselves up for an unpleasant future shock?

Possible Unfulfilled Financial Expectations

One shocking change annuity agents who become RIAs may encounter in the future is reduced income. Agents who are accustomed to making larger commissions as their sales volumes increase may find that new approaches to annuity compensation may alter their expectations. According to Paula Hogan, Principal of Hogan Financial Management, a Milwaukee-based, fee only firm providing comprehensive financial planning services, “When people wear two hats it’s very confusing to the consumer. Consumers have a right to know who the advisor is working for.”

Hogan also believes that the transition to income-generation will lead to new ways to compensate advisors: “The issue you raise (compensation) is also an important one because it speaks to changes taking place in the financial services industry as people shift from accumulation to retirement income distribution. Annuities will play an increasingly important role as more and more people seek to insure their standards of living in retirement. I believe that advisors have real value to offer their clients and they deserve to be paid for it. However, agents’ traditional commission-based compensation models may prove as unworkable as advisors’ AUM-based models. It may be that new approaches to compensation will be needed including flat-fee arrangements.”

Fewer Advisors, Greater Responsibility

Boomer retirement is certainly likely to propel increases in annuity sales. But according to Harold Evensky, Chairman of Evensky & Katz, a wealth management firm headquartered in Coral Gables, Florida, annuities fit in a larger context of retirement planning which must prioritize the best interests of consumers. Says Evensky, “There’s good news for professionals in fields related to financial planning. The need for quality advice for retiring boomers is fast outgrowing the current supply of practitioners. However, as investment advice is often the core element of a good retirement plan, advisors need to ratchet up their knowledge of investment issues and register as Investment Advisors with the State or SEC. Doing so will meet their legal responsibility and insure that they are legally committed to placing their client’s interest first.”

Key Questions

Agents considering the transition to RIA status should evaluate the move carefully and ask themselves some important questions:

Am I willing to place the interests of my client ahead of my own?

Am I willing and able to accept an entirely new method of compensation with the result that my compensation may decrease?

And, under what legal framework do I wish to operate?

The potential answers to these questions imply an interesting set of trade-offs, opportunities and costs.

©2007 David A. Macchia. Al rights reserved.

About the Unique Opportunities for Attendees at RIIA’s Annual Meeting and Awards Dinner

Summer’s over, September is upon us. That means I have to get back to work on this magazine; lots of interesting topics to be explored, and some fantastic interviews to publish! Tomorrow I’ll publish part one of a multi-part series on the efforts underway to remake annuity agents into Registered Investment Advisors.

One of the major industry highlights in September is the Retirement Income Industry Association’s Annual Meeting and Awards Dinner.

In just about 2 weeks from now- September 17, 2007 at the Royal Sonesta Hotel, Boston – RIIA’s Founding Chairman, François Gadenne, will convene what is shaping-up to be a very unique event. With many of my readers active participants in the retirement income industry, you’ll not want to miss the opportunity to attend this one-of-a-kind gathering. Here’s how François describes the meeting:

The Annual Meeting and Awards Dinner provide us an opportunity to meet with a large group of Financial Advisors (FAs), their key membership organizations and their specialized trade magazines to learn, from their perspective, how well the industry is doing during this transition from asset accumulation to income distribution. We expect that attendance will range from 150 to 200.

One key question directed to FAs that will be explored at the meeting has already been publicized in our conference promotion materials:

“Do you know how to build a successful retirement income practice while the industry is slowly moving from an accumulation focus and towards a retirement income focus?” It’s an important question that will be answered by an elite group of advisors who have already successfully made the transition to income-generation practices.

The structure and content of the conference is meant to attract FAs who are interested in retirement income issues and want to do something practical about it, now.

The value of the conference for RIIA’s Regular Members and conference sponsors is that up to 50% of the audience will be FAs and that there will be plenty of time to interact with them.

During the morning sessions, the Committees will present the relevance of their work for FAs. In particular, look for key announcements and developments from the Research, Education and Methodologies Committees.

During the afternoon sessions, the Communications Conference will focus on the communications needs of FAs during this time of transition. RIIA’s Committees as well as experienced and successful Financial Advisors will present what they have done to address the question and their results to date. Their insights will be valuable to any retirement income organization looking to maximize success.

The lunch keynote (Matt Greenwald), afternoon keynote (Harold Evensky), and dinner keynote speaker (Zvi Bodie) are leaders in the field who have relevant messages for FAs.

Our Noted Authors (Terry Burnham and Harold Evensky) will sign books that were selected because they have relevant messages for FAs.

During the dinner, the RIIA Awards will recognize companies whose work and communications are particularly helpful to FAs during this time of transition.

Given the attendees list, much of the value-added will take place during the breaks, dinner, and desert/after-dinner drinks.

To register for the Annual Meeting, please visit www.riia-usa.org.

LPL Chairman & CEO, Mark Cassady, to be Subject of Leaders & Innovators Interview

Mark S. Cassady, Chairman & CEO of LPL Financial Services will be my interview subject as part of the Leaders & Innovators series. Cassady heads-up the nation’s largest independent brokerage firm in terms of revenues. LPL is represented by more than 7,000 advisors in 4,500 branch offices. The firm, which has its own clearing platform, has been a leader in many areas including the development of technology.

I’m eager to explore numerous issues with Cassady including his vision for LPL’s continued growth, and it’s strategies around Boomer retirement security.

©2007 David A. Macchia. All rights reserved.

Interview with Heather Dzielak; Head of Lincoln Financial’s RISV Group Cites Need to Reduce Product Complexity; Describes Planning Focus As Key to Compliant Sales

dzielak-oct-2005Heather Dzielak is Senior Vice President of the Retirement Income Security Ventures (RISV) group at Lincoln Financial. She is heading a unit whose stated mission is to position Lincoln as the nation’s “preeminent provider of retirement security.”

Dzielak is an executive who’s clearly on top of her game. In this wide-ranging interview, she addresses a host of issues including product complexity, distribution challenges, communications, non-traditional competitors and income-generation strategies. She also describes Lincoln Financial’s strengths in terms of balance sheet and distribution, and she provides insight into how new distribution models may evolve to meet the future needs of various market segments.

Macchia – First of all thank you for agreeing to let me interview you.

Heather Dzielak is Senior Vice President of the Retirement Income Security Ventures (RISV) group at Lincoln Financial. She is heading a unit whose stated mission is to position Lincoln as the nation’s “preeminent provider of retirement security.”

In this wide-ranging interview, Dzielak addresses a host of issues including product complexity, distribution challenges, communications, emerging competitors and income-generation strategies. She also describes Lincoln Financial’s strengths and provides insight into how new distribution strategies may evolve to meet the future needs of various market segments.

Dzielak – You’re very welcome.

Macchia – To begin, Heather, would you describe your title and role at Lincoln.

Dzielak – Absolutely. The official title that I carry right now is Senior Vice President of the Retirement Income Security Ventures Group. And it’s a new group that was formed in October of last year. The group was really the outgrowth of the more strategic work that Lincoln has undertaken over the last three years.

Former CEO Jon Boscia had a vision that the baby boomers moving into retirement are going to create some unique opportunities for the financial services industry– most particularly for insurance companies, given our ability to underwrite both mortality and morbidity risk. It’s a capability that we believe is going to be critical to helping secure retirement income for our boomer clients.

With that said, Jon asked a group of us over the last couple of years to really think about what all of this means to Lincoln Financial Group. What does it mean in a way that wraps the entire company around it? Our current strategic intent is to be the leader in retirement income security.

We did some strategic work about two years ago. And in 2007, we really began to focus more on execution – the top initiatives that we as a company need to undertake to position ourselves for the future. And out of that work came some execution items, but more importantly came the realization that this opportunity is big enough; that it warrants a group of folks who could think about it and begin to understand and watch this phenomenon on a 24/7 basis. That really was the formation of the Retirement Income Security Ventures (RISV) Group.

It was a commitment by the company, recognizing the magnitude of this opportunity and the need to have a group that sits horizontally across our company to help each of our businesses make sure we continue to position ourselves as a leader in this space. So, that’s the group that I head, and it’s going to be a very lean, agile group. If I were to describe it to someone in our industry such as yourself, it’s like an internal consulting group. We really partner with the businesses to make sure we’ve got the focus and discipline to drive the strategic intent.

Then secondarily, there will be a subset of our group that’s really going to be focusing on the future. What do we think the world will look like 2 to 3 to 5 years out? Much more in an R&D capacity. Really observing the behavior of the boomers and making sure we stay ahead of the trends that emerge as they move into their retirement years.

Macchia – Right. So what you’re describing is a group that sits cross-silo.

Dzielak – Yes.

Macchia – I imagine that given the strategic importance of what you’re attempting to do, having a view across silos was inherently important. Is that right?

Dzielak – Yes. It was very important. It’s important to have the cross-silos seat, but also to sit on the same management team as the business leaders so that this group partners with them. When you think about driving initiatives and accountability, leadership from the highest levels and throughout the business units agreed that it’s about partnership. All of the business leaders, including myself, report to Dennis Glass.

Macchia – When you articulated the stated mission to become the preeminent provider of retirement income solutions

Dzielak – Security

Macchia – Security… Sorry, Security.

Dzielak – Yes.

Macchia – I said to myself that’s a mighty big apple to pick.

Dzielak – Yes, it is.

Macchia – What is it about Lincoln particularly in terms of its inherent strengths or willingness to innovate – what are the qualities that you understand that you think make that possible?

Dzielak – I guess I think about a couple of things. First and foremost when you think of retirement and retirement security, I want to be clear that our mission here isn’t about just creating retirement income streams. It’s more about understanding clients’ risks in retirement and a recognition that the products that we bring to market today are uniquely positioned to help clients manage many of the risks that are of top concern to them.

I can articulate the five risks that we’re focused on. If you think about what’s unique about Lincoln, at the highest level it’s the products that we bring to market to address market risk, inflation risk, longevity risk, healthcare risk – in some capacities there are some opportunities for innovation there – and the last one we call “sources of income” risk– that’s the recognition that clients are no longer going to be able to fully retire on pensions or Social Security and that there are other forms of income that they are going to have to build into their plan.

So, I guess that one level is about our products. That is, as we tend to phrase it, our “franchise rights”. There are some innovations that Lincoln brought to market within our product categories, such as Money Guard®, which is a hybrid product to help deal with long term care risk. We have an innovation around income called i4Life®. Both of those products have been recognized in the market as innovative products that are attracting and meeting retirement income needs.

The second distinguishing feature of Lincoln that gives us the belief and comfort that we can be the leader is our distribution. We have an incredibly powerful wholesale distribution group – Lincoln Financial Distributors. And what’s unique about LFD is that they’re a distribution group with all of the product lines under common management.

When we think about retirement income security, it’s not just about an annuity play, it’s not just about a mutual fund play, it’s not just about a life insurance play– it’s about how we bring our product capabilities together to effectively meet consumers needs. We have the competitive advantage in our distribution because they all fall under common management. We’re not dealing with three or four silos of product-oriented wholesalers. They come together under common management, which gives us the unique platform to launch what we believe is important in a retirement income security plan. We also have an incredibly powerful retail distribution outlet which gives us an opportunity to actually pilot some ideas we’re already talking about in a very controlled, disciplined environment. So it’s the combination of the wholesale and the retail distribution that we believe positions us well.

The next area that we view as a competitive advantage is our employer market business. If you think about the future of retirement income security and the future of retirement for many of our clients, they’re all likely going to be coming out of some employer sponsored plan. We have a very large employer based business – 403(b) and 401(k) – which we believe are going to lead to future growth. That business today is teaching us a lot about how clients want to think about their retirement. The bulk of that business actually sits right in the sweet spot – the baby boomers . So as much as our retail distribution gives us an opportunity to study how advisors are going to meet this need, this employer market business is giving us the window directly to consumers as they hit that tipping point and realize retirement is down the road. We’ve got an interesting opportunity to study them, and we believe that they are also giving us insights that will lead to industry leadership. It’s the bench strength that’s going to be the engine that will drive retirement income security.

Macchia – What else?

Dzielak – The last thing I’d say, and this is a little bit from the conversation we had two weeks ago, one of the areas where we have a lot of improvement to do…there is a belief here at Lincoln that the winners in this game aren’t going to be about just product. They aren’t going to be just about distribution. They are going to be thinking about creating that experience for the customer. And we’ve got a new model that emerged with the integration of Lincoln and Jefferson Pilot – we consolidated all of our customer service capabilities under common leadership – we call it a Shared Services organization.

But, there is a belief and an interest in that organization to really think about how we can service our customers in a very consistent way regardless of where they are in their life stage. Whether they came to us as a participant in an employer plan or came to us as an annuity contract owner through LFD, but service them in a way that’s consistent. Again, no matter where they entered Lincoln in their life stages, or no matter if they have a life insurance policy, an annuity policy or a defined contribution plan, Lincoln has created an environment where they understand why they own our products and they understand why those products are so critical for their retirement income security. I believe we’ve got the combination of products and distribution, but also somewhat of a structure that enables us to execute more effectively than we could have years ago.

Macchia – Right. Inherent in those advantages is the reality that Lincoln is a large multi-faceted company.

Dzielak – Yes.

Macchia – Do you think there’s an inherent competitive advantage going forward in boomer retirement on the basis of the size and breath of a company?

Dzielak – Yes, I do. I think size and scale is going to be critical. It’s much more difficult to move a bigger organization, but size and scale is so critical in the way we’re thinking about playing in this environment. If you hear what I’m saying about retirement income security, it’s about having the capital and the wherewithal to really honor those guarantees and points of security that we’re going to be promising to our consumers.

So, from a size and scale play I think distribution is going to be crucial. There are several ways to look at it – there’s breadth of distribution, but there’s also having the capital capacity to be the provider that customers truly believe can pay off on those guarantees. So size and scale do matter from a couple of perspectives.

Granted, it will challenge our nimbleness and our ability to execute. And that’s why, when I think about Lincoln, to have this unified strategic intent that drives every line of business is so critical because of our size. We need all of our 8,000 to 10,000 employees thinking the same way, so we’re not corralling stray cats. It’s really, David… it’s been kind of a refresher for a lot of folks that are on the ground here to have a single common strategy to drive to. I think it’s very unique for Lincoln, and it’s created a level of simplicity in how we think about our business which helps when you’re as big as we are.

Macchia – Heather, you mentioned advisors.

Dzielak – Yes.

Macchia – And I know that Lincoln has a large and highly skilled advisor distribution network.

Dzielak – Yes.

Macchia – That collides demographically into a consumer base of tens of millions of people who will be needing distribution guidance in the future. Moss Adams in a recently released LIMRA study indicated, among other things, that 70% of the industry rather, is made up of solo practitioners who don’t want to grow, and that in absolute terms there’s too few advisors for the amount of available prospects who will be needing assistance. I wonder what you think about when you hear me say that, and what you think the implications are for advisors and for other forms of distribution?

Dzielak – I completely agree with you. It’s one thing we think about a lot as we’re embarking on this work.

One thing that we believe in wholeheartedly at Lincoln is advice. I didn’t say advisor, I said advice. We’ve built a very profitable, successful business based on a face-to-face advisor relationships, which I believe will continue to be absolutely critical in the markets we operate in today. But, the reality, as you just stated … I mean there’s the whole other side of the population that either has chosen not to engage with an advisor, for whatever reasons – and we’re going to be studying that – but also the population that may never choose to engage with an advisor.

I don’t believe it’s completely about wealth and wherewithal. I think people like to do business the way they like to do business. And what we are recognizing and discussing right now is a notion we call ‘stages of advice,’ … especially with the size of our employer-based business, we need to think about bringing advice to these customers in a variety of ways. Whether that’s online, through a call center, the OnStar kind of capabilities, or whether that be face-to-face– which could be similar to our high-end fee-based channels.

Or, there’s another face-to-face model that’s much more economic and also appealing to consumers who aren’t interested in the traditional advice channel. So, we also want to create an environment as I referred a moment ago as stages of advice. You may enter at one place and go as far as you can on the phone or on the web, but you may want to be referred out. So, it’s not about building separate self-contained advice channels, but advice channels that can give clients market entry into Lincoln in ways that are comfortable for them— but provide flexibility as they understand how complex their needs may be or may not be. That type of thinking is very much in infancy, but I think, in general across the company, there’s a recognition that the way we’ve been so successful today will continue to help us be successful in the future— and we also need to think of alternative ways to expand our reach to keep customers that we believe would benefit from our products and services.

Macchia – In my judgment, that’s a very well conceived formulation and the future is probably going to hold all of those pieces working simultaneously.

I’d like to ask you about something else and that is: What constitutes a “solution” to generate income? I say this understanding that there’s a more holistic view in terms of the other issues that need to be addressed. But, there’s a couple schools of thought about retirement income generation solutions. One is that it’s by definition going to require new types of products that have not yet been introduced in the retail world, and there’s another school of thought that says we have everything we need right now. We have ETFs and mutual funds and variable annuities and insurance products, long term care, fixed and variable annuities, etc., etc., etc., and that putting these products in strategic combinations is really the answer. I wonder if you have a view of which of those may be correct?

Dzielak – As of right now, I do believe that the products that are offered in the market today are ahead of the consumers. We have the right tools today to begin to meet the needs of retirement – whether it be with annuities, ETFs, mutual funds. The issue I believe we have as an industry is that we haven’t positioned them, talked about them or sold them to meet the income needs. They’ve still been positioned as accumulation products – even if you get into the withdrawal benefits on the annuities.

Bottom line, I do think on the whole we have the products that can carry us for the next 12, 18, 24 months. I think new product categories will likely emerge, probably more in the area of turning non-liquid assets into liquid assets. If you think about how much equity these boomers have in their homes, how do we convert that to income? So there’s probably new categories that will emerge – are reverse mortgages are the right thing? But, David, honestly I think we have the products right now. What we don’t have is the process to help the advisors better position those product options to meet the consumers’ needs.

Macchia – I agree.

Dzielak –I believe in my heart that we have made our products much more complex than customers can swallow- and advisors for that matter. I think we’ve out innovated ourselves. We need to move back to the basics and really simplify the products that we have.

Macchia – I also agree with that. Let me ask you about another aspect of this, and that is something that I see developing out there in the retail world. You have advisors who are increasingly interested in income distribution; they clearly need training and insight. But you have some that are tending to coalesce around what I would describe as analogous to the religions we have in the real world.

You have the religion of VA GMWB, you have the religion of target date retirement funds, or the religion of target date funds that are linked to a lifetime annuity, or you have other people who say that lifetime annuitization is the answer, others who say the religion of systematic withdrawals, and others who believe in time-weighted , segmented strategies. I wonder if you see this phenomenon, and if so, what you think the end game here is in term of choosing a religion.

Dzielak – We see it everyday– we are a very product lead industry. You’ll see certain advisors, brokers who migrate to their religion of choice. We believe that will continue to exist. We need to make sure in a product lead channel that we have the right solutions.

There is an emerging belief- not only at Lincoln, but I think in the market – not in your traditional wire house broker channels – that planning is really what’s going to bring advisor capability to the top, and what planning is about to me is understanding first the needs of the client and then matching the right product solution to meet those needs. And that’s the approach we’re taking here at Lincoln. I think we’ll have the most success as we move into this new era with those advisors and those advisor firms who really value the notion of needs-based selling and planning and aren’t as transaction and product lead. I don’t think you’re going to get away from it. I mean, it is very rooted in a lot of the advisors that we work with today. They specialize in one product line or one product for that matter, and have been extremely successful with it. There are solutions that enable them to provide some level of retirement income to those clients, but the real magic and the real successors will be those who take a much more planning lead approach.

Macchia – And, related to that, what about compliance and potentially future financial liability risk? If, for example, an advisor recommends to a consumer with $700,000, in retirement assets that putting it in a VA and using the GMWB as the retirement “solution” is the answer. Does that perhaps denote a problem in the future?

Dzielak – Absolutely. It’s interesting because that’s why we believe so much in this planning process that we’re working so hard on. It’s going to have some substance as to why you recommended that portion of the portfolio being an annuity or that portion of the portfolio being in this basket of mutual funds. It’s definitely a fine line, and we’ve engaged our compliance area in the work that we’re doing on the planning process.

We believe with the proper planning approach that it is going to be a much more compliant sale. Today, I don’t know, to be candid with you, what the thought process is in a lot of our advisors heads on why they recommend a certain portion of the portfolio in annuity. There’s not a lot of rigor around matching the annuity sale up with the income need. The tools and capabilities we hope to bring to market will give a lot more credence to the product recommendations to justify why a portion of the client’s portfolio does belong in an annuity and why a portion may belong in this insurance policy and mutual fund.

But it is a very interesting area, and it’s going to be. I do think we’re going to have to challenge the norm on some of the compliance. There is some game-changing stuff here that this industry really needs to step up and challenge traditional norms- around the annuity sale in particular, but also enable advisors to provide more advice than they do today.

Macchia – Your comments remind me of something that Wealth2 has recently done, driven by one of our large independent broker-dealer clients which is to develop what may be the first risk assessment process covering retirement income.

Dzielak – Yes.

Macchia – It’s obvious that this is conventional wisdom in accumulation, but the exercise here is to try to determine – based upon 17 questions – a client’s volatility factor and guarantee factor. In other words, what is the tolerance for variable versus guaranteed income? How much of the overall income should be provided, say, by a GMWB benefit? And what target rate of return assumptions should be used to develop, over time, the variable income stream? Does this resonate with you as something that’s important?

Dzielak – Absolutely. Yes. As I hear you talk and think about the work we’re doing, it’s very similar. When we think about accumulation, a lot of what went into driving the accumulation success in individual markets is: Are you saving in the right products? Is your asset allocation appropriate? Are you getting yourself enough upside and protecting the downside?

As we move into retirement and think about what clients are going to face, it’s much more about product allocation than it is about asset allocation. Product allocation helps you more effectively address the risk side of this equation. But I think what Wealth2k is undertaking is very similar to the types of questions that will lead to the product solutions that we believe are critical to securing income in retirement for these clients. And it’s the questions that we’ve gone out and talked to advisors about; they are not questions that are being asked en masse today.

Macchia – Clearly.

Dzielak – They’re not driving the recommendations that advisors are providing the customers.

Macchia – I think that, while I’m happy to hear you say it, and I agree with you completely. I want to ask you about something else and this is a question that I ask in every interview because it goes to the core of my beliefs of what’s at stake in terms of boomer retirement.

I have many times stated and have sometimes found absolute perfect agreement in my assertion, and other times I have been challenged, sometimes vigorously challenged, over my belief that in this high stakes contest over boomer retirement assets, the ultimate winners will not be those companies that have the “best products,” but rather will be those companies that are best able, most effectively able, to communicate their value to large and fluid segments of a marketplace. I wonder what … I wonder if you buy into that?

Dzielak – I completely agree with you. I do not believe this game will be won by product leadership or product innovation solely. I think that will be table stakes. When I think about retirement income security–it’s probably articulated in this interview in a way that makes you and potentially the readers of this interview think that it’s about products that bring security. To me, I think the more important aspects of security are a relationship with a company and an advisor that make them comfortable that retirement is going to be okay.

So when I think of what we could do at Lincoln and what we’re thinking about at Lincoln is creating that experience— but extend it well beyond our product set and give the advisor and the ultimate consumer, or consumer directly, comfort that Lincoln understands their needs. They’ve developed products, their capability, how ever they think about us, that addresses those needs and gives them comfort that they don’t have to worry about their finances in retirement. The winners are going to be a very customer-experience lead company.

Macchia – I agree again. Is it true? Do you have a formal experienced officer; someone who’s been identified…

Dzielak – No, we don’t. But in the group we spoke of when we first started this interview, I do have an area of our team that is focused on the product/service experience. So we are incubating that notion here within the group that’s been formed. The work they’re doing bridges across how we’re creating the experience and the products we’re building, the services we’ll be providing– how we’re creating that experience at every customer touch point. I think it will grow and emerge to something like an experience officer, but it’s very new territory for us, so we haven’t justified that role yet.

Macchia – I understand. I want to ask you about something else which relates to the communications question and the high stakes nature of this contest. But while insurers slowly and, in some cases, glacier-ly ready themselves to prepare for this opportunity, other types of organizations have set their sights on the same customer base. In terms of large asset management firms which for years have successfully developed, marketed and sold structured products in the institutional markets, there’s a great deal of focus currently on building products with guarantees and qualities that mimic, say, variable annuities or other insurance-related products, and selling those into the large consumer market right in the middle of the insurers’ ball field. And some of these companies are very large, very sophisticated and move quickly and have a high degree of marketing savvy. I wonder if you think about that. I wonder if you think about that in a year or two or three … that Lincoln or other insurers could be facing a whole new level of competition, and if so, what you think the implications of that might be?

Dzielak – Yes. We think about it every day. In this role that I have here at Lincoln, if you ask me who my peer group is, it extends well beyond – and it may not even include a lot of the top insurance companies that we face off with – it does include the asset management companies. It does include brokerage. It does include banking.

The world’s watching and very aware and concerned because they are the companies who have the customers today. If you look at asset management and defined contribution – a Fidelity, or an American Funds – they have huge client bases that, if they out execute us, they have a high likelihood of success. The one area that we still own is the guarantees. Yes, there are synthetic guarantees being built, as you know. Is that of equal value to customers? Is that level of guarantee going to be acceptable to the customers? It’s something that concerns us.

This is our game to lose and execution is going to be the key. We’ve got something special in the insurance industry. As you mentioned in your question, traditionally we’ve operated at glacial speed. The formation of this group here at Lincoln was based on a recognition and a challenge to pickup the pace, to out execute and to think less about operating at a traditional insurance company pace, but keeping up with asset management and brokerage firms.

The other thing I’d say to you, as much I get anxious about the activity going on out in the other competitors … is it all about one company owning this opportunity or is it about creating relationships with some of these forward thinking asset management companies? Is there a way to bring our franchise rights in combination with some of them so it comes together? We own this space. Who’s going to win this game? I don’t believe it’s the company that’s going to build all of the necessary capabilities, but companies that create those appropriate relationships with other folks in this industry who want to be leaders and bring our complementary skills together. So as I think about it, it’s not as much our strategic intent as it is that we want to be the retirement income security company; we may get there through joint ventures, through partnerships or building our own capabilities. That’s still to be determined.

Macchia – I actually see the potential of that in a similar fashion. I think there are important strategic opportunities, but I also think that a minority of insurers will be able to execute on those strategic opportunities.

Dzielak – Yes.

Macchia – But, for those that do…

Dzielak – it will be big.

Macchia – It could be really big and highly rewarding.

Dzielak– Before I forget, when I think about partnerships and joint ventures, the other thing that the insurance industry has been woefully behind on is technology. So, when you think about creating this experience for customers– is there a way for us to leap frog some of these other industries or competitors that we just talked about and think about joint ventures more on the technology and service side, too? It’s not just about the assets and asset management and insurance, but also looking towards technology as being an enabler. How do you create some distinct competitive advantage there, too?

Macchia – Well, in my commercial life I’ve certainly staked a large financial bet on the truth in what you just said.

Dzielak – Yes.

Macchia – We’ll see. Heather, we’ve covered a lot of ground. Is there any area that I have failed to address that we should talk about?

Dzielak – The only other comment I would make is that we’re just at the beginning. There are a lot of folks out there that don’t believe that the wave has hit yet, and question why everyone is focusing on retirement income. One of the things we talk a lot about here as a real challenge as we embark on the next one to three to five years is that we recognize that it’s an evolving era we’re entering.

A lot of the work that we’re doing today is creating capabilities that will allow us to watch and study consumer behavior, so that we’re ahead of the trends. One thing I worry about and that we’ve tried to be careful about here at Lincoln is to build capabilities and infrastructure that enable us to evolve. I can guarantee that what we understand today is going to be very different than how we understand it two years from now. We need to create environments in financial services that allow us to observe customers at a much more direct level. Most of what’s driven our business today is a lens through our advisor channel. The financial services industry needs to take some learnings from the consumer products industry and other industries – the credit card industry – that have become much more in-tune with buyer behavior. I think we’re going to learn a lot from our customers in the next decade and we better be setting ourselves up to be willing and able to learn and capture those learnings and transition them into products and solutions.

Macchia – On that very large thought, I like to transition into a couple personal questions, if I could.

Dzielak – Sure.

Macchia – The first one, Heather, is this. If I could somehow convey to you a magic wand and by waving this magic wand you could affect any two changes that you wish to make in the world of financial services, what would those changes be?

Dzielak – Oh, my goodness. That’s a big question.

Macchia – It’s my specialty.

Dzielak – If I could change anything, the one thing that I see holding companies back from progress is – how do I say it – silo or segment mentality. I believe that the way that companies – and I’m not just speaking to Lincoln, I’m speaking in general – the way that we’re structured, the way we’re “incented” drives the behavior today that’s not aligned with how customers interface and buy our products and have relationships with our companies. So, if there was a way to break down the silos and get more enterprise customer-facing thinking, I think progress would move at a much more rapid pace. Does that make sense?

Macchia – Well, to me it makes perfect sense. That’s why I helped to put RIIA together. That’s the reason. Let me ask you the next question. Which is: If you were not heading up the strategically important group at Lincoln, but instead you could have any position, any occupation in any other industry, anything in the world, what would you choose to do?

Dzielak – I’d actually be an entrepreneur. And I would be an entrepreneur that would be focused on proving financial advice to consumers. It’s interesting, I feel so passionate about the power of this opportunity, and I believe Lincoln’s the company that can be a leader. If Lincoln can’t or we can’t pull it off here because of the corporate culture or the size, there’s a tremendous amount of gratification I could get from personally figuring out ways to bring financial security to boomers.

I don’t know that I would engage in another corporate job. I think I’d like to be in an environment where I can actually affect execution on something I believe in. Whether that’s consulting or whether that’s building out my own advice capabilities. I don’t know what form it would take, but I would take the work I’m doing here and bring it into an environment where I can actually effect change and execution.

Macchia – Well, your passion for that is palpable. Last question. I’d like you to imagine your own retirement, but in its most conceivably perfect form. Where would you be and what would you be doing?

Dzielak – Where would I be and what would I be doing? My kids would be grown up and successful. I would still be very active. I don’t believe I would be– I know I wouldn’t be active in financial services. I’d be active in doing good for my community, doing good for the less fortunate and doing it in an environment where I never had to think about my finances. I want to get to a point in my life where I can really create a legacy for folks that are less fortunate. I worked with someone in the past who talked to me about income as freedom, and it rings so true to me. I want to get to a point where I feel very comfortable– and that’s not traveling around the world to me. It’s about knowing I can wake up in the morning and actually do good for people that haven’t been able to do good for themselves. For me, retirement is not about the glamour. It’s about the time in my life where I’ve taken care of my family, protected myself, and now have the financial wherewithal to make a difference in some else’s life.

Macchia – Pretty beautiful vision.

Dzielak – It will come true; I know it will. I think about it a lot and feel so lucky to have the life I’ve had, and I just can’t wait for the day when I can share it with someone who just hasn’t had that fortune.

Macchia – I wouldn’t bet against you. Let’s put it that way. Thanks so much.

Dzielak- I’ve enjoyed it.

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©Copyright 2007 David A. Macchia. All rights reserved.