Mining the Retirement Income Market

Mining the retirement income market

Financial Services

Contents

i Foreword

1 Introduction

2 Future growth opportunity: the emerging retirement income market

6 A need for innovation

7 Product

8 Advice

9 Sales

11 Service and customer experience

13 Financial services companies: positioning and challenges

16 Take action to win

Dear Colleague:

The baby boom generation, which has shaped societal mores and economics for decades, is reaching retirement as we experience the most profound financial crisis since the Great Depression. As a result, a disproportionately large segment of the population is at or near retirement at a time when the asset value of their holdings has significantly declined. This convergence has highlighted the extent to which boomers are vulnerable to income risks in retirement and made clear the need for innovative market offerings to provide more secure retirement incomes.

The drop in asset values has shaken consumer confidence across the board and precipitated fundamental restructuring of the financial services industry. Leaders in every sector have been humbled. However, for those who are strong enough to survive, industry restructuring provides a rare opportunity to build capabilities strategically that may help fuel future growth.

Because of the size of the baby boomer segment and the value of the assets they control, the retirement income market represents a potentially powerful growth engine for financial services companies seeking to rebuild reputations and consumer relationships that have been damaged by the financial crisis. A burst of innovation is likely as the economy recovers and financial services companies refocus on the long-term growth opportunity of the retirement income market.

Innovation in the retirement income market will likely focus on the unique needs and challenges presented by baby boomers. This generation’s needs are different from those of their parents’ generation – both because boomers are expected to spend much longer in retirement and because many may have to rely more on their personal investments, rather than on defined benefit plans and Social Security. Baby boomers will need to convert their savings into a reliable stream of income and to protect their income against the uncertainties of retirement.

It is anticipated that mass-affluent boomers likely will present the greatest opportunity – and the greatest challenge – in the retirement income market for financial services providers: Serving this market profitably may require fresh ideas and new ways of doing business.

In this report, we examine the size and characteristics of the retirement income market, highlight innovation opportunities, assess the competitive landscape, and lay out action steps that financial services companies should consider taking to position themselves for leadership in this market. We hope you find this report valuable and encourage you to contact us with questions or for further discussion.

Best regards,

Jim Reichbach Vice Chairman U.S. Financial Services Leader Deloitte LLP

Foreword

Mining the retirement income market i

The financial market crisis that began in 2008 has devastated many individuals’ savings and undermined consumer confidence in our financial institutions. Significantly affected are those at or near retirement who counted on the value of their 401(k) plans, IRAs, home equity, and other personal savings to pay for their basic living expenses in retirement. The decline in value across all asset categories has made this generation of retirees’ vulnerability to risks clearly evident.

2008 was also the year that the leading edge of the baby boom reached retirement. Since the 1960’s, the needs and preferences of this oversized generation have significantly influenced marketplace demand. Their need for new and innovative products and services that provide greater security for retirement income is likely to be a major growth opportunity for those financial services companies that not only survive the current crisis, but have the creativity and capabilities necessary to respond.

A series of new retirement income solutions is likely to emerge as the economy recovers and financial services companies refocus on long-term growth opportunities. 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, and service features and delivery.

Introduction

These changes will likely occur within the context of a dramatically restructured financial services industry. Giants in every sector have failed, been dismantled, or acquired. Disruptive though it may be, such industry restructuring may provide stronger players a once in a lifetime opportunity to rebuild strategically their capabilities and focus on the growth engines of the future. The field is wide open for those financial services companies capable of rebuilding confidence by delivering real value in the retirement income market.

The following discussion focuses on what financial services companies will likely need to do to translate the emerging retirement income market into a future growth engine, by:

• Providinginsightintothespecialretirementneedsof the baby boom generation and how these vary by

market segment• Highlightingwaysinwhichfinancialservicescompanies

can innovate their offerings to achieve market leadership• Assessingthecompetitivelandscapeandthe

organizational challenges of marshalling required capabilities effectively

• Outliningthekeyactionstepsthatfinancialservicescompanies should consider taking to position themselves to win in this market.

For those who choose to compete, the ability to commit resources and a willingness to innovate and adapt will be essential for success.

Mining the retirement income market 1

New retirement needs of the baby boom generationAs the financial crisis has shown, severe capital market fluctuations do occur and can quickly erode individuals’ retirement savings. Boomers’ vulnerability to retirement income risks is greater than that of their parents’ generation – both because boomers are expected to spend much longer in retirement and because many may have to rely more on their personal investments, rather than defined benefit plans and Social Security.

Boomers who are still working are primarily concerned with maximizing the size of their asset base for the future.

Future growth opportunity: the emerging retirement income market

“Because of the size of the baby boomer segment and the value of the assets they control, there is a tremendous market and revenue opportunity for financial services providers that can successfully address these emerging needs.”

However, retirement will present baby boomers with many additional financial challenges. In retirement, their focus will likely shift to addressing the complex financial issues associated with converting accumulated assets into a stream of income that will be sufficient for the rest of their lives. This income will need protection from multiple risks, including investment risk, inflation, rising health care costs, and longevity.

The leading edge of the baby boom generation is now beginning to retire, moving from the asset accumulation phase to the asset payout phase. As a result, they likely will need a broad spectrum of products and assistance that span the breadth of financial services, including:

• Planning(e.g.,financial,tax,risk,estate)• Riskassessment• Assetmanagement• Insurance(e.g.,longevity)• Assetmonetization(e.g.,reversemortgages)• Transactionprocessingandmanagement• Long-termcarefinancing• Healthcarefinancing

Because of the size of the baby boomer segment and the value of the assets they control, there is a tremendous market and revenue opportunity for financial services providers that can successfully address these emerging needs.

2

1 Investable financial assets, as defined in the Survey of Consumer Finances, include the following: transaction accounts, certificates of deposit, savings bonds, other bonds, publicly traded stocks, pooled investment funds (excluding money market funds), retirement accounts, and cash value life insurance, other managed assets and other financial assets. Source: Federal Reserve Board, Survey of Consumer Finances, 2007.

Baby boomer assets and market segmentationIn 2007, the most recent year for which household financial data are available, baby boomers had $14.0 trillion in investable financial assets1. But Deloitte estimates that only 62 percent of this sum consists of “payout assets,” i.e. assets that will be transformed or invested to produce a stream of income to support planned expenditures during retirement. The remaining investable assets will be saved and transferred to the next generation.

Ultra high net worth individuals (those with greater than $5M in investable assets) may not need to convert a large portion of their assets into income because investment returns likely will provide sufficient income during retirement. (Indeed, total investable assets for this segment historically have continued to grow, rather than decline, during retirement.) Most other boomers, however, are likely to use a significant portion of their investable assets and may also monetize some non-financial assets, such as homes, to meet their retirement income needs.

Assets used for retirement income and assets not used for retirement income (households aged 45-64)

Retirement payout assets (households aged 45-64)

500

0

1,000

1,500

2,000

2,500

<100 100-249

250-499

500-999

1,000-2,999

3,000-4,999

5,000

634

1156

1518

19262089

646

804

$634 B

$4,600 B

$2,089 B

$1,450 B

Total investable financial assets = $14,043 B

High/ultra high net worth 17%

Core affluent 24%

Mass affluent 52%

Mass market 7%

Investable asset segment ($000)

Mass

Payo

ut a

sset

s ($

B)

Mass affluent Coreaffluent

Highnet

worth

Ultra high net

worth

Source: Federal Reserve Board, Survey of Consumer Finances, 2007, and Deloitte analysis

Assets not used for

retirement$5,270 B

Payout assets used for

retirement$8,773 B

Exhibit 1: Retirement income market size and segmentation

As shown in Exhibit 1, the mass-affluent ($100k to $1M) own 52 percent of total baby boomer retirement payout assets, and this figure rises to 76 percent when the core affluent ($1M to $3M) are included. These households have significant assets to convert to income for retirement. Individuals in the mass and core affluent segments comprise the most significant potential market for assistance with retirement issues, including:

• Assessinghowmuchincometheywillneedtomaintaintheir living standard

• Timingassetdrawdownstomatchfinancialneedsthatcan change over time

• Balancingincomeprotectionandgrowthobjectives• Insuringagainstcapitalmarketandlongevityrisks• Absorbingshocks,suchasadebilitatingillnessorthe

death of a spouse• Monetizinghomeequity• Contendingwithever-risinghealthcarecosts• Addressingestateandtaxissues

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Exhibit 1. Retirement income market size and segmentation


Respondent perceptions/behavior

Comfortable Not comfortable

Higher asset

Lower asset

Higher asset

Lower asset

Most critical financial objective is “ensuring adequate income during retirement” 52% 48% 74% 73%

Biggest threat to financial future after retirement is “significant health problem” 32% 31% 26% 34%

Satisfied with financial game plan (top 2 on a scale of 1 to 7) 60% 52% 16% 10%

Usefulness of information sources (top 2 on a scale of 1 to 7): face to face 49% 42% 48% 42%

Always prefer doing research on financial items myself (top 2 on a scale of 1 to 7) 33% 35% 24% 27%

Very confused about alternative financial products and services (top 2 on a scale of 1 to 7) 5% 9% 19% 21%

Satisfied with information received about retirement products, services, and investment options (top 2 on a scale of 1 to 7)

46% 38% 20% 15%

Satisfied with financial advisor and assistance received with retirement planning (top 2 on a scale of 1 to 7, for those who have a financial advisor)

66% 61% 43% 44%

Have established a retirement budget 63% 67% 39% 34%

Have calculated how much in total retirement savings, pensions, and social security is needed to cover expected retirement expenses

76% 69% 60% 45%

Have identified whether any gaps exist(ed) between what is needed in retirement and what is available

69% 64% 44% 40%

Source: Deloitte research commissioned through The Diversified Services Group, Inc., “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August 2006

Exhibit 2. Retiree and near retiree attitudes about retirement, by asset class and comfort level

Attitudes on retirement: Deloitte’s findingsDeloitte’s research shows that segmenting the retirement income market based primarily on economic criteria is useful in sizing the aggregate market opportunity. However, this approach fails to provide financial services companies with the deeper consumer insight necessary to develop and market innovative solutions. A study commissioned by Deloitte2 examined the concerns and attitudes of retirees and near-retirees in two groups: Low Asset, individuals with less than $250,000 in investable assets, and High Asset, those with investable assets of $250,000 or more. (See Exhibit 2.)

Two key findings of the study are:

• WhilewefoundthatHighAssetconsumersweremorelikely to be comfortable about retirement than Low Asset consumers (68 percent versus 41 percent), many consumers in both asset classes were worried about retirement. More often than not, the level of retirement preparedness was found to be a stronger indicator of consumer attitudes and behavior than relative asset level.

• Thoseinthestudywhowerecomfortablesharesimilarattitudes, regardless of asset class, and these attitudes differ distinctly from those who were not comfortable. Regardless of assets, for example, respondents who were comfortable were more than twice as likely as those who were not comfortable to be satisfied with the information on retirement products and services they received.

2 Deloitte research commissioned through The Diversified Services Group. Inc., “Consumer Attitudes and Perceptions about Retirement Income,” July, 2006; and “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.

4

Analysis of the data demonstrates that the comfort level of individuals regarding their preparedness for retirement is a key determinant of how they will react to product offerings, financial advice, marketing messages, and, in general, of the kind of help they will want regarding retirement income solutions. A lack of comfort is correlated with lower levels of satisfaction with products/solutions and advisors, implying that the Not Comfortable segment is motivated for change. While the greatest opportunities appear to reside in the Not Comfortable segment, there are sub-segments within the Comfortable categories where opportunities can be found.

Companies that want to carve out their share of this market might make a more immediate and effective impact if they:

• Paycloseattentiontothemorehighlymotivatedsegments

• Servethemwithmessages,products,andadvicethatfittheir particular needs

• Dothisinawaythatcloselyreflectsconsumers’ownperceptions and attitudes

Doing this, however, requires digging beneath the economic aggregates and developing original insight into consumer needs, perceptions, and attitudes regarding retirement income solutions. Companies that focus on understanding the wide range of differing end-consumer needs and behaviors will be better positioned to serve their clients by truly meeting their needs and ultimately building the foundation for substantial growth in the retirement income market.3

The retirement income market challengeOneofthemostimportantimplicationsforfinancialservices companies is that the retirement income market, though large and potentially attractive, is notably different from the asset accumulation market they are accustomed to serving. Important issues and distinctions include:

• Thebasicdifferencebetweenkeycustomerobjectives:maximizing return on assets versus maximizing a reliable lifetime income

• Thefinancialsignificanceofthemass-affluentmarket.Mass-affluent market boomers are not merely a large share of households; they represent the majority of the assets that will be converted to retirement income

• Theimportanceofunderstandingend-consumerattitudes and behaviors when developing innovative rather than incremental solutions for this new market

Financial services providers that want to realize the potential of the retirement income market must consider carefully the major degree of change and investment that may be required in order to compete successfully.

3 Deloitte research commissioned through The Diversified Services Group Inc., “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.


“One of the most important implications for financial services companies is that the retirement income market, though large and potentially attractive, is notably different from the asset accumulation market they are accustomed to serving.”

Current state: incremental market innovationThe marketplace has already seen several new product introductions targeted to the emerging needs of the retirement income market. Mutual fund companies have begun to market retirement income funds – “self-annuitized” solutions intended, but not guaranteed, to provide a stream of income for a period of years. Examples include:

• FMRLLC’s(“FidelityInvestments”)IncomeReplacementFunds, which are designed to provide withdrawals from savings over a set time period, after which all investment gains and principal will be exhausted;

• TheVanguardGroupInc.’sManagedPayoutFunds,which are intended to provide a monthly distribution while preserving principal over the long term; and

• CharlesSchwab&Co.,Inc.’sRetirementIncomeFund,which provides monthly income by paying dividends on a monthly rather than a quarterly basis.

None of these offerings, however, provide protection against risks, such as longevity risk or capital market shocks, that cannot be fully diversified through asset management.

A need for innovation

Insurers have emphasized their ability to provide insurance against non-diversifiable risks; they have introduced riders to annuities that dramatically increase investor liquidity, investment control, and value at death. The advantages include:

• Livingbenefitridersthatallowconsumersaccesstotheirannuities’ cash value in special circumstances, such as a catastrophic health event or the need for long-term care;

• Guaranteedminimumwithdrawalbenefitsthatgiveinvestors the ability to withdraw funds at a specified annual rate that is guaranteed not to decline.

Such enhancements helped stimulate growth in assets under management for insurers. But individual annuities are estimated to represent only 6% of total investable financial assets.4

Clearly, greater innovation will be required to capture substantial market share in the retirement income market. Significant consumer needs remain unanswered, and no financial services company has yet figured out how to profitably serve the mass-affluent market.

Future state: a burst of innovationAs financial services companies recover from the immediate crisis and focus on future growth, there will likely be a burst of innovation in the retirement income market. As a result, change may be significantly more substantive than any seen in this arena to date: It will likely be profound, not incremental, across multiple dimensions of the business, including product, advice, sales, and service.

“Significant consumer needs remain unanswered, and no financial services company has yet figured out how to profitably serve the mass-affluent market.”

4 Deloitte analysis of data from Federal Reserve Board, Survey of Consumer Finances, 2007, and LIMRA International, The 2007 Individual Annuity Market.

6

Oneeffectofthefinancialcrisishasbeentoelevateconsumers’ risk consciousness, particularly heightening their aversion to capital market risk. Consumers’ immediate response has been to demand more insured investments (e.g., FDIC insured accounts, fixed annuities) and to shun equities. Insurers, other than the federal government, have struggled with the cost of hedging in such volatile markets, and many are raising prices and/or redesigning benefit guarantees. Eventually, we expect to see new products emerge to mitigate investment risks and to address the challenges of other risks to retirement income, such as longevity, long-term care, and health care costs. As product innovation intensifies, we expect to see greater development of unbundled products that can be sold a la carte or assembled into packages to meet specific customer risk preferences.

Most often, insurance against many retirement-specific risks has been bundled with asset management services in the formofriderstoannuityproducts.Onlyrecentlyhavewebegun to see attempts to unbundle annuity products.

Some insurers have begun offering a guaranteed minimum withdrawal benefit (“GMWB”) that is separate from their annuity products. This product provides consumers with the guarantee of a future minimum income stream when they invest in the selected funds of asset managers who have contracted with the insurer.

Product

Not all insurers are willing to provide an unbundled GMWB for reasons related both to complexity of execution and strategic positioning. Increasingly, however, we expect to see other types of risk protection unbundled from the management of retirement assets, permitting customers to purchase some insurance without having to relinquish ownership and control of their assets. For example, Deloitte hasapatentpendingonaproduct,LifeOptions,whichwould allow consumers to purchase insurance against capital market downturns and longevity risk (Exhibit 3). ProductslikeLifeOptionsshouldbeeasiertoadministerthan an unbundled GMWB and may be strategically more attractive to some insurers.

Unbundled products may be used as components of broader retirement solutions that will be assembled by retirees, financial advisors, or product manufacturers. Whether bundled or unbundled, the next generation of products will likely be packaged and marketed as simpler and easier to understand, and be available for sale via less expensive distribution channels.

Strategic relationships across financial services sectors, such as insurance and asset management, will likely continue to increase as competitors explore and invest in new product development that incorporates attributes beyond their own competencies or capabilities.

Life Options*

This product separates asset management from longevity and capital market risk protection, thereby allowing customers to buy insurance without relinquishing control of their assets.

LifeOptionsprovidesanincomebenefitinanyyearthatthe•principal and accumulated returns of a market index that reflects the asset allocation selected by the investor are inadequate to provide the investor’s planned spending level.

LifeOptionsprovidesanincomebenefitiftheclientsurvivestothe•terminal retirement age and market returns have not exceeded the assumed investment returns. An income stream is provided for the remainder of the individual’s lifetime.

ThecostofLifeOptionswouldbeapproximately10%of •the initial outlay for an annuity.

Unbundled GMWB

This product unbundles a guarantee for lifetime minimum withdrawals from the underlying variable annuity and allows it to be provided on mutual funds, managed accounts, and other investment vehicles.

This product provides an income benefit starting at a certain age •subject to certain restrictions (e.g., generally require asset allocation fund choices, withdrawal each year is subject to a maximum) for life.

Positive investment experience can be locked in once a year on the •contract anniversary so the guaranteed minimum amount of income can go up but never down.

At least two insurance companies are working with asset •management companies to launch this guarantee on certain managed accounts.

* Patent pending, Deloitte

Exhibit 3. Unbundled products

Life Options* Unbundled GMWB


Pre-retirees and retirees alike need advice, education, and solutions as they look to balance the financial and emotional aspects of a major life transition. And, they are looking to their advisors for help in devising strategies that provide control of their retirement futures in these uncertain times. Consequently, the role of the advisor/financial planner is shifting from selling products to consulting on life goals. The Ameriprise Financial, Inc. “Dream Book,” a guide that helps individuals articulate their retirement dreams and goals, is an example of this approach.

Given that the average baby boomer may spend 25 to 30 years in retirement, planning will become more of an ongoing educational process than a point-in-time event. The advisor will likely focus on assembling solutions to meet a broad array of needs, then adapt these solutions as client needs evolve through the various phases of retirement.

As products are unbundled, advice becomes more critical to formulating the most cost-effective solution for a particular client. At the same time, advisors may be faced with what could become a daunting a la carte menu from which to select. Practical considerations, quality assurance, and compliance are likely to foster development of advice “modules” to help advisors craft solutions efficiently while ensuring that solutions suit the needs of each client. For example, modularized advice is being linked to specific investment solutions as a means of serving less affluent customers economically.

Today, advice and financial management tend to be fragmented, but new solutions are being developed to provide greater integration. For instance, there are new financial modeling tools designed to help advisors and their clients assess tradeoffs among different categories of risk under a range of possible scenarios. These products work by providing risk-adjusted solutions that incorporate insurance and investment options balanced across these product categories.

Advice

“Given that the average baby boomer may spend 25 to 30 years in retirement, planning will become more of an ongoing educational process than a point-in-time event.”

Financial services companies, including Massachusetts Mutual Life Insurance Company and Fidelity Investments, are beginning to create retirement management accounts that consolidate retirement income sources and expenditure outflows in order to simplify and improve asset and liability management. The evolution of consolidated accounts is expected to make it easier for retirees and their advisors to monitor investment performance and planned versus actual spending, as well as to make timely adjustments to maintain needed income levels.

Given the potentially significant changes in the role of advisors and the development of new and restructured products designed for asset drawdown rather than asset growth, advisor compensation models will need to evolve as well. The result of these changes will likely be better alignment of advisor incentives with consumer objectives. We have already seen the growth of fee-for-service models for high-end consumers, such as those by The Ayco Company, L.P. In the middle market, Citigroup Inc.’s “myFi” advisors are salaried and deliver financial advice primarily via call centers in exchange for a monthly fee.

Although there may be considerable resistance to compensation changes among established advisors, the conditions are ripe for new players to shift from asset-based fees and commissions to a system that encourages maximizing a reliable income stream during the retirement payout phase while customer assets are being drawn down. This approach is expected to be supported by the emergence of new and innovative sales channels.

8

The restructuring of the financial services industry is forcing a consolidation of retail distribution and a reduction in the number of investment brokers and financial advisors. Face-to-face selling will most likely continue to be the dominant means of distributing financial services and advice to baby boomers.Otherchannels,however,willlikelyincreaseinimportance – especially those that serve the mass-affluent segment.

The challenge, across all channels, is to enable consumers to obtain retirement income advice and products more easily and affordably. To date, the economics of asset-based fees and commissions have tended to make serving low asset customers less than attractive. Although some companies have prospered serving low asset consumers, more financial services companies have tended to focus on affluent and high net worth customers. But because mass-affluent consumers own the majority of retirement payout assets, we will likely see innovation in sales channels and compensation models that will make selling to this segment more profitable. Notable examples include expanded use of the employer group channel, development of non-traditional retail distribution outlets, and increased cross-channel combinations.

Changes in attitudes among pre-retirees, plan sponsors, defined contribution investment managers, and public regulators favor expanded use of employer plans to distribute products and advice after retirement. Consider the following:

• Sixtypercentoflower-assetconsumersbelievethattheiremployer has an obligation to provide retirement planning assistance, and 40 percent believe that this obligation extends to their post-retirement years.5

• Similarly,theassetmanagersofdefinedcontributionplans have a strong incentive to prevent plan participants from entering the retail market through vehicles, such as graduated purchase annuities and guaranteed minimum withdrawal benefits.

Sales

• ProvisionsofthePensionProtectionActof2006encourage plan sponsors to assume more proactive roles than in the past.

Deloitte also anticipates an expanded role for non-traditional retail channels. Just as we have seen in other maturing industries, retail selling may evolve from a few dominant models to a wide range of options.

Many of these new options are expected to be oriented toward the needs, preferences, and economics of the mass-affluent market. Mass-affluent consumers are less likely to have a financial advisor,6 and recent research suggests that although they still prefer face to face buying, they may be receptive to non-traditional approaches.7 Therefore, alternative marketing channels will likely become more important, including:

• Parttimeand/orniche-orientedsalesforces• Hourlyfee-for-serviceplannersandadvisors• Socialnetworking,bothonlineandcommunity-based• Affinitygroups• Useofdirectchannels,especiallycallcentersand the Web.

5 Deloitte research commissioned through Diversified Services Group, Inc. “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.

6 Deloitte research commissioned through Diversified Services Group Inc., “Consumer Attitudes & Perceptions About Retirement Income” July, 2006; and “Consumer Attitudes & Perceptions About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.

7 Peter Tufano and Daniel Schneider, “Using Financial Innovation to Support Savers: From Coercion to Excitement,” HBS Working Paper, April 2008.

“Because mass-affluent consumers own the majority of retirement payout assets, we will likely see innovation in sales channels and compensation models that will make selling to this segment more profitable.”


In addition to an increase in the number of sales channels, the retirement income market, like the broader financial services market, will likely see an evolving array of approaches that reflect different combinations of channels (direct and face to face), media (Internet and telephone), and location (home and store). Exhibit 4 illustrates potential elements of a multi-channel sales strategy.

The reality is that companies will have to master the ability to switch clients smoothly from one channel to another during a single encounter. A consumer, for example, who accesses a customer service center to make an inquiry, may

need to be switched to a live investment advisor to select and purchase an appropriate product, without obliging the customer to start all over with the next contact in their overall customer experience.

Financial services players will likely have to decide how much to invest and how to allocate resources across multiple distribution channels. Managing this broader spectrum of options in order to create a positive and competitively advantaged customer experience will be a major challenge.

Exhibit 4. Elements of a multi-channel sales strategy

Develop goal-based customer dialogues •

Launch target-segment-focused destination experiences •

Drive growth in retirement through customer-focused, multi-channel, engagement strategies

Improve services and support for advice-oriented financial planners •and retirement face-to-face representatives

Brand/differentiate financial planning and retirement •solution tools

Distribute innovative products and solutions as packaged bundles•

Launch non-traditional talent acquisition and • development programs

Make selective ongoing distribution acquisitions•

Develop a common retirement sales process and integrated •support platform

Expand growth-segment-targeted products/distribution •(Emerging affluent, Hispanic, Asian)

Expand general retirement/advisory site links/relationships/ •distribution access

Expand incremental cross-distribution relationships •

Source: Deloitte analysis, 2008

Re-engineer process to eliminate problems commonly experienced •by retirees

Enhance service to sales reps and retirement advisors by providing •multiple levels of relationship management support and service

Employ predictive modeling to present real time service/sales •options starting with high value customers/producers

Strengthen focus of Internet presence on retirement

Enhance call center customer/producer experience

Deepen institutional distribution partnerships

Expand/increase efficiency of own sales force: - Employer plans - Institutions - Individuals

Utilize advisors as branded face to face retirement channel/advisor platform of choice

10

Develop goal-based customer dialogues •

Launch target-segment-focused destination experiences •

Drive growth in retirement through customer-focused, multi-channel, engagement strategies

Improve services and support for advice-oriented financial planners •and retirement face-to-face representatives

Brand/differentiate financial planning and retirement •solution tools

Distribute innovative products and solutions as packaged bundles•

Launch non-traditional talent acquisition and • development programs

Make selective ongoing distribution acquisitions•

Develop a common retirement sales process and integrated •support platform

Expand growth-segment-targeted products/distribution •(Emerging affluent, Hispanic, Asian)

Expand general retirement/advisory site links/relationships/ •distribution access

Expand incremental cross-distribution relationships •

Consumer confidence in our financial services institutions has been severely shaken. Financial services companies are under pressure to differentiate themselves as sources of superior value and to again earn their customers’ confidence. New products, new customer segments, and the need to manage costs will only intensify the impact of these trends in the retirement income market.

A dependence on new product offerings and pricing strategies as the sole means of differentiation is likely no longer enough; the ability of competitors to mimic easily new product features has undermined efforts to differentiate on these grounds alone. In the retirement income market, customer service can be an important differentiator as competitors seek to rebuild consumer confidence and establish their credentials as stewards of assets and sources of advice and services, specifically for this market.

Providing a good customer service experience is no small challenge: The performance of financial services companies in delivering a consistent customer service experience, much less experiences that are differentiated by customer segment, has been mixed. Many have struggled to balance costs against the apparent demand of their customers for an increasingly diverse mix of service options.

Recent market trends toward independent financial advice tend to reduce product manufacturers’ direct control over the customer experience at the point of sale. Even companies with proprietary sales forces often limit face-to-face customer service for routine transactions. As a result, the customer service contact/call center is a principal interaction point where many financial services companies can deliver a distinctive customer experience.

Service and the customer experience

Building brand differentiation through customer experience requires keen insight regarding consumers – to define the nature of the experience, to understand the key aspects of the experience that can be differentiated, and to translate this intelligence into “moments of truth” that can be managed during the service interaction.

Advanced analytics will be critical to developing this insight and to designing and managing the overall customer experience. Advanced segmentation and predictive modeling can transform the ability of companies to group customers into meaningful segments that buy differently, prefer different product offerings, and seek different service experiences. Financial services companies seeking to differentiate themselves may increasingly use these tools to align new products, distribution, and customer service operations to the needs of specific segments of the retirement income market.

At call centers, predictive modeling systems are being used increasingly to integrate real-time information (interactive voice responses and initial requests from the caller) to form an offer from the advisor handling the call with a likely higher probability of being accepted by the customer. At the same time, Internet protocol-based systems are enabling the virtualization of call centers, liberating call centers from the physical constraints of geography by integrating all members of customer support units into a single team, regardless of location. This development can be used to help contain expenses, for example, through the use of cost-efficient home or mobile service representatives.

Many financial services companies have been slower in adopting these service capabilities than organizations in other industries. This scenario opens the door for a disruptive play by a technology-savvy new player.

To deliver a competitively advantaged customer experience, many financial services companies will likely need to significantly upgrade their call center capabilities. Given the pace at which the technology is advancing and the degree of catch up required, some financial services companies have turned to outsourcing as a means of accelerating their access to the rapidly evolving technology that is crucial to supporting highly differentiated customer service delivery. Whether insourced or outsourced, significant investment, complex choices, and continuous technology upgrades may all be a part of meeting the customer service challenges of the retirement income market.


“In the retirement income market, customer service can be an important differentiator as competitors seek to rebuild consumer confidence and establish their credentials as stewards of assets and sources of advice and services specifically for this market.”

“The nature of the retirement income market calls for financial services companies to cross traditional boundaries – within their organizations and across industry sectors – in order to meet the challenges of this market and succeed.”

The pace and nature of innovation, coupled with the need to serve mass-affluent customers more effectively and profitably, are expected to have major implications for financial services companies that decide to compete in the retirement income market. The nature of the retirement income market calls for financial services companies to cross traditional boundaries – within their organizations and across industry sectors – in order to meet the challenges of this market and succeed.

In-depth organizational changeFinancial services companies positioning themselves for the retirement income market are struggling with important organizational issues. Most companies that strive to become more customer-centric find that their existing operating models, oriented to support products and services, create silos that undermine a consistent, company-wide approach to serving customers.

The problem is particularly acute in the retirement income market. The transition to retirement typically involves the movement of assets from an employer group/institutional plan to a retail IRA, annuity, or other savings product. Moreover, retirees require a wide range of advisory, asset management, insurance, and transactional services that often reside in discrete product organizations across a company.

Financial services providers are taking several approaches to bridging the silos. For example:

• Somecompaniesarecreatingtheroleof“retirementczar,” an individual who is charged with identifying opportunities and issues, and making the case for innovation within the individual business units. Much like a brand manager in a consumer products company, these executives use persuasion and influence to marshal resources and gain support for retirement-oriented initiatives. A risk of this approach is that the business units often don’t move beyond discussion to strong commitment and major investment.

Financial services companies: positioning and challenges

•Othercompaniesareredrawingtheirorganizationchartsto bring related retirement products into the same profit center. Companies with large defined contribution plan businesses, for example, may consolidate IRAs and/or retail annuities into a single retirement business line to facilitate rollovers from employer plans to retail accounts. A risk of this approach is that it may complicate the task of managing retail channels that are used both for retirement products (such as annuities) and other retail financial services (e.g., life insurance).

How well either of these structural approaches works will depend on the commitment of leadership, the talent of managers and employees, and the processes that enable them to succeed.

Competing across the financial services sectorsThe retirement income market opportunity cuts a clear path across traditional financial services sector boundaries. Banks, insurance carriers, mutual fund companies, and brokerage/investment managers all have established positions managing assets and providing administrative services both for retail retirement accounts and defined contribution plans. All are at risk that the retirement of the baby boom generation will disrupt their existing retirement businesses as retirees move assets out of their current retirement accounts and into new, income-generating products. And companies in every sector hope to capture a disproportionate share of this “money in motion” and establish an even more robust position in the retirement income market.

Traditional sector boundaries are being redefined by industry restructuring. Already we can observe some shifting among the sectors of capabilities that are important in the retirement income market. Because industry restructuring is fundamental and ongoing, the full impact may not be understood for some time. In light of these uncertainties, we have chosen to assess the retirement income market strengths and weaknesses of each sector as traditionally defined. Although the specifics will vary from company to company, the sector competitive profiles suggest the breadth of capabilities that will be required and potential opportunities for cross-sector investments, partnerships or other types of relationships.


Banks• Bankshaveanopportunitytobuildupontheirextensive

penetration of households (approximately 90% of the population has a checking account8) and their strategic position at the center of checking and credit card transactions. This opportunity can allow banks to establish a role in planning and managing retirement income and expenditure flows through retirement incomeaccounts.Onthedownside,banksareexposedto erosion of their core account base if competitors make major strides in developing and marketing such accounts.

• KeyadvantagesincludeawidearrayofCDsandotherlow-risk, FDIC-insured products; frequent customer touch points; and the ability to provide reverse credit products to monetize real estate assets.

• Somebanks,however,maybechallengedtopositionthemselves as knowledgeable retirement planners given the limited advisory skills of their sales staff (outside of private banks) and their current lack of payout and retirement-specific risk protection products.

Insurance carriers• Retireesaremoreconcernedthaneveraboutrisks

to retirement income, giving insurers an opportunity to develop new products designed to mitigate these risks. Insurers face a critical decision about whether to unbundle insurance coverage from asset management offerings and how best to achieve this, as their ability to assume these risks is a core strategic advantage over players in the other sectors.

• Insurers’principaladvantagesinpursuingtheretirementincome market opportunity are expertise and brand recognition for managing risk, existing payout products, access to face-to-face distributors (agents and independent advisors) who have consultative selling skills, and significant employer group relationships.

• Obstaclesthatmayhampertheabilityofinsurerstorealize market potential include limited brand permission for investment advice, relatively few customer touch points, distance from the end customer, and a historical slowness to innovate.

Mutual fund companies• Thedominantpositionofthelargestmutualfund

companies (as measured by assets under management) in the defined contribution plan market means that this sector has the greatest exposure to asset erosion as the baby boom generation retires. But they are also in a potentially good position to capture rollover assets.

• Manyoftheselargemutualfundcompanieshavewell-developed direct distribution channels and a reputation for customer service and low-cost delivery. These advantages, coupled with their asset management capabilities (though potentially tarnished in the current financial crisis), may help them capture rollover assets, especially when the market recovers.

• Still,mutualfundcompanieswilllikelyneedtorepositionand broaden their brands for the retirement income market.Keyissuestoovercomeincludeahistoricalreliance on growth-oriented investments and associated expertise, the absence of risk protection products and features, and a lack of strong personal financial advisor relationships.

8 Federal Reserve Board 2007 Survey of Consumer Finances

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Brokerage/investment management firms• Thebrokerage/investmentmanagementfirmshavea

potentially strong competitive advantage in their ability to capture the rollover assets of affluent retirees, given their deep penetration of this segment.

• Otherstrengthsincludeface-to-faceconsultativeselling skills, asset management skills, and expertise in managing income and expenditure flows through CMAs. Finally, their historically favorable position with more affluent customers may mitigate the need to develop capabilities to access and serve the mass-affluent market.

• Majorweaknessesincludetheabsenceofpayoutand risk protection products, their growth investment orientation, and comparatively limited employer group relationships.

Given the potentially significant investment and degree of change that may be required, not all financial services companies can or should choose to compete in the retirement income market. Those considering whether to enter this market should look beyond its aggregate size to ensure they understand what actions they will need to take to be successful.

Exhibit 5. Retirement income market positioning by financial services sector

Opportunity Advantages Challenges

Banks Management of retirement •transaction flows

Fixed income investments•

“Reverse” credit products•

90% household penetration*•

CD’s/FDIC insured products•

Frequent customer touch•

Mortgages/credit products•

Lack of guarantees and •retirement-specific insurance

Limited consultative selling/ financial •advisory skills

Limited employer group relationships•

Insurers Payout/annuity products•

Insurance against retirement risks•

Financial guarantees•

Existing payout products•

Expertise/brand recognition for •risk management

Agency/broker network•

Employer group relationships•

Limited brand recognition •for investment advice

Infrequent customer touch •

Slowness to innovate•

Mutual funds Capture rollover from defined •contribution plans

Target date and payout funds•

Financial planning/advice•

Onethirdofhouseholdinvestable•assets under management*

Employer group relationships•

Direct sales channel•

Perceived low cost•

Limited personal advisor relationships•


Growth focus•

Brokerage/ Investment managers

Capture rollover from defined •contribution plans

Target date and payout funds•

Financial planning/advice•

Onethirdofhouseholdinvestable•assets under management*

Face-to-face consultative selling skills•

CMA accounts•


Growth focus•

Lack of employer group relationships•

Source: Deloitte analysis, 2008* Source: Federal Reserve Board 2007 Survey of Consumer Finances


Baby boomers likely represent the largest and richest retirement income market in history. The opportunity it presents has been long anticipated. Those companies that are willing and able to take advantage of this future growth engine will need to take action: The leading edge of the baby boom is beginning to retire.

Financial services companies that want to succeed in this market will need to innovate in their offerings and adapt their operating model to deliver their products and services consistently and efficiently.

Take action to win

Exhibit 6. Mining the retirement income market

Source: Deloitte

1) Build your end customer knowledge. When the task is to address new and unmet needs, the past may not be a reliable guide. Insight into consumers’ concerns, preferences, and behaviors is necessary to understand what is lacking in the current market and to develop creative solutions that fill the gaps. Start by capturing and analyzing information from your existing customer interactions and transactions. Supplement internal data with primary consumer research and external consumer databases.

2) Decide where you want to play. Segment and size the market to identify customers, products, services, and channels that offer your company the greatest opportunity for profitable growth. Analyze your current and target businesses to understand overlaps and differences, and better position your company to chart a viable path from where you are today to where you want to be.

3) Define and communicate your brand. Get started; it can take a long time to establish a brand. Craft a value proposition – product and customer experience – that is customized to the needs of your target market and that differentiates you from the competition. Develop a message and select media that address the distinctive perceptions and attitudes of your target segment. For example, if pitching to consumers who are uncomfortable about retirement, the message might be about taking the worry out of retirement rather than promoting an adventure-filled retirement.

4) Enhance your product development capabilities. Whether a product leader or follower, you will likely need to bring products to market more quickly and efficiently in the future. Involve your customers and distributors up front to test market concepts and features. Engage IT, operations, risk management, and legal early in the development process to prevent downstream problems and rework. Simplify where possible and reduce low value-added variation by utilizing a common “chassis” and reusable “components” wherever possible.

Key actions financial services companies should consider include:

Customer knowledge

Positioning

Brand

Product development

Channel optimization

Advisor education

IT infrastructure

Culture

Service model

Performance measurement

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5) Align sales and distribution channels and incentives. Analyze the cost to serve of distribution alternatives and understand the sensitivity of these economics to changes in such factors as volume, compensation structure, and consumer acceptance of new media and channels (e.g., Internet). If you rely on independent distributors, evaluate them as you would end-consumers (i.e., segment distributors to understand both their business needs and their potential for generating profitable revenue from your target customers). Focus on the most profitable channels, craft value propositions for them, and be prepared to manage multi-channel approaches.

6) Equip your financial advisors. Financial advisors have a critical role in assembling appropriate solutions for their clients and may need assistance understanding how the issues and options in retirement differ from those during the asset accumulation phase. Ensure that financial advisors who represent you have the education, tools, and incentives to provide advice and service to end-consumers that is appropriate and consistent with your brand.

7) Adapt your service delivery model. Start with an audit to assess the quality and consistency of your current customer experiences and identify gaps with your brand promise. Analyze the cost of alternative solutions versus the pricing inherent in your product/value proposition. Common improvement opportunities include expansion of channel choices, seamless inter-channel routing, real-time customer analysis, automation, tighter management of routine execution, and realization of cost economies (e.g., operational consolidation, relocation, outsourcing, spend reduction).

8) Strategically align the IT infrastructure. Technology is a critical enabler across all aspects of the operating model – advanced consumer analytics, retirement income planning tools, risk management and compliance, product administration, customer contact centers – and the list of needs and potential costs can appear endless. Resist the pressure to respond to changes in business needs with systems and solutions that are deployed with tactical objectives, as this commonly leads to duplication of infrastructure across business units and departments. Focus on a long-term portfolio of initiatives that balances short-term benefits with sustainable long-term restructuring.

9) Develop a reinforcing culture. Whatever your brand positioning – high service, low cost, innovation – infuse the core values in your culture. Begin with a clear articulation of the vision from leadership, understand what capabilities and attributes your employees will need to deliver it, and align your recruitment, training, performance measurement, incentives, and organizational structure to reinforce these values.

10) Measure performance and modify your approach: The retirement income market is just emerging and how it evolves will depend in part on how financial services companies respond to the challenge. Ensure you have appropriate “learning loops” in place to evaluate how consumers are responding to your value proposition, and be prepared to modify and adapt your approach on an ongoing basis.


The retirement income market represents a powerful future growth engine for financial services companies seeking to rebuild reputations and consumer relationships. The financial services companies that choose to mine the retirement income market will need to innovate, build new capabilities, and commit to the long-term process of establishing their brand promise and ensuring their ability to deliver on it. Deep insight into consumer needs and preferences, creativity and innovation, a clear market strategy, and an unflinching commitment to continuously assessing their strengths and vulnerabilities will be essential to success.

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Jim ReichbachVice ChairmanU.S. Financial Services and U.S. Banking & Securities LeaderDeloitte LLP+1 212 436 [email protected]

Dorothy AlpertVice ChairmanU.S. Real Estate LeaderDeloitte LLP+1 212 436 [email protected]

Rebecca C. AmorosoVice ChairmanU.S. Insurance Industry LeaderDeloitte LLP+1 973 602 [email protected]

Cary StierVice ChairmanU.S. Private Equity, Hedge Funds & Mutual Funds LeaderDeloitte LLP+1 312 486 [email protected]

Author

Ann M. ConnollyDirectorDeloitte Consulting LLP+1 212 618 [email protected]

ContributorsRichard BerryDirectorDeloitte Consulting LLP+1 212 313 [email protected]

Joe GuastellaPrincipalInsurance Consulting LeaderDeloitte Consulting LLP+1 212 618 [email protected]

Mary KearneyDirectorDeloitte Consulting LLP+1 617 437 [email protected]

Don McNeesPrincipalDeloitte Consulting LLP+1 212 618 [email protected]

Priti RajagopalanManager, Deloitte ResearchDeloitte Services LP+1 609 806 [email protected]

Dan RosshirtPrincipalDeloitte Consulting LLP+1 212 618 [email protected]

Financial services leadership team

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright ©2009 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu.

Item #9057May 2009

Mining the Retirement Income Market

Business

Transcript of Mining the Retirement Income Market