Retirement Income

A website that isn’t seen can’t generate leads

A website that isn’t seen can’t generate leads.

This is why Wealth2k has developed a simple and effective strategy that financial advisors
may use to tap the power of online marketing using Google AdWords.

To get their websites in front of potential customers, companies representing every sector of the U.S. economy commit advertising dollars to AdWords. But at a combined $4 Billion in 2012, no industries spend more than insurance and finance. This should be a clear message to independent financial advisors about the importance of online marketing. No advisor’s economic future is well served by a website that’s a sleep aid.

Social Security Wise reinvents financial advisors’ ability to market successfully online.

The “Bucket War” of 2009: Now that everyone seems to have discovered “Buckets,” what’s next?

You may not have noticed, but over the summer a “Buckets” war broke out in the retirement income business. It seems that everyone has discovered “Buckets,” a reference to time-segmented asset allocation or “laddered” income-generation strategies.

In June of this year the non-profit National Endowment for Financial Education (NEFE) launched a retirement income-focused website called The website highlights a strategy to, “to split your money into three buckets. Each “bucket” covers a certain period of years and holds different types of investments, depending on the time period covered.”

In July, both Russell Investments and Nationwide unveiled their versions of “Buckets.” Russell based it’s version on a four-Bucket strategy, naming them the “Endowment Bucket,” the “Kids’ and Bequest Bucket,” the “Lifestyle Bucket” and the “Essentials Bucket.”

Not to be outdone, Nationwide’s program, known as RetireSense, is based upon five, five year “Buckets” that Nationwide has called “Life Segments.” With it’s program it appears that Nationwide has copied Wealth2k’s program, The Income for Life Model. “Buckets” of five-years’ duration not to mention expropriating the “Segment” nomenclature seems like a copy to me. Where did Nationwide get these ideas?

In August, a group called Sequent introduced a program called “Better Buckets” that is based upon a three-Bucket design. I suspect that Raymond Lucia, CFP, author of the book entitled Buckets of Money may object to all this “Bucketizing!” He owns a trademark on the term buckets.

Having been “on the street” with a laddered income generation strategy (The Income for Life Model) since 2003,I’m thrilled that so many others have joined the party. It’s a positive development. Time-segmentation offers very real economic advantages as well as psychological and behavioral benefits that are just as important. Look no further than the experiences over the course of the market breakdown of advisors who had recommended The Income for Life Model. They and their clients are in much better shape than most. I’ve “lived the difference” with these advisors. It’s quite real.

So we have a bevy of “Buckets” but do we have a winning strategy? Maybe. Wealth2k’s focus is not to force a predetermined number of “Buckets” on an investor. Rather it is to craft n income-generation plan that utilizes precisely the number of “Buckets” that best meets the investor’s needs. Doesn’t that make more sense? Moreover, the Wealth2k approach begins with assessing the investor’s need for guaranteed retirement income and then proceeds to “build a floor” of guaranteed retirement income undet the time-segmented strategy.

More and more people are learnng about outcome-focused retirement income investing strategies including time-segmentation. You may enjoy visiting the first website Wealth2k has built for investors. It’s I would appreciate your thoughts about it.

The “Facebook-ing” of Retirement Income

What factors stand in the way of independent advisors and broker-dealers maximizing their success in the retirement income and Rollover IRA markets? It’s a complicated question with multiple answers including the impact of potentially disruptive changes in the regulatory landscape.

One area that I am convinced will really matter is the quality of advisor-client communications. Financial advisors, like most business people, are being affected by customers’ preferences and habits when it comes to evaluating products and services. The nature of the evaluating process is changing, with online research and validation becoming ever more important.

I recently wrote an article for Kerry Pechter’s Retirement Income Journal that addresses how the behavior of high-quality, Web savvy prospects for retirement income services may impact advisors’ future success. If you would like to read the article, click here.

The Coming “Framework Culture” and the Adoption of a Blanket Fiduciary Standard; Forces for Regulatory Reform, Boomer Retirement Income Security Needs Will Level the Regulatory Playing Field

With so much upheaval in the economy one wonders about what changes may arise in the not too distant future. In that context let me offer two predictions:

Prediction Number One: All advisors will be deemed to be fiduciaries within 1-2 years.

There could be no development more disruptive to today’s financial products distribution landscape than the leveling of the regulatory playing field and the categorizing of all advisors as fiduciaries. It’s coming. Inevitable, in my judgment. RIAs, brokers and insurance agents will all operate on a level playing field and the results will be spectacularly disruptive. Start planning now.

In the Post Madoff, post-Lehman, post-AIG world of financial services, the investing customer- especially the Boomer investing customer- will not tolerate anything less than a fiduciary standard of care. What Boomer customer (when he or she understands the difference, and they will) won’t prefer to have his/her financial interests placed first?

Different industries will look at and respond differently to the forces pushing us toward the adoption of a blanket fiduciary standard.” How will industries react? Look for a bifurcated response between the investment management and insurance industries.

Life Insurers

This is a true inflection point for insurers. Will they opt to embrace transparency and retool their distribution models? My guess is that many insurers will be late to react and then do whatever possible to delay (defeat) the adoption of the blanket fiduciary standard. There is also the issue of distraction. Those insurers seeking to invalidate SEC rule 151(a) through a legal challenge will continue to expend energy on this effort. But whether that are or are not successful may not matter much in the final analysis. The regulatory environment is shifting under the insurers and unless they grasp the magnitude of the coming disruption they will be caught flatfooted and unprepared.

Investment Managers

How will the investment management industry respond? In a recent InvestmentNews article the Investment Company Institute’s President & CEO, Paul Schott Stevens, was quoted as backing adoption of a blanket fiduciary standard. He stated that a fiduciary standard, “…does provide a higher standard of responsibility and accountability,” and he asked, “Isn’t that something that all of our recent experience suggests is important?” After Madoff and company, who could reasonably argue that the answer to that question should be answered “yes?” Not the Boomers, I’m betting.

After suffering $Trillions in investment losses the Boomers will demand a fiduciary standard of care from every advisor they engage with.

With Obama atop the Federal government we are likely to see a return to a Carter-like strengthening of Federal regulation, generally. In terms of financial services, following $8Trillion of accumulated bailouts/guarantees and back-stops, the forces for intense regulation cannot be stopped. This probably means, among other things, Federal takeover of insurance regulation (to prevent the next AIG).

Prediction Number Two: The traditional product-centric/asset allocation culture will be supplanted by a new “Framework Culture” that is better equipped to recognize and manage the full spectrum of a retiree’s risks.

In the framework culture investing (financial capital) doesn’t go away but it does change. The investing strategies employed in the framework culture will be far more outcome-focused and funded by complimentary products that are mixed strategically in order to optimize overall performance.

In the framework culture “performance” isn’t defined by investing alpha as much as it is by “psychological alpha,” the investor’s ability to persist with the overall retirement security strategy through even the bleakest periods of investment performance.

“Psychological alpha” can be delivered by time-segmentation of assets and the inclusion of a lifetime “income floor” that collectively provide predictable retirement income and appropriate exposure to upside investment opportunity in accordance with the investor’s preferences and risk tolerance. Importantly, “risk tolerance” in this context focuses on evaluation of retirement income risk tolerance.

Products will come and go over time, but the framework endures. Products will be tweaked with innovation in order to match performance with objectives. But the enduring framework provides an understandable, monitorable roadmap.

Other forms of capital such as Social Capital and Human Capital are critically important in the framework culture. In fact, one could argue that these types of capital have taken on more importance than at any time since the introduction of Social Security. Outsized losses in qualified and non-qualified investment accounts, low personal savings and few defined benefit plans are only some of the factors that accelerate the need for a re-definition of retirement income planning. Significantly, this is already taking place. At the Retirement Income Industry Association the next-generation advisory process is being developed, and it can’t arrive quickly enough. (See March 2009 Research Magazine article by RIIA Chairman, Francois Gadenne).

The movement toward blanket adoption of the fiduciary standard and the arrival of the framework culture are disruptive developments that will ultimately serve the best interests of investors. They are developments that will also serve the interest of companies that demonstrate their ability to successfully adapt to a new way of doing business.

Please let me know if you agree with these predictions.

©Copyright 2009 David A. Macchia. All rights reserved.

Excerpts from my May 9 Keynote Address at the Structured Products Americas Conference: Creating a Smooth & Successful Introduction of Structured Products in the Boomer Retirement Market

At last week’s Structured Products Americas conference I spoke about the opportunities and challenges facing structured products providers (and distributors) as they set their focus on the U.S. Boomer retirement marketplace. The potential for structured products is simply enormous. As more advisors and their clients shift their attention to outcome-oriented investing strategies, the outlook for structured notes, ETNs and other structured investment products is bright.

That said, there are several issues that will test the industry before it reaches its full potential in the years ahead. Delivering education efficiently to huge numbers of people (both advisors and consumers) is one. Reigning in the tendency to engineer complexity into product designs is another.

When thinking about the potentially large share of retirement investing dollars that structured products may attract, I’m convinced that their success will not be fully realized unless the structured products industry finds ways to link its products to near perfect context for their selection. If it succeeds at this it will inspire confidence among investors and advisors that yields market share and profitability.

Structured Products Americas Conference
The Biltmore Hotel
Coral Gables Florida
May 9, 2008

Good Morning.

I’ve been looking forward to this meeting and the opportunity to describe what I believe is going to be required for a smooth and successful introduction of structured products into the Boomer retirement market.

I think about the issue of Boomer retirement, a lot. and I view it through two lenses.

In my commercial life, my company, Wealth2k, has been in the business of delivering comprehensive solutions for retirement income distribution since 2003. That’s the “ice age” of income distribution. We’ve seen a lot, and learned a lot, all of which is reflected in leading-edge programs such as The Income for Life Model.

In my non-profit life I’m a Director of the Retirement Income Industry Association where I have the privilege of working with a host of talented individuals- from industry and academia- who have come together across industries and business silos to engage in the retirement income conversation.

he role of the Retirement Income Industry Association is to be sort of a retirement income version of Switzerland, a neutral place where all silos can come together in an unbiased fashion. You can see this fact in the diversity of member companies RIIA has attracted. Names like Merrill Lynch, Bank of America, MetLife Financial, Goldman Sachs. Oppenheimer, Wachovia and UBS, to name a few.

I also learn a great deal about retirement through the interviews I conduct with academics and executive leaders in financial services. The interviews appear at my blog, and also as a monthly feature in Research Magazine.

So, I come to this meeting with some pre-conceived beliefs. Including that the Structured Products industry has the potential to define the future of retirement security in the United States. But how the industry gets itself out in front of tens of millions of Boomer customers is the key question. How it educates advisors, regulators and consumers, packages its products, creates vital context for structured products and communicates their value are big questions that I’m going to talk about.

Sometimes looking back over history can help us see things that we should or shouldn’t repeat.

History matters, of course. Recent history has shown that one type of structured product has been offered to retail customers in the U.S. since 1995. And if there ever was an index case to show how the structured products industry should not behave as it targets the consumer market, it’s showcased in the example of the 13-year history of the Equity-Indexed annuity.

Looking very much like a vanilla Structured Note, the first equity-indexed annuity was introduced in 1995 by Keyport Life Insurance Company. The annuity was called KeyIndex. The annuity had a five year contract term. It provided upside growth potential based upon a 95% participation in any potential growth of the S&P 500 over the term.

The annuity also offered downside protection based upon minimum guaranteed interest crediting equal to the original investment compounded at 3%. This meant that, at a minimum, the annuity owner would be guaranteed 121% of the original investment after five years.

What actually happened, of course, is that the people who purchased these annuities in 1995 did very well. They just about tripled their money. Pretty compelling.

If you looked at the structure of this first equity-indexed annuity, you could observe some things: First, it was easy to understand. Fairly transparent, uncomplicated, and uncluttered.

Second, it offered a pristine value proposition that was quite appealing to the consumers it was target to: upside growth potential combined with downside protection.

Third, if the growth in the S&P had not occurred, the annuity owner would not have been particularly disadvantaged. A 21% gain would have been quite acceptable.

Fourth, liquidity was generous. There was a deferred sales charge of 5% grading down to zero at the end of five years. The commission to the retail agent was 4%.

The target market for this annuity was the segment of investors age 60 and over. And so it represented a particularly suitable type of story to bring to people who were nearing or already in retirement.

By year 2000, when the first generation of KeyIndex annuities was coming up for renewal, much had occurred in the equity-indexed annuity industry. Other insurance companies that had seen the success that Keyport was enjoying and they began to develop their own equity-indexed annuity products.

It was at this point we began to see the usual knee-jerk reaction response by insurance companies to their perceived competitive threats: add complexity, bury higher loads and fees, reduce liquidity and play upon agents’ weaknesses in terms of prospecting and productivity by juicing-up compensation.

So by the year 2000, it was possible to exchange the Keyport annuity for another insurance company’s equity-indexed annuity that offered 125% of the upside performance of the S&P 500.

But, as you can imagine, there had to be another dimension to this second-generation equity-indexed annuity. A modifier, if you will. And there was. It was the introduction of daily averaging of index values in the calculation of the ultimate annuity accumulation value.

The effect of adding the averaging formula to the interest crediting calculation was to create an annuity with far less growth potential than the original Keyport annuity. But it also created an annuity which could be marketed and misrepresented as if, in fact, it was actually a superior product. After all, if 95% of something is good, 125% of something must be even better.
This is when we began to see widespread market conduct practices that featured agents explaining only the upside of equity-indexed annuities. Frankly, as time went on, most agents struggled to understand how these ever-more-complex annuity products credited interest.

As sales success followed the introduction of such products, the insurance companies engineered more novel “features” such as two-tiered interest crediting and “bonuses” on the invested premiums. So, before long, an equity-indexed annuity could be sold that provided a 10% bonus on the original investment, on top of the 3% minimum interest rate guarantee, and another 10% paid in commission to the insurance agent. That’s 23% out the door in the first year. How could the insurance company possibly make money on this deal when it was investing most of the premium in bonds paying 6%?

Gimmickry takes care of that issue. The penalty period for early surrender had been effectively made permanent, so the investor couldn’t really liquidate his or her account value. The base interest rate was only credited on 85% of the original investment, and the 10% “bonus” was more cute than credible.

In practice, the only way to get back one’s money without suffering a horrific financial penalty was to take systematic withdrawals over a minimum of five years, to which the insurance company imputed a withdrawal factor based upon a below market internal rate of return. This contract provision effectively reduced the withdrawal penalty level down from horrific to only severe.
A relevant question for us to ask is, “Was this particular annuity a success in terms of sales?” Did consumers really put their money into it?

If fact, this particular equity-indexed annuity was such a success that it became the most popular selling equity-indexed annuity in history of the business. About $20 Billion in total sales since its introduction.

The sales success of insurers offering equity indexed annuities with ever more complex and gimmickry features, low levels of liquidity, extraordinarily high expenses and double-digit commission rates caused something to happen that had never before been thought possible: that is, almost by definition, annuities became viewed as unsuitable for retirees. Having begun my career 31 years ago, and having been taught that the only people who were suitable for annuities were seniors, this was quite a remarkable achievement for the insurance industry.

By 2005, the equity-indexed annuity marketing environment had become so misleading, so predatory and so reckless that FINRA, an organization with no jurisdictional responsibility for oversight of the fixed annuity industry, stepped-in with its Notice to Members 05-50. That notice directed broker-dealers to assume suitability review for equity-indexed annuity sales, for product selection and even for the training of their registered representatives who would continue to market the products.
As you can imagine the consumer press began to notice what was occurring in terms of annuity marketing. So did a number of regulators.

Articles began to appear in newspapers and magazines that cautioned seniors to, “Avoid a Costly Mistake.”

The front page of the New York Times exposed an open secret in the annuity business: agents using specious professional designations to position them as specially trained to manage seniors’ financial needs.

The ultimate reflection of how crossed-up the annuity business has become occurred just a few weeks ago. Using the same format as it has employed to snare child sexual predators, Dateline NBC set up a hidden camera sting operation to catch insurance agents in the act of selling indexed annuities to seniors.

In recent years as the annuity marketing environment became more hostile, the response by equity-indexed annuity providers was to add more and more required disclosure forms at the point of sale. These companies’ legal departments may have advised this approach, but it has been entirely ineffective in mitigating the criticism, poor publicity, class-action litigation and regulatory sanctions that have plagued the industry.

The annuity business today is badly broken. In fact, it’s so broken that its level of success in what should be its greatest sales opportunity, ever- Boomer retirement- may be compromised. This is a fact that the structured products industry should pay close attention to. Not only for what it makes possible, but also for what it teaches.

What’s at Stake Over Retirement Income

All of us understand that there’s a lot at stake in terms the business opportunities around retirement income. When you think about the Boomers’ needs as they approach retirement, when you think about the strategies required for effective management of their post-retirement income distribution challenges, it’s easy to see that insurance companies possess inherent advantages over other industries. Such as, for example, the structured products industry.

It’s insurers who have the historical competency and vast experience in providing lifetime annuity guarantees, asset liability matching and longevitization. But what are these tangible advantages worth if the stench associated with the industry is so strong it repels its natural customers?

This is really a tragedy on a grand scale for the life insurance industry. And, because of guilt by association, the experience of the equity-indexed annuity business is problematic for the other annuity product silos as well, including variable annuities and immediate annuities. The typical consumer simply cannot differentiate between these different types of annuity contracts. They just hear the word “annuity” used in some negative context and they recoil.

Interestingly enough, there’s been one meaningful development that is making a positive impact on the equity-indexed annuity industry. That is an effort called FIA Today. It’s actually my brainchild, undertaken by my company, with the goal to transform the equity-indexed annuity sales process. It’s a web application.

FIA Today utilizes web-based technology, digital media and FINRA-reviewed educational presentations in order, for the first time, to place a neutral, unbiased education at the center of the equity-indexed annuity sales process.
With this web-based application insurance agents are able to explain equity-indexed annuities in a fair and balanced manner, and investors may gain a meaningful understanding of the risks and rewards of owning these products. Before FIA Today, investors only heard about the potential rewards.

There are two things that are very, very important about FIA Today. The first is that it relies upon a delivery format that is meaningful for today’s consumers. Specifically, the key educational tool, a FINRA-reviewed movie that is able to convey a compliant educational story, but do so in a way that doesn’t sacrifice sales appeal. The movie is delivered to the web browser, on-demand. It’s the consumer who is empowered to be able to learn without sales pressure.

The second important aspect is personalization in terms of compliant, advisor-personalized micro sites that function as personalized virtual advisors. These virtual advisors deliver the educational experience direct to the consumer’s web browser while maintaining the advisor’s identity and central role.

In my judgment, the deployment of a similar, technology-driven, advisor-centric educational application is urgently needed for the retail Structured Products marketplace. In fact, Wealth2k is going to provide it.

We have unambiguous indication from some of the largest distributors in the U.S. that they want it. They want it because they have a huge stake in seeing that both their advisors and retail investors are provided balanced, neutral and unbiased education on Structured Products. I believe that the providers of structured products have a similar stake in this effort.

Context and Relevance

Let’s focus on some of the issues that will be relevant to achieving large sales success in the Boomer retirement market.

Here’s a key word: Context

To achieve the greatest level of success, structured products must find the best Context for their selection by advisors and investors.

The logical context for structured products in the Boomer retirement market has two parts. The first is in playing a vital role in retirement Transition Management, and the second is playing a vital role in post-retirement income distribution

It’s in the opportunity around transition management that the equity-indexed annuity industry has blown its chance, paving the way for structured products to take away its market share.

In thinking about transition management, we likely all understand that in the 7-8 years preceding retirement, retirement assets may double. Investment losses during this critical period will cause a lifelong reduction in the amount of retirement income that can be generated.

Similarly, investment losses occurring in the years immediately following retirement will also cause a lowering of retirement income if not portfolio ruin.

If you make an investing mistake when you are still 20 years away from retirement, you have time on your side. The negative effects of the mistake can be mitigated. If you make a poor investing decision one year away from retirement you have a very big problem.

In part, this reality is driving lots of activity across the financial services industry. One reason is that we cannot know the ultimate levels of financial liability that the industry faces as a result of investing mistakes i.e. bad advice or products that crater during the distribution phase.

The Empirical Validation Framework (EVF)

What will the responses be to such mistakes from the courts, from Government regulators or from self regulatory organizations?
To mitigate this liability potential, on the one hand, and to develop a more meaningful approach for retirement investing, on the other, an effort is taking place at The Retirement Income Industry Association- or RIIA, as we call it. Work is underway to create the next-generation framework for retirement income investing.

Called the Empirical Validation Framework- or EVF- this initiative stems from the realization that the Markowitz, mean variance optimization paradigm is just too limited in scope to recognize the multiple risk factors retirees actually face.
We’d all agree that investment diversification has fueled the growth of financial services for the past several decades. However, it will take much more than MPT to power the industry over the next decades.

Moving beyond asset allocation to the new paradigm of retirees’ financial risk management, we can see that we have to add the components of pooling, hedging and risk free asset determination while still incorporating investment diversification.
If you think of this as a triangle you see Pooling, Hedging and Diversified Risky Assets at the various points of the triangle. With an important additional dynamic- advice- right in the center.

This arrangement is important because it more accurately aligns with the actual risks that retirees face, and with the strategies needed to mitigate those risks. RIIA has created a risk matrix in order to map the various risks so that people are able to better understand their full spectrum and how their personal situations may be impacted.

Once the risks are understood, advisors can begin to think about applying risk management approaches to these numerous risk factors.

When we think about investment diversification we think about what we might refer to as a prudent man index case for asset allocation. Call it 60% / 30% / 10%.

But when we think about retirement investing in the context of the EVF, we may think about this differently.
Maybe something that looks more like 40% / 40% / 10% / 10%

Now we’re covering the areas of Diversification, Pooling, Hedging, and the inclusion of Risk Free Asset (advice).

For any given investor these percentages may vary in recognition of individual investor suitability. That’s where the advice component comes in.

Financial services companies may implement the suitability-adjusted EVF with the specific products they offer. The EVF is product neutral. It does not identify the specific products that should be used to implement the risk management mandate.

That said, one can easily see a natural context for the value proposition provided by structured products. For example, in a solution for income generation based upon a strategic combination of products, structured products, for instance, designed to simultaneously grow and protect, and others designed to generate income , offer relevance that’s obvious.

In retirement income distribution there are several methodologies employed to generate income. I call these the religions of retirement income. Let me give you just one example of how the structured products business can capitalize.

One retirement income religion which is rapidly increasing in popularity is time-segmented asset allocation. This approach creates perfect context for structured products, where they me used as funding vehicles designed to meet time-specific targeted rates of return and targeted income levels. That’s a slam dunk if there ever was one

As I said the development of the retirement income EVF is being led by the Retirement Income Industry Association. RIIA’s Founding Chairman, Francois Gadenne, has energized the organization’s Research Committee on this project, and he has enlisted the participation of many noted academics from many universities.

The academics are conducting research in multiple areas that relate to the EVF including:

The optimum risk management allocations based on utility theory
The optimum risk management allocations based on consumption smoothing & living standard risk/reward framework
The impact of Arrow/Debreu State Preference Theory on risk management allocations, and,
– The impact of the Theory of Lifecycle Saving and Investing on risk management allocations

Now the emergence of a new retirement income investing framework implies much, including the imperative to train financial advisors on its use and context.

In fact, the very definition of a financial advisor’s role is in the process of undergoing transformation. Let me read this from one of RIIA’s Education Committee’s decks:

“As investors move through their lifecycle, approach retirement and live in retirement, a financial advisor is increasingly pressed to acquire new knowledge and to master new tasks that depart from traditional investment accumulation and move towards retirement income management. Such new knowledge and tasks have become sufficiently numerous and complex to require the formalization of new professional job definitions.”

RIIA is well into its development of this new job description, as well as a Body of Knowledge and curriculum for the training of FAs on these issues. It will offer a program for a new professional designation, Retirement Management Analyst(TM)- RMA- that will equip advisors with the skills they need to properly guide their clients through the distribution investing stage.

I’m not here to be a recruiter for RIIA- but I can’t help myself. It’s out of my passion I have for what the organization is contributing to the future health of retirement income businesses. No company intent on maximizing its opportunities in Boomer retirement can afford to not be member, in my judgment.

* * *

Formulating Success with Boomers

Let’s shift to something else. Let me talk about something close to my heart, something that I believe is vitally important to structured products providers and distributors. It has to do with a formulation for success with the consumer market.

Here’s my assertion: The key to success in delivering structured products successfully to the Boomers is not going to be found in a product or a piece of software. Instead, it’s going to be found in an emotion. It’s the emotion of Confidence.
Why is the creation of confidence so important? And confidence in what, exactly?

Here’s what I mean. Over 31 years in financial services I’ve seen one consistent phenomenon repeat itself over and over again during the accumulation phase. That is, investors putting their money into products that, at best, they only had a hazy understanding of. What these investors did have is confidence- in their advisors.

As we now look toward the years ahead in the distribution phase, I see the role of confidence changing in a significant and potentially dangerous manner. Due to financial liability potential that is so significant for all parties, I believe that investors will require confidence not only in the advisors, but also in the products, solutions and investing strategies themselves.

So, if I’m right about this- and I’ve staked a big bet that I am- then we have much work to do in the area of communications. Communications is the key to creating confidence.

Here’s the communications-based formula for the creation of confidence:
Clarity + Comfort + Compelling = Confidence

Clarity isn’t a commodity. Rather it’s the result of artful communications and storytelling.

Comfort is a by-product of Clarity. It’s the sense that clients understand and accept your clearly conveyed value.

Compelling is another word for “Why?” Why should the client select a particular product or strategy out of the universe of many?

The sum of Clarity, Comfort and Compelling is confidence in the particular financial product or strategy you wish to sell.
I see companies commit lots of money to product development. And I see them investing heavily in software modeling tools. These are appropriate investments. It’s the investments I don’t see that troubles me.
What I don’t see is the investments in the sorts of communications tools that advisors really need in order to stimulate interest in and understanding of structured products. Advisors will need a balanced set of hard and soft tools if they are maximize success with non-traditional products.

And here I’ll observe that if a company has a communications department, it doesn’t mean that that company is generating the kinds of communications products that are really called for.

Look at this quote from FPA President, Nicholas Nicolette. He says something that we should all pay close attention to:

• “The resources financial planners value most- in light of the increased retirement income business- are the ones that enable and facilitate their communication and conversations with clients.”

He is describing a need that almost all financial advisors indicate is critical to them. But it’s a need that isn’t being met.
The industry is building a coin with only one side. I see this in many parts of the business. For example, the variable annuity industry is making a huge investment in technology for straight through processing. But what is the advantage to making it easier to purchase an annuity if there is no interest in purchasing an annuity.

The investment in STP needs to be matched with an investment in communications and education that give consumers the context for understanding- and creates the demand for- the benefits of variable annuities.
We must realize that a brochure is simply insufficient to accomplish that objective.

Remember Hillary Clinton’s book, “it takes a Village?” Well, to the Structured Products industry I say, “It takes a Movie!”

You will have to give people the education, the motivation, and the confidence they want in a format that they want to receive it.
Let’s recognize that the digital video revolution is real. More and more people now learn by watching rather than reading. Consumers want to be entertained at their web browsers. On-demand. Maybe at 1:15 in the morning. Whenever they want it.
Web video has already marginalized or transformed large industries like newspapers and broadcasting. It’s had a profound impact on politics. Who would have thought that we’d be watching YouTube Presidential debates?

The adoption of broadband on a wide scale has changed everything when it comes to explain the value of complex financial products. Broadband is the brightest development that has occurred for the industry. It’s opened up the potential for dynamic growth, but it won’t mean much if it isn’t utilized.

This technology can be leveraged to solve many of the challenges we face. It will absolutely solve the compliance and market conduct challenges. It can be harnessed to furnish vital context and create widespread demand for structured products among millions of digitally-centric Boomers.

It can explain the advantages of structured products in a manner that is unimpeachably compliant, timely and convenient.
It’s the key to mass advisor education, and mass investor education. It’s the key to up selling and cross selling.
It’s the key to making people understand that the word derivatives shouldn’t scare them to death.
It’s the key to solving the advisor’s prospecting woes. It’s the key to penetration of the independent broker-dealer marketplace.
All of this is a function of communications and what I call the Retirement Income “C-Words of Retirement ncome Success:”






There one more C-word I want to mention. It’s the not so good C-Word: complexity.

The grave danger for the structured products industry is that complexity becomes such a burden that it turns out to be an impediment to effective communications. The mass market retail customer does not need the most complex, arcane, and exotic structured product that can be created.

The typical advisor does not need the most complex, arcane, and exotic structured product that can be created.
What both groups need are well-designed, easy-to-understand and timely structured products that can be conveyed compliantly and passionately, and with clear and compelling context.

If the industry meets this test it will achieve not only greatness in terms of sales success, it will have served American Boomer investors in an honorable manner throughout the most financial challenging period of their lives.

Before I conclude, one more item from history. Anyone recognize this guy?

Right. This is Bill Gates (photo from 1977). It’s Bill Gates long before he was fully formed (current Gates photo), long before his company’s products were packaged and destined to become part of the everyday lives of millions the world over.

This progression we see in Bill Gates life reminds me of the structured products industry. Not yet fully formed, not yet packaged for the masses, but having the potential for market dominance for a very long time.

Thank you for listening.

Copyright 2008 David Macchia. All rights reserved.

Study: Boomer Retirement Websites a Bust; Widening Deficit Highlights Negative Implications for Retirement Income Businesses

Last week an Ignites article by Hannah Glover highlighted a study of Boomer-directed websites that found that most companies’ retirement websites fail to live up to their sponsors’ advertising pitches. The report entitled, “Online Support for the New Retirement,” conducted by Practical Perspectives and Gallant Distribution Consulting, found retirement firms’ websites are typically, “…too scant, too pushy or too hard to find.”

My regular readers will know that I agree heartily with this assessment. I’d go even further in describing many retirement income websites; downright off-putting. That’s why so much attention to this very issue has been made here. What financial services companies must realize- and quickly- is that the gap between consumers’ expectations versus what companies deliver via their websites is dangerously wide. That deficit, however- as wide as it is- is the opportunity.

Future success in retirement income and retirement websites are interlinked, in my judgment. The reason is that more than in the past, the websites are going to be relied upon to create the confidence in retirement products and strategies that is essential to success.

To explain the magnitude of the difference between investing for accumulation versus investing for retirement income distribution, I’ve often used the analogy of the beginning of retirement as being the economic equivalent of puling up stakes and “Moving to Tibet.” In other words, leave everything you know behind and enter a strange, new world. I think the “Tibet” analogy is relevant to describe the extent of the disparity between the websites of financial services companies and those of large companies in other industries. If you would like to see some examples of how non-financial companies create engaging website/microsite experiences designed to better convey their value- and help their intermediaries, just visit Mercedes-Benz.TV, Calloway Golf, the Boston Pops and Cadillac.Catch a Digital Wave (close the gap), click here.

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

Role Reversal! Annuity Market News Turns the Tables on Me

As someone who generally plays the role of interviewer, I’m appreciative of Senior Editor, Kerry Pechter, for the interview he conducted with me that appears in the December ’07 issue of Annuity Market News. Kerry asked my about a variety of issues that are important to me including the state of the variable and fixed annuity industries, retirement income, and the emergence of structured products in the U.S. retail market. I appreciate his capturing my views accurately.

If you would like to read the interview, please click here.

Interview with Philip G. Lubinski, CFP. Leading Retirement Income Expert is First to be Featured in New Interview Series: America’s Elite Financial Advisors

philToday marks the introduction of my new interview series called America’s Elite Financial Advisors. I’m excited about these new series for many reasons but none more so than the opportunity to provide a platform to individuals who possess insights and knowledge that is too often insufficiently appreciated.

The subject of the inaugural interview is a man who counts me among the members of his fan club. Phil Lubinski is both a friend and business partner who has journeyed down the retirement income highway with me since 2003. Actually, I hitched a ride. Phil has been successfully navigating that roadway since 1984. It’s an obvious understatement to say that this was well before most had discovered the business opportunity in retirement income distribution.

It was Phil’s early work in crafting a time-weighted, laddered asset allocation strategy designed to generate sustainable, inflation-adjusted retirement income that led to the development of Wealth2k’s The Income for Life Model™ (IFLM).

Phil has brilliantly led the advisor education efforts around IFLM. He has completed training of more than 4,000 FAs using his one-of-a-kind approach to income distribution education. Focusing on the practical investment and income tax techniques that advisors are required to master in order to properly place retirement assets into a distribution mode, Phil’s IFLM Training Institute is hailed by advisors for the practical guidance and planning techniques they are taught. That advisors so easily relate to Phil is a key element in his ability to establish credibility with professionals who recognize that they are learning from one of their own.

A devoted Colorado Rockies fan (and season ticket-holder), I’m unable to easy Phil’s pain in seeing his favorite baseball team lose the World Series to the much superior Boston Red Sox. But I can make it possible for more people to get to know the man I refer to as the “Pope of Distribution.”

MACCHIA: Firstly, Phil, my sincere thanks to you for agreeing to have this interview with me. As you know, this is the first in a new series of interviews I’m calling America’s Elite Financial Advisors. I believe it’s important to gather the perspectives of those advisors who have managed to reach the highest levels of success. So, I’m happy you are the first to be interviewed. Thank you for that.

Phil Lubinski: It can only get better from here.

MACCHIA: I’m an optimist! Let me begin by asking you what you believe are the qualities of an elite advisor?

Phil Lubinski: Wow. You know I hope it’s not defined by the amount of commissions they generate on a yearly basis because, while that’s a measure of success, I really think the elite advisor is the one that has a relationship with a their clients that is far more than just transactional; elite advisors have a problem-solving relationship including advice and solutions in areas that have absolutely nothing to do with a product sale. A significant indicator of an elite advisor is the retention rate of their clients.

One measure of client retention was the National Quality Award. It was given to advisors who had an 85% or higher persistency rate, which correlates directly to client retention. Of all the top “production” awards I’ve received, my proudest accomplishment was receiving the National Quality Award for 20 consecutive years. The fact that I could retain more than 85 percent of my clients in good markets and bad spoke to the true nature of the relationship.

MACCHIA: You bring something up that resonates with me, Phil, because of my own background- having also entered financial services through the insurance door. And what you’re describing that doesn’t exist anymore is partly, if not totally, due to the fact that, along the way, insurance companies became product manufacturers with few exceptions. And the kind of development of not only the talent of salespeople but also, in a sense, the values of salespeople were lost. I wonder if you see that as being true?

Phil Lubinski: I see it as true and not necessarily in a malicious way. Like you, my roots also began in the insurance industry. My biggest decision 30 years ago was trying to select the best agency to join. In Denver, there were three very prominent insurance agencies that I interviewed; Northwestern Mutual, New England Life and State Mutual. Although all three companies had extremely competitive products, I chose State Mutual because its General Agent, Bernie Rosen, had a legendary training program. Not only was it a comprehensive 3 year program, but, more important, it instilled the “values” you referenced in your question. It was a true “needs” based approach that always placed the clients’ needs ahead of your own.

What I witnessed beginning in the late 80’s and through the 90’s was the explosion of the variable products combined with the greatest bull run in the history of the U.S. stock market. Planning and problem solving came to a screeching halt. Recommendations were no longer “need” based, but rather, “greed” based. Cost and performance became the mantra, insurance companies de-mutualized, stockholders needs seemed more important than the policyholder’s needs.

As the financial services industry focused more and more on profitability, budgets were cut, and one of the first things to go was advisor training. Unfortunately, the training was turned over to the product wholesalers. What I’m seeing now as we roll out the Income for Life Model™ nationally is advisors hungry for training. Advisors desperately wanting to learn how to sell the process, not the product. It has been an eye opener for me.

MACCHIA: Your answer raised many excellent points, some of which I want to come back to later- specifically in terms of retirement income. I want to stay on the issue of wholesalers for a minute because wholesalers are individuals that I know contact you and your associates quite often. And they are in the vanguard of distributing ever changing, ever more complex and ever more diverse products to advisors. How do you and your colleagues view wholesalers today? Do you like the process? Do you think it works? Do you think it’s broken? What is your general take on the whole notion of product wholesaling?

Phil Lubinski: I don’t know if our OSJ is a typical office or not. We have 11 advisors with more than 15 professional credentials and an average tenure of 17 yrs. We allow very few wholesalers to make presentations. The days of T-shirts and golf balls are over. We’re tired of hearing about yield and riders. Virtually every quarter there’s the new and improved rider, the “simple” single product solutions, the “my” fund beat “their” fund mentality. Even more alarming is that the products and features are changing so quickly that the wholesalers aren’t being trained adequately and several times have given us inaccurate information. We specialize in retirement income planning. We know there is no single product solution. We want wholesalers to show us how to strategically combine several products to meet our client’s needs. We’re not interested in hearing them “slam” their competitors. So, in answer to your questions, we don’t like the wholesaling process and through no fault of theirs…it is broke. Consequently, they bring little value to our table.

MACCHIA: Well, let me ask you this. In terms of products, in terms of the stories that you’re hearing about products and product innovation, do you view it that true innovation is occurring? Or do you view it that incremental changes are being made? Or do you find that it’s something different?

Phil Lubinski: It seems like many of the innovations are the same thing with a little different wrapper. There’s this kind of herd instinct out there though and I hate to keep picking on the annuity industry. The mix of business in our office is pretty equally spread between insurance, mutual funds, and advisory fee products. But on the annuity side that certainly has been where the changes have been the greatest. But what happens is every few months there’s “Here’s our new and improved rider. The one you sold your client six months ago (that was the newest and best thing then) isn’t as good as this one now.” And when there’s any play to that rider then there’s ten other wholesalers coming in saying, “We got one too, but here’s why ours is a little bit better than theirs.” It’s what happened with disability income insurance back in the early ‘80s.
The companies got so competitive trying to make their definition of disability unique that they almost put themselves out of the business. And now the annuity income riders have become so complicated that the wholesalers presenting them don’t understand them. What is more frustrating to us is that when a “new and better” contract comes out, the existing policyholders are not given the opportunity to exchange their contracts. It’s becoming more like the computer industry….”why buy one today, there will be a better one tomorrow”.

Are they innovative? I guess so, since prior to the income riders, your only choice was to take a systematic withdrawal and run the risk of over withdrawing and running out of money, or annuitizing the contract and giving up access to all your principal. They’ve played no role with our existing retired clients who have the traditional retirement with pensions and Social Security. They already have their base of guarantees and don’t need to be buying any more guaranteed income stream. But certainly those boomers moving into retirement without the guaranteed income streams their parents had definitely need a percentage of their income guaranteed for life. But certainly not 100%. In other words, the guaranteed income riders are potentially part of an overall solution, just not the only solution.

It’s kind of interesting that in 1952 a guy named Harry Markowitz suggested that diversification was a proper strategy for wealth accumulation. It was almost heresy to suggest such a thing but 40 yrs. later he was awarded a Nobel Prize. Today, diversification is a household term. Why wouldn’t the same diversification strategy work on the distribution side of wealth? Why would a retiree NOT diversify their income sources? Why not have a combination of income sources that offer guarantees, market opportunities and insurance against premature death, disability and longevity. Wrap all of these features and benefits up into a single product and now you have innovation. Until that happens, retirees need to diversify their income sources with a strategic mix of products. I just hope it doesn’t take 40 yrs. for this message to become widely accepted.

MACCHIA: Right. Well let’s talk about that. Let me begin with a compliment.

Phil Lubinski: I like that.

Macchia: One of the things that I often times- and publicly-say about you, Phil, and I know you’ve heard this before- but I’ll repeat my belief here that, after knowing you for a number of years now, and after working with you to develop solutions for retirement income, in my judgment no individual in the financial services industry has a greater practical, real-world understanding of the challenges associated with converting accumulated assets into distributed income than you.
Phil Lubinski: Thank you. You’re on a roll, keep going.
MACCHIA: Well, I’d like you to comment on a few things. One key thing that I have learned about retirement income planning is a phenomenon that I see repeating itself in the retail space over and over again. It’s financial advisors coalescing around philosophies or as I describe them “religions” of retirement income. There’s the religion of systematic withdrawals. There’s the religion of lifetime annuitization. There’s the religion of lifetime annuitization linked to, say, target date retirement funds. There’s the religion of laddered strategies- time weighted strategies. There is the religion of variable annuities and GMWB riders. I wonder if you see it this way? And what you think the ultimate conclusion of all this is going to be?
Phil Lubinski: Yeah, the religion analogy is a good one in that most religions will have a core belief and then they all have a different view on how to practice that core belief. Consequently, I don’t necessarily think that there’s a right religion and a wrong religion.

But more important, advisors have to develop a religion of retirement income they believe in and practice it. They need to stop trying to practice all of them simultaneously. When training advisors I jokingly say that you can’t go to the Synagogue on Saturday and Mass on Sunday. It’s not because one is right and the other wrong, it’s just that you can’t follow both. Once an advisor decides which religion of distribution they are going to practice, then confidence and passion follow. I’ve never met an “elite” advisor who wasn’t passionate about their work and confident with their recommendations.
As you said there are several “religions”…..systematic withdrawals, annuitization, segmentation, laddered securities, dividend/interest sweeping, etc. They all work, just some more efficiently than others. I’m obviously bias to the Income for Life Model™ because I began developing it over 20 yrs. ago and have used it to help hundreds of my clients retire. All I know for sure is that “churches of distribution” are going to be popping up on every corner and advisors better do their homework and understand the pros and cons of each. Additionally, we as advisors, better not lose sight of an extremely important obligation we have to our clients which is “knowing them well” and in some situations protecting them from themselves. The best intellectual solution may turn out to be the worst emotional solution.

Some retirees need to have surrender penalty fences built around their financial house. Others may need more guarantees. Income riders may give certain retirees the courage to take market risk with the rest of their retirement money. Which religion is best for boomers transitioning into retirement? I guess we won’t know until the last boomer dies. All I know is that I’ve never had a client who followed my religion miss a monthly check or go broke. Let me give you a couple of “real life” examples of human behavior dictating decisions and products more than intellectual analysis.
A couple of years ago I had a client who was retiring and given the option to take her pension as a life income or a lump sum that could be rolled over into an IRA. Based on the amount of the lump sum vs. the life income with 100% survivor benefit, it was mathematically clear that she would be better off taking the lump sum. The next day, she called to tell me that she had decided to take the life income with the survivor benefit instead. When I asked why she had changed her mind, her response was “I couldn’t share this with you last night when my husband and I met with you, but my husband is a habitual gambler. If I took the lump sum and then died before him, he would take the balance of the account and be broke in a short period of time. If I leave him an income stream instead, I can’t stop him from gambling it away, but at least the next month he’ll have another check”. Intellectually and mathematically her decision made no sense, but emotionally, it was the right decision. I just had another case where a client of mine received an inheritance and wanted to invest it. I recommended an annuity.

One of my associates asked why I would recommend an annuity to a single person who is only 50 yrs. old. I responded by explaining to my associate that in the 20 yrs. I’ve been working with this client the only wealth he has is in his 401k. He is constantly in debt (even though he has always said he was going to pay it off), he refinances his home every time there’s equity in it. The only monies he leaves alone are the accounts that he can’t get without big penalties. As advisors we think that our most important responsibility is to protect our clients from taxes and inflation. Sometimes, our greatest responsibility truly is to protect them from themselves! I kid my clients about my T.I.U. protection plan, telling them that part of my job as their advisor is to protect “your” money from Taxes, Inflation and “U”. Because I find that sometimes individuals do more damage to their wealth than taxes and inflation combined. Only by having a planning and problem solving relationship and knowing our clients “well” can we make the proper recommendations. Elite advisors have such a relationship.

MACCHIA: Well I think you raise some key insights, Phil, and it leads me to ask you why, beginning in 1984, you focused on the development of a time weighted asset allocation model that has become the foundation of today’s The Income for Life Model™ program?. And I gather it’s because of the experiences of working with real people at ground level. Because you saw the dimensions of that emotional problem firsthand. And I assume saw that that particular strategy helped minimize the negative effects associated with emotionally-based investment decisions. I don’t mean to put words in your mouth, but, is that how you saw it?

Phil Lubinski: The Income for Life Model™ evolved totally from day to day, one-on-one work with my clients. It literally stems from being in the “trenches” and dealing with the unpredictability of human behavior and changing events in a retiree’s life. It is, to some extent, an academic/intellectual model because you have to mathematically validate it and prove that the assumptions made are reasonable. But, currently, it is the only strategy in the market place that can easily adapt to retirees changing needs.

It’s nice to lay out a long-term financial plan with spreadsheets projecting income and expenses for the next 25 or 30 years. But, here’s reality: in the 30 years that I’ve been in this business I’ve never had a retiree spend what they said they were going to… I’ve never seen rates of return be exactly what we projected…and, certainly, unexpected expenses are common place. Spreadsheets are nice, but, at best, they are an indication of the future, not a precise predictor.
What’s evident to me is if you’re going to design a retirement income distribution strategy it better have tremendous flexibility and a regular process for review and re-evaluation. This goes right back to the relationship with your client. Each year we formally review the model and the client’s goals and objectives. We’re not chasing the highest yields, not focusing on new sales, but we are constantly “fine tuning” the plan. Adapting it to changing circumstances, not changing markets. Single product solutions will never provide this type of flexibility. As far as I can tell, the Income for Life Model™ is the only strategy in the market place that has this type of flexibility and a 20+ yr. actual track record…not a hypothetical one.

MACCHIA: Next, I’d like to ask you about other advisors. You are very fortunate to have possess a wealth of experience in income distribution planning through your years of implementing with your clients, and that’s an experience framework that 95 percent of advisors do not share. Now I know that part of your time is devoted to training other advisors on income distribution planning. What are the things you’re telling them when you talk about the income distribution opportunity? And what do you see or observe among these other advisors in terms of how you think they are relatively prepared or unprepared for this business opportunity?

Phil Lubinski: I believe they are more unprepared than prepared. This was documented in a study a few years ago by Cerulli and Associates concluding that neither the industry nor its advisors were prepared. The challenge is how to train and arm an advisor with a solution that has moving parts and has the kind of flexibility that I personally feel is necessary. For some advisors the learning curve becomes so overwhelming that they revert back to doing things the same way they always have or seek out a simple, set it and forget it, single product solution. That’s very bothersome to me. I’ve actually been told by some advisors who have attended my training classes that wholesalers were not only sitting in the audience, but have approached them within a day or two telling them that the solution really doesn’t need to be that complicated. And, furthermore, assure them that their product will accomplish everything a multiple product solution, like the Income For Life Model™ can… with a single application.
Damnit! This is someone’s life savings we’re dealing with. It’s not simple

MACCHIA: Right, right. Tell me about the training that you do. What form does it take? How long does it last? What is the reaction among the advisors you train? What do you see that advisors are able to achieve after the training that they weren’t able to achieve before?

Phil Lubinski: I think the biggest advantage of the training is it’s one of their peers training them. I’m still in the trenches with them and I’m talking to them at their level. It’s not coming from the academic on high. It’s not coming from that person that’s never met with a single client but thinks they know what that clients needs. So the reaction is very favorable. I relate well with them because I am one of them. And the ah-ha that has that come out of the training is– I really see it now. I get it.

You know, ten years ago there was a sense that things never needed to change when you transitioned from accumulation to distribution. It was a seamless transition. You just kept doing it the way you were doing it on the accumulation side…in reverse. So if I successfully dollar cost averaged into the market, why wouldn’t I dollar cost average out. Then, the horror stories started coming out during bad markets of people going broke.

The result of advisors attending my classes is they understand that the strategies used to distribute wealth are inherently different than those used to accumulate wealth. They believe that multiple products must be strategically combined. They understand the importance of annual reviews. They appreciate the depth of the relationship I have with my clients. I know the class made an impact when an advisor says to me “I’ve been doing retirement income planning for my clients, I just didn’t realize I’ve been doing it wrong.”

MACCHIA: I want to turn the conversation toward products for a minute, and begin with a discussion of annuity products. Having come from the insurance business you’re very, very familiar with all types of annuity products and I’m sure you recognize that the annuity industry is navigating through what is probably the most hostile marketing environment it’s ever faced. Certainly in my 30 years I’ve never seen anything the equal of it. I wonder how you view annuities today? Are you using annuities in your practice? And how do you perceive that your clients may be view annuities?

Phil Lubinski: Unfortunately, because of the publicity around the abusive sales of annuities, the vast majority of clients have a bias against them when they come in. An important part of the process with the client is to educate them that annuities aren’t inherently bad as long as they are positioned properly. I always try to give them “real life” examples they can relate to. A good one is comparing annuities, or any other financial product, to prescriptions that a doctor might recommend. I tell my clients that most prescriptions aren’t “bad”, but there are certainly some that are “bad” for you. If, after understanding your goals, objectives, tax status and risk tolerance, I believe an annuity is appropriate…I’ll recommend it. If not, I won’t…pure and simple.

We have an extremely proud generation of boomers moving into retirement. For some, their biggest fear is outliving their income and becoming dependent on their children or the government. Obviously, annuities are the only financial instrument that can eliminate this concern. Once again, I don’t see them as the only solution, but certainly use them as part of the overall solution. It’s funny (not really funny). I’ve listened to a couple of radio shows. One tells the listeners that annuities are good and mutual funds are bad. The other show says mutual funds are the only answer and annuities are evil. I’ve been told that the guy doing the mutual fund show is not insurance licensed and the one doing the annuity program is not securities licensed. Yet, the poor listener believes they are hearing objective advice. How often do you hear a news story about the merits of an annuity? How often do you hear about the spouse whose husband or wife died after the 2000-2002 market crash, but was paid the pre-crash values? How often do you read about the 92 yr. old still receiving monthly income from an immediate annuity he bought 25 yrs. ago? All the time I hear people say “insurance is a bad investment”. My standard answer is “you’re right, and investments are bad insurance”. Why don’t we decide together what is good or bad for YOU, not what someone writing an article thinks.

MACCHIA: Right. Well said.

Phil Lubinski: Just more words than it should have been.

MACCHIA: No, no. Not at all. Let me ask you about the role of RIAs which have changed and expanded over recent years. When you look at the world of RIAs from your vantage point how do you see it?

Phil Lubinski: I see a lot of confusion from advisors trying to understand the RIA business. Not knowing whether to register their own or operate under their broker dealer’s umbrella. Not receiving a lot of guidance as to the responsibilities and liabilities of being one. Every advisor would love to have 40 or 50 million under management and receive advisory fees year in and year out. Certainly having those fees is a financial comfort to the advisor and creates “equity” in their practice that can be sold to a transition partner. In theory, it brings more objectivity into the advisor/client relationship and certainly a more structured review process with your clients. Financially, it is very difficult for the “commission only” advisor to transition into a fee structure. The beauty of the Income for Life Model™ is it is best funded with a mix of fixed commissionable products and investment portfolios that can easily be placed in advisory accounts.

If an advisor is going to focus on retirement income planning there needs to be a commitment to regular reviews with your clients. If all the advisor recommends are first year commission products, then how can they possibly fulfill their ongoing commitment with no continuing revenue? Additionally, why would a junior advisor want to purchase a practice that requires ongoing servicing with no compensation? It’s interesting, when I first started in this business at 28 yrs. old, new clients would wonder if I would survive. Now, at 58 yrs. old, my clients wonder if I will still be reviewing their retirement income plan for the next 25 yrs. And, if I am, what went wrong with my own retirement plan? Three years ago I began a 10 yr. business plan to introduce my clients to my transition partner who plans to work another 20 yrs. We have a business agreement for her to purchase my practice based on the value of the reoccurring income.

Having a portion of their income model in investment advisory accounts easily establishes the purchase price. More important, it gives my clients peace of mind knowing I have a practice continuation plan. Also, they have this 10 yrs. to get comfortable with my partner. Being able to operate under an RIA is beneficial to my clients, my transition partner and me.

MACCHIA: Let me ask you about another RIA-related development of recent vintage. That is, the notion of insurance agents who are being solicited into RIA status. The effort seems to be aimed at annuity agents who may be unhappy with broker-dealer incursion into the equity-indexed annuity business, and, or, generally-heightened supervision by broker-dealers. But the “pitch” that’s put forth is that they become RIAs, essentially cutting their practice down the middle, becoming RIAs for investment activities and maintaining the traditional insurance license and relationships on the insurance and annuity side. Do you think that’s a practical model? A model that has the requisite integrity to be viable over the long run?

Phil Lubinski: Any business model that is focused primarily on commissions and the avoidance of supervision is fatally flawed.
MACCHIA: Let me ask it another way. Agents by definition are fiduciaries for the insurance company they represent. They are agents for the company. RIAs are fiduciaries to their clients. Do you think it’s possible to be both with the same client?

Phil Lubinski:
That’s an interesting question having been in the “captive” world and having my own RIA at the same time. Fortunately, the company I was affiliated with had a “full” product shelf and the amount of proprietary sales that were required to maintain benefits etc. was a small percentage of my total production. Certainly, their proprietary products were competitive or I would not have been with them. Bottom line, by always doing what was in my clients best interest first and running a very busy appointment schedule, I was able to fulfill my responsibilities to the company and my clients. Now that I am affiliated with an independent broker dealer, I don’t find my recommendations changing. I have, however, known advisors who have affiliated with companies whose local agencies place a great deal of pressure on them to only sell proprietary products. I believe they have a difficult time walking that line.

: Well, thank you for that answer. I think that makes sense. I want to ask you a couple of personal questions if I could.

Phil Lubinski: Okay.

: How about this: I somehow convey to you a magic wand, and you can wave it and immediately institute any changes at all in the business of being a financial advisor. These changes could be related to products, regulation, marketing. It could be something I’m not thinking of. What change or changes would you make?

Phil Lubinski: Wow! This is probably one of those answers that three days from now you wish you could change. I would like to see a focus at the industry level on process rather than product. I’m hearing some lip service to that effect at national meetings but I’m not really seeing it being implemented in the field. Every advisor would love to see different regulatory oversight because it’s gone to an extreme. It’s certainly not limited to our industry. We’re seeing doctors leaving their practices because they can’t practice medicine anymore. We’re seeing teachers abandoning teaching because they can’t teach anymore. At times you feel you’re practicing law more than financial planning.

Specific changes I’d make are…
1. Better training
2. Less complicated products
3. Re-define the wholesaler relationship and their compensation
4. A planning/problem solving focus

MACCHIA: Good answer. One more personal question. As someone who has helped hundreds and hundreds of people enjoy more secure retirements, when you imagine your own retirement, in its most conceivably perfect form, where will you be and what will you be doing?

Phil Lubinski: We’ve have a genetic flaw in my family. My 90 yr. old father just retired this year. The thought of not being involved in this industry in some capacity is unimaginable. This has been the most emotionally and financially rewarding career I could have ever asked for. The ideal retirement for me will be knowing my clients are in good hands, being able to continue developing the Income for Life Model™ and helping advisors establish meaningful and impactful relationships with their clients. This intertwined with time to kick back, marvel at the continued success of our children, spoil grandchildren and someday see the Rockies kick the Red Sox’s butts in a World Series would be perfect.

: Sounds pretty good- except the Red Sox part. Phil, I want to thank you for this conversation.

Phil Lubinski: Thank you. It was fun.

* * *

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,, where all of our research since 1978 can be found, and, 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.