DSG has recently completed our fourth annual payout annuity industry study. For this year's effort, we've decided to supplement the yearly data collection and trend analysis with a series of executive interviews. Building upon previous research, these executive interviews not only address the payout annuity market specifically, but also consider the broader retirement income management opportunity.

When to Invest?
Throughout the executive interviews, we found a consistent set of expectations that the retirement income market will inevitably become the major new financial services opportunity, that this will be happening very soon (in years, not decades), and that there will be substantial advantages for those companies who are investing resources now to carve out their niche in this market.

Yet, with the exception of a few companies, meaningful resources still are not being allocated to this opportunity. In fact, some companies have backed away after building the necessary infrastructure, taking a "wait and see" approach. As a result there appears to be a "Catch-22" situation: the retirement income market will not begin to approach its potential until companies in general apply more resources to the opportunity; but companies will not apply resources until the market seems "big enough" to justify their commitment. Like the variable annuity business in its earliest days, it may take a while before "critical mass" is achieved.

Obstacles to Progress
There are three (perhaps four) hurdles that are standing in the way of the industry’s forward progress:

• Company focus Time and again, in our consulting and research, we have encountered individuals with responsibility for building the retirement income business, but whose hands are tied by their management’s decision to keep postponing the needed spending. While the impact of the downturn in equity markets in recent years has certainly given cause for many companies to tighten their budgets and protect their existing (accumulation) business, they often do this by reducing focus on the retirement income opportunity. While they are undoubtedly faced with difficult trade-off decisions, they may find themselves protecting their present at the expense of their future.

A few companies are preparing for the future by testing programs and products now, thereby building their knowledge and experience base, while also developing corporatewide support for this longer-term view. They will likely be far ahead of their competition in only a few years.

• Intermediary mindset Except for those few companies that do not make use of them, intermediaries will be key to the success of the firm's retirement income initiative. Yet DSG research has shown, and our clients confirm, that most intermediaries do not have the appropriate knowledge or tools, or perhaps even sufficient interest to provide an appropriate range of retirement income solutions to their clients.

It is clear that advisors need education and training, marketing tools, sales tracks, and product choices that will encourage and enable them to successfully serve this market. They will need a compensation arrangement and product features that will permit them to offer retirement income options without worrying about losing their livelihood. Moreover, until they see the need to provide a "solution" rather than a "product," they will not be able to serve their clients well.

Unlike the accumulation phase of the retirement equation where product sales/transactions are often the focus, the broader, "retirement income portfolio" approach will require a shift in financial advisors’ skill sets and mindset. Increasingly savvy investors will look for help in developing appropriate retirement income solutions, leaving less well-informed advisors with a shrinking client base.

• Customer advice Consumers, in general, are ill prepared for the task at hand. To be blunt, while most consumers need to be shown the importance of providing for retirement income and how to do that, most of them will never reach that point unless the intermediary (their advisor) takes them there. As "gatekeepers," the appropriate behavior of the financial advisors will drive the increasing consumer demand.
• Employer participation Employers are not exactly an obstacle, but their active participation can help drive consumer (employee) interest more in the direction of providing for income after they retire. While some employers continue to worry about incurring a liability if they provide advice to employees, they are now becoming more aware that a similar liability could ultimately arise if they take no role in helping their employees understand their own retirement income responsibilities. Several of the executives we've interviewed have noticed a very recent increase in employer interest (and receptivity) in helping their employees prepare for retirement income needs.

Each of these obstacles must be overcome before demand for retirement income solutions can reach its potential. The solution for most companies is straightforward, though not necessarily easy. More than anything, it will require the willingness to apply resources and the commitment to stick with it.

Turning Need Into Demand

It is accepted fact that the need for retirement income solutions is already here — all you have to do is look at the demographics. But the demand for appropriate solutions must be created. The key to building demand is clearly held by the companies; all they need is the will and the foresight to make it happen. Then, they must take action -- providing solutions, training their reps, and informing clients. This, then, is how the demand for retirement income solutions will likely come about:

1. Companies must apply resources to the development of retirement income programs, and most importantly, educate and train their intermediaries as well as provide them with the necessary tools and compensation. The more that companies get the message out, the more it will be heard by intermediaries and their clients.
2. Intermediaries, once they are properly trained and equipped, must show their clients the necessity of retirement income planning and the solutions that are available to them.
3. Employers, with the help and encouragement of the solution providers, will likely reinforce the message to their employees. In all likelihood, this will be seen as a benefit by employees, and will serve the added role of attracting and retaining good employees.

As more companies become more active, the demand will grow. Increasing competition will have a positive impact, not only because it generates better solutions for the clients, but also because it broadens the level of knowledge about retirement income issues.

The market's future is in the hands of the financial services companies, and history has shown that bold moves often lead to significant growth. More than anything, all they need is the determination to act.

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