Editor's Note: The following is adapted from an article published in the Winter 2006 issue of Bank Insurance & Securities Marketing, the official magazine of the Bank Insurance & Securities Association.

Important Trends
The Retirement Income Market was created by the growing demand for solutions to help consumers create, maintain, and manage suitable levels of retirement income for as long as needed. This demand is being driven by a confluence of societal and demographic trends. Key among these trends are:

• An Aging Population
  The baby boom generation, some 77 million strong, is fast approaching retirement. The first boomers are just turning 60, and like all things related to this generation, the focus on retirement issues and retirement income will soon become a major national concern.
  
  By the year 2010, the 55+ population will number more than 76 million or about 25% of the total population; those over 65 will total 40+ million.
  
   
• Increasing Longevity
  On average, Americans are living longer compared to earlier times. Life expectancy at birth today is about 77 years, which is 29 years more than in 1900. For those who are currently at age 65, life expectancy numbers are even higher -- about 82 years for men and 85 for women. Of course, these are averages, which means about half of the population will live even longer.
  
  With the good news about longevity also comes the bad news — most people are not aware of these odds, they're likely to underestimate their expected longevity, and thus most people will not be adequately prepared when they retire.
  
   
• More Individual Accountability
  Over the past two decades, the responsibility for managing retirement finances and funding one's own retirement income has consistently shifted to the individual. This shows up most dramatically in the shift from defined benefit to defined contribution plans for employees.
  
  As more individuals enter retirement, they do so knowing they must essentially create a do-it-yourself pension.

While there has been much talk about when this retirement income market opportunity will begin to "take off," recent activity in the marketplace would suggest it already has. More and more companies have "placed their bets" on this market, as evidenced by advertising and communications, installation of "retirement income specialists," creation of retirement income business units or programs, development of retirement plan rollover retention strategies, software that addresses post-retirement planning, creation of new products and product features to address the need for guaranteed lifetime income, and generally a significant shift of corporate resources to this issue.

Though it is not too late to carve out a position in this market, it is now becoming risky to postpone it any longer.

The State of the Retirement Income Market
Selected highlights from recent DSG research studies conducted within the past year provide a snapshot of the current state of the retirement income market:

There has been a noticeable shift away from variable payout annuities and towards variable annuities with guaranteed living benefit riders (GLBs).

Perhaps the biggest news in the retirement income marketplace has been the enormous success of the GLBs. These variable annuity riders, which allow the client to invest in an equity-based variable annuity, while providing guarantees to protect against market risk, have led to "dramatic" increases in sales of variable annuities.

Examining the marketing success of these products, leads to several important implications about the retirement income market:

• There is more attention being given to retirement income and the need to find solutions than ever before.
• Reps and consumers are definitely more focused on finding such solutions and alternatives to help provide retirement income.
• Simplicity trumps complexity. (A key reason for the popularity of GLBs vis-à-vis variable payout annuities was "ease of understanding").

Currently, the most popular of the GLBs is the guaranteed minimum withdrawal benefit rider (GMWB), frequently with a "lifetime income benefit" feature.

Many companies continue to expand their focus and efforts in the retirement income market.

In 2004, about 2/3 of the companies surveyed indicated they had increased their retirement income market efforts, at least to some extent. By 2005, the survey shows that number had increased to over 3/4 of the companies.

Most executives believe the retirement income market is critical to their firm's future success, and are taking active measures to move in that direction.

The majority of those executives interviewed had taken these actions:

• Promoted increased awareness (of retirement income issues) via education and PR.
• Implemented product extensions or enhancements.
• Improved sales/illustration tools.
• Improved or simplified marketing materials.

Most companies experienced an increase in popularity of retirement income products among their financial advisors.

Of the executives interviewed, 71% saw an increase in the popularity of retirement income products among the financial advisors who distribute their products.

Financial advisors in all distribution channels are becoming convinced that the market is real and represents a great deal of importance and promise. Interestingly, much of this is due to prodding by their clients.

Financial advisors recognize they have a serious need for more knowledge regarding retirement income issues and solutions.

Perhaps surprisingly, the advisors that we interviewed rank themselves third behind their broker/dealer and the product manufacturers, in terms of knowledge of retirement income issues and solutions.

Positioning for the Future
Looking into the near-term of the retirement income market, most executives believe strongly that growth will continue to be high, but at the same time, competition will also "heat up."

Financial advisors generally expect to see an "avalanche" of growth on the horizon for the retirement income market, primarily due to demographics and the consumers seeking help with these complicated financial issues.

A Major Challenge: Advisor Education
For companies who want to establish a position in the burgeoning retirement income market, there are plenty of immediate challenges: What products and service solutions to offer? How to target and segment and communicate to consumers? How to organize and apply resources most effectively? Perhaps one of the most critical challenges for companies — one that will impact all the other challenges — will be the education and training of advisors/reps.

In all of our surveys, one consistent finding is the importance of advisor education: for most firms, the advisor is key to their success in this market, and educating them about the issues and how to address them is critical. In our executive interviews, for example, "education of advisors" received a 4.9 score out of 5.0 on an "importance scale," and "lack of advisor education" was rated highest as a potential "obstacle to success" in the retirement income market.

For any company that uses intermediaries, the issue of advisor education must be addressed thoroughly, if they expect to penetrate this market effectively.

What sort of education is needed? Our research provides some important clues. Financial advisors who are active in the retirement income market will need to develop a body of knowledge that includes the following:

• A more holistic understanding of a retiree's financial and non-financial needs and key postretirement life events.
• A full array of products/solution sets that can be used for specific client profiles and situations.
• Simple-to-use retirement income planning programs and tools, and the training to use them.
• Marketing and advertising programs designed to generate new pre-retirement leads.
• Knowledge of best practices being followed by other advisors in the retirement income space.

Next Steps
The financial needs of retirees are quite unique and will require a different set of solutions and delivery methods. Extended life expectancies, a greater number of variables to be managed, and the difficulty in communicating with older clients, makes for a much more protracted and complicated planning and monitoring process. While many financial advisors recognize these differences, they are not yet adequately trained and equipped to address all of a retiree's financial needs.

Financial service companies that recognize the potential of the retirement income market must act soon to capture their share of the opportunity. For those who make use of intermediaries to market their product or service solutions, they need to remove any impediments to success. Key among these, and recognized by the advisors themselves, is a lack of advisor knowledge when it comes to retirement income issues and solutions. We believe the appropriate, possibly most important, next step is to begin training and education of financial advisors. DSG

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