Stock-Market Crash Transforms Retirement Market

• ByJoe Mont,
• On 11:13 am EST, Monday November 2, 2009

BOSTON (TheStreet) -- A wave of 78 million baby boomers may lead to the biggest change in financial services since those same Americans helped transform the industry in the 1960s.

New retirees, who hold a combined $14 trillion in investment assets, are increasingly moving money into income-generating accounts from stocks and mutual funds. Companies that want to profit from a shift in the burgeoning retirement-income field need to retool their operations and products, analysts at consulting firm Deloitte LLP say in a report. The biggest retirement-investment firms include Fidelity Investments, Vanguard Group, T. Rowe Price and Charles Schwab.

Boomers, who were born during the two decades that followed World War II, may put 62% of their investment assets into accounts that produce a stream of income to pay for retirement expenses such as housing and vacations, Deloitte estimates. The rest will likely be saved and eventually transferred to beneficiaries.

The challenge for money managers isn't just handling the sheer number of retiring boomers or the magnitude of the money in motion. The larger issue is how to adapt from a focus on asset accumulation, which includes equity-based mutual funds and other growth-oriented investments, to the distribution-centered retirement-income market.

Boomers will have to rely on personal investments rather than defined-benefit plans and Social Security, as previous generations did.

"Most people are going to have to cobble together what's left of a defined-benefit plan," says Don McNees, a Deloitte principal in financial services. "They may have a couple of 401(k) plans from a few different employers, as well as some different pieces of an individual investment portfolio. Now, they have to try to figure out how to pool those disparate products into something that provides a monthly paycheck that matches up pretty well with their expense outflow."

As retirees -- and pre-retirees, those who are about to stop working -- have lost more than a trillion dollars in last year's stock-market crash, companies that provide long-term retirement services will gain the most, the Deloitte study says.

"Innovation may be more substantive and profound than any that has occurred to date, and will likely influence all aspects of market offerings -- product, advice, sales, service features and delivery," according to Deloitte.

Companies are beginning to respond. Fidelity sells its branded Income Replacement Funds, which convert a portion of retirement savings into regular monthly payments that keep pace with inflation. Vanguard's Managed Payout Funds provide a monthly distribution while preserving principal over the long term. Charles Schwab's Retirement Income Fund offers dividends on a monthly, rather than quarterly, basis.

"There will be some firms that get there early and establish their brands in this space and, as a result, garner a significant share of the people reaching out for these kids of new solutions in the marketplace," McNees says. "Branding and marketing is not enough."

Larger firms may struggle initially because many pre-retirees would rather deal with independent advisers for their retirement needs, McNees says.

The study offers advice for how various sectors can best compete.

Insurers could continue to introduce riders to annuities that increase investor liquidity and investment control, Deloitte says. Guaranteed-minimum withdrawal products could be unbundled from annuity products and give investors the ability to withdraw funds at a specified annual rate that's guaranteed not to decline.

Banks could build upon their brand name and extensive penetration of households to establish a role in planning and managing retirement income and expenditure flows through retirement-income accounts.

The dominant position of mutual-fund companies in the defined-contribution-plan market means they have the greatest exposure to asset erosion as the baby-boom generation retires. On a more positive note, many large mutual-fund firms have well-developed direct-distribution channels and boast asset-management capabilities that may help them capture rollover assets that investors combine. Key issues to overcome include a historical reliance on growth-oriented investments, the absence of risk-protection products and features, and a lack of strong personal-financial adviser relationships.

-- Reported by Joe Mont in Boston.

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