By Linda Koco
Ed Friderici is on a crusade. He said many consumers are not moving into protection products as they approach retirement. These pre-retirees don’t know what products they own or where their assets are invested. He means to change that.
The managing director at Saybrus Partners is traveling around the country, talking with agents and advisors about how to help pre-retirees understand why they need to have protection products such as indexed annuities as well as accumulation products in their portfolios. His Hartford, Conn., firm is an insurance agency affiliate of Saybrus Equity Services and a subsidiary of The Phoenix Companies.
It is balance that pre-retirees need, not accumulation-only or protection-only products, he said in an interview with InsuranceNewsNet.
The message is hardly new. The retirement income industry has all but made it a theme song in recent years as the baby boom generation approaches and enters retirement. A number of carriers have kicked in with related education materials, calculators, new retirement products and options, and related initiatives.
Despite all that effort, the majority of retirement assets are still going into equity investments, Friderici said. Hence, his mission.
The staggering 78 percent
Roughly $400 billion of defined contribution assets have been rolled into individual retirement accounts, and about 78 percent of it is in mutual funds, separately managed accounts, individual stocks or other equity investments, he said, citing data from LIMRA. “That’s a staggering amount.”
Another 14 percent is in savings accounts and bank certificates of deposit, “earning little more than zero percent.”
The top-heavy investments in the market have occurred even though “the pool has been drained twice,” he said, referring to the major losses that investors suffered in the last two recessions.
In a bull market, that kind of market exposure could be a good thing. But in a bear market, account values can fall by 40 percent or more, and he said he is concerned that consumers who are close to retirement won’t be able to recover by time retirement begins.
It’s even more worrisome because average investors, making decisions on their own, underperform the market due to “bad behavior,” he said. “They buy high and sell low, chase the hot performers,” and, because they have no advisor, they don’t know what to do.
He sees this in everyday life. For instance, while at a dinner party at the home of a friend, the topic of retirement came up. As the conversation unfolded, Friderici said he asked one of the guests — a highly educated 58-year-old man — if the man was set for retirement.
“Yes, absolutely,” the man answered with confidence. “I have an IRA rollover with [XYZ] Mutual Fund Company.”
Friderici inquired a little more and found out that “the man did not know what he owned. Nor did he know what else is available in the marketplace to help with his retirement.”
In other instances, he finds pre-retirees are not doing their due diligence what their accumulation-only mode costs them, with the result that some are paying 2 percent to 3 percent of asset value in fees without knowing it.
Things like that have led him to conclude that lack of knowledge and awareness is contributing to the continuing tendency of people to stay in accumulation-only mode even as they near retirement.
That’s why he is pounding the proverbial pavement, nudging agents and advisors to nudge pre-retirees to get some balance between accumulation and protection modes. Some of his suggestions include:
--Remind clients this is their retirement money. This is so whether it’s in a rollover IRA or still inside a plan such as a 401(k).
--Ask, “what is the cost/benefit to you in being in an accumulation only mode versus a balanced mode?” The same question applies if the client is over-exposed on the cash/money market side.
--Ask, “what if you are in a nursing home when a bear market hits and your retirement money drops 40 percent?”
--If the client has little understanding, use the many tools that are now available to educate the person about retirement planning concepts and solutions.
Among those solutions, Friderici is partial to indexed annuities. He said they can cost the same as or less than advisory products and are very “benefit rich” for the end consumer — offering downside protection, upside potential, guarantees, a death benefit, sometimes care benefits and more.
Some advisors are “gung-ho” on the annuity solutions, or they’ll integrate advisory with annuity solutions. It is less common, however, for investment advisors to make the “leap” and go over to the annuity side, but he said he’s working on that.
When advisors see the “big disconnect” between what pre-retirees think they have and what they don’t know, that becomes a “big opportunity,” he said. It’s an opportunity for agents and advisors to help people learn how to manage their retirement assets in a balanced way, with both accumulation and protection.
Will this help reduce that 78 percent of equity exposure in rollover IRA assets? “There’s the opportunity,” Friderici said.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].
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