From assets to income: paying back money to customers requires a business model different from helping them build assets. Insurers are beginning to make the transition.

Major life insurers for years have said that the next great challenge facing baby boomers is creating and managing retirement income. Their record of devoting resources to income products and advice, however, has not matched their expressed enthusiasm, and only in recent months has evidence of rekindled efforts appeared.

Knowing what to do once regular paychecks stop won't come easily for most boomers. Most will not have the kinds of defined-benefit plans their parents enjoyed, and only a minority appear to have built up adequate retirement assets. Of those who have, most will depend heavily on their own savings, and they are likely to find that generating retirement income isn't simply the reverse of saving and building assets. Risks are greater, too; retirees who make mistakes might never recover.

While issues of retirement income are largely the domain of financial planners, insurers have a stake in developing products that mitigate the risks of losing buying power and running out of money. The trouble is that planners, insurers and the public still tend to think in terms of a dollar amount they will need to retire as opposed to income, said Borden Ayers, principal of Diversified Services Group Inc., a Wayne, Pa.-based research and consulting firm to the financial-services industry. "Most people don't really have a good understanding of the relationship between wealth and income," he said.

Diversified Services has surveyed life insurers on the topic for several years, including four payout annuity studies. Ayers recalled great interest in 1997 in retirement income, and some large insurers worked to develop supportive infrastructure up to 2000. But when no one produced meaningful results, companies pulled back, he said. "They were making so much money on accumulation assets, and advisers were not interested in retirement income," he said. That lack of interest was because advisers' clients were used to earning 20% annually on their investments, "and they figured they'd just take 8% per year in retirement and invest the difference."

The other problem with advisers was that their knowledge and perception of income annuities was out of date, Ayers added. "They knew about single-premium, fixed-income annuities, and their perception was that they wouldn't get paid much, that the money would be gone, and that they would lose a customer," he said.

Ayers said the situation became "bleak" when the stock market collapsed, and people no longer were "gazillionaires." Next came the precipitous drop in interest rates, and insurers couldn't offer annuity customers as much in payouts as they could before. Ayers said the net result has been "inertia," and while there is a lot of talk, insurers haven't dedicated a lot of resources. Only now, as firms have begun to emerge from the damage control that occurred as a result of the economy, have insurers again been able to look ahead, he said.

Help for the Middle Class

Not surprisingly, industry leaders appear to be focusing proposed solutions on where middle-income Americans are saving for retirement: in qualified plans at work. In November, MetLife Inc. launched Personal IncomePlus, a variable income annuity that employers may offer employees as an option within the company's qualified retirement plan or as an Individual Retirement Account rollover option for money that has been distributed from the plan. It allows retirees to convert a portion of their retirement savings to an income stream with a minimum lump-sum purchase of $25,000, said Dorit Murciano, vice president of MetLife Retirement & Savings.

To help people calculate how much monthly income their savings can provide, MetLife introduced in August an online Income Meter. It followed in October with a guidebook to income annuities. Following Personal IncomePlus, it later in November launched a business-to-business advertising campaign to promote income annuities to plan sponsors and human-resource executives.

MetLife is the first company with an income annuity that allows back-and-forth transfers between variable and fixed-income options, said Murciano. Personal IncomePlus offers 35 investment options; an array of payout plans that can include a spouse or beneficiary; an asset-allocation service; a team of retirement specialists available by toll-free phone calls; education and planning tools available on a Web site; and seminars on financial topics. Because the annuity is a voluntary workplace benefit, insurance-related charges are lower than for retail products.

"Employers help their workers save, but they are not thinking about the other side of the equation," said Murciano. "The beauty of the way we oilier this program to employers is that we take care of everything, and they don't have to handle any of the administration. The cost is paid by employees, but the employer is leveraging the power of the group to provide the most effective pricing, and there is no sales commission."

Murciano said MetLife has "gotten terrific feedback" on the program so far in the form of requests for information. "We're meeting with plan sponsors and intermediaries, and they're very interested to hear more," he said. MetLife plans to roll out a retail version of the immediate variable annuity this year.

Pru Chooses GRInS

Prudential Financial Inc. is in the development stage of a new kind of product that allows investors to buy shares of future monthly retirement income while they still are working. It has contracted with Retirement Engineering Inc. for help in designing a synthetic annuity version of the Boston-based company's Guaranteed Retirement Income Security (GRInS) family of products. Scott Sleyster, president of Prudential Retirement, said GRInS is a way to deliver defined-benefit outcomes to the defined-contribution market in a user-friendly manner. It avoids "undue risk" for a plan sponsor, and by securing a minimal floor of retirement income, it can free plan participants to invest the rest of their money aggressively, he said.

Prudential's GRInS product will use zero-coupon bonds as the underlying investment that provides the guarantee. Investors choose a date on which they want to start their retirement income, and the bonds mature at about that time. Investors then can take a lump sum or the income stream, which might be greater than the guarantee, depending on market conditions at that time.

This product design should provide appealing features for investors, said Francois Gadenne, president and chief executive officer of Retirement Engineering and co-founder along with Ben Williams. The main appeal is that the product relieves investors of managing a portfolio. A previous business venture of Gadenne and Williams was Rational Investors, which provided portfolio-management advice to participants in 401(k) plans. They found that only 20% of those participants showed interest in such advice, and far fewer used it. "What they want is a pension," he said. "They don't want to learn to build a clock; they just want the time."

The GRInS product Prudential is developing will also help overcome the natural human tendency to buy high and sell low. That's because GRInS products show investors the daily price of a dollar of guaranteed monthly income for life. That price will fluctuate along with the market value of the underlying zero-coupon bonds. GRInS changes investors' behavior because when the net asset value is down, they'll see that the future benefit remains the same. "They'll say that GRInS units are cheap today, and maybe they should buy more," said Gadenne.

Such transparency might help an investor map the ultimate expense of consumption, Gadenne added. His example: lf the cost of $1 of monthly income beginning in 2023 is $60 (for investor and survivor), then the cost of a $6,000 vacation this year is $100 a month in retirement income for life.

A Security, Not a Contract

Annuities, of course, can guarantee a future minimum income for life, and GE Life & Annuity Assurance Co. has been heavily marketing its Retirement Answer product, which it introduced early last year. In that product, an investor agrees to pay a stipulated amount in a lump sum or periodically in exchange for a guaranteed amount of future income, with more than the guaranteed amount if GE's investment experience is better than expected. Gadenne said the difference with GRInS is that it is a security, not a contract, and investors can buy or sell GRInS units at any time. People can even change their minds and exchange to a longer maturity, he said. GRInS products can also be designed with other kinds of underlying investments, including bond mutual funds and collateralized mortgage obligations, said Gadenne.

Retirement Engineering is working with insurers other than Prudential, Gadenne said, but as of December, it had no other formal commitments.

Large companies such as Prudential with lots of talent might normally develop their own products, but Sleyster said Prudential's management team has been devoted in recent months to an acquisition of Cigna Corp.'s retirement business, and it expects to be occupied with integration in coming months. The Cigna transaction would double the number of participants in Prudential's defined-contribution plans to about 2 million, he said. Prudential last year also bought American Skandia Life Assurance Co., a purchase Sleyster said is part of Prudential's commitment to retirement markets.

The contract with Retirement Engineering proves "the benefit of being open-minded," said Sleyster. "Francois spends time networking with other companies. If we get the GRInS product built, we might gain from other distribution markets and institutional partners. Why wouldn't you talk to people with ideas and contacts that might accelerate your business?"

Sleyster said Prudential is "reasonably far along" in development of the product. He said it has spoken with distributors about versions of the product and has found "strong interest" by plan sponsors and participants. "The proof of demand for the product is there," he said. "We've looked at various filings we could use when the product is finalized."

According to Sleyster, GRInS should prove very helpful in delivering solutions to participants in qualified plans where sponsors are reluctant to deliver advice and providers can't bear the expense of sending advisers for personal visits. "Some of these ideas are fairly complex, and if you're going to deliver them cheaply and efficiently, you need to make them simple," he said. "It's hard to keep things simple and keep plan sponsors and regulators happy." He added that the market "is waking up to this need," even though many boomers still aren't close to retirement.

Buying Slices of Income

Principal Financial Corp.'s entry in the retirement-planning market for qualified plans is its Income IRA, which Ron Danilson said uses the principle of "benefit-cost averaging"--the reverse of dollar-cost averaging. Danilson is vice president of retirement and investor services at Principal, the largest provider of 401 (k)s in the nation.

The Income IRA allows people to roll over qualified-plan money into individual retirement accounts when they retire. The IRA would contain a brokerage account with mutual funds and a Fixed payout annuity. The assets at first go into a portfolio of mutual funds to give the owner access and to help assets to continue growing in early retirement years. Any registered producer can provide planning advice, not just from Principal. The company also has contracted with Golden Retirement Resources Inc. to offer investors that firm's Retire-Mentor online calculator, which helps them to pick an appropriate asset allocation. Investors choose from a variety of mutual funds run by Princor, the company's mutual-fund family, and seven outside mutual-fund managers.

Participants in the Income IRA would then gradually shift assets to the fixed payout annuity over a period as long as 15 years. Danilson said the annuity is unusual, and possibly unique, in that it allows people to buy slices over a long period even as they collect payouts. If life circumstances change, they could even reinvest proceeds from the annuity back into the IRA's mutual funds. "There's a significant element of control and liquidity," said Danilson. "You can stop and start payments, which you might want to do if you receive an inheritance or go back to work." IRA owners are subject to required minimum-distribution rules, but if they own another IRA, they have the option of taking all of the distributions from the IRA of their choosing, be added.

The flexibility of the program addresses many risks and concerns, said Danilson. Broadly, they include longevity, inflation, loss of spouse and any of a number of unexpected events, such as needing money to pay for medical treatment, ha addition, benefit-cost averaging moderates the risk of buying a fixed annuity when interest rates--and therefore future payouts--are low. Danilson said a participant making prudent use of the program might retire at age 60 and gradually annuitize assets up to age 75, at which time the income stream is fully guaranteed. He said a good strategy might be to use guaranteed income for recurring expenses on essentials and then to shift gradually to generate income for discretionary spending. An optional caregiver benefit increases payouts for those unable to perform activities of daily living.

Principal introduced the Income IRA late in 2002 and rolled it out during the first half of last year. Training programs have been under way for both agents and Principal Connection phone counselors. Danilson said Principal has had modest success in selling the program so far, and he reported that account balances are much larger than the company had anticipated, averaging about $150,000. Counting required minimum distributions from all of its retirement accounts, Principal makes monthly payments to about 250,000 people, he said. "Boomers represent a market with a new need, one we've seen coming for some time," he said. "We're well positioned because of the number of retirees we've been servicing."

Income Plus Access

Lincoln Financial offers retirement-income flexibility through its I4Life Advantage, the second generation of its Income4Life rider to its variable annuities. The rider provides an "access period" for as long as annuitants choose, during which they draw lifetime income without ceding control of the assets to the company. The longer the access period, the lower the payouts, and withdrawals would also lower the periodic payments. Thomas Sundstrom, an assistant vice president, said Lincoln expects most people to choose an access period of 10 or 12 years, but they still can decide later to extend it. Lincoln is pursuing intellectual-property registration on the rider.

Unlike fixed payout annuities, I4Life Advantage is linked to variable products, meaning the amount of payouts will fluctuate based on the performance of the annuity's investments. Owners are free to transfer among assets in the annuity, however, in response to changes in the market or their own circumstances. And the rider can be used either with nonqualified variable annuities or with those in qualified plans.

Shipley Munson, vice president of campaign marketing with Lincoln Financial Distributors, said the product also comes with a feature that protects principal, a change prompted by the three-year bear market in stocks that ended early last year. Combined with lifetime payouts, the guarantee gives insurers such as Lincoln an advantage over mutual funds, he said. "If you just try to use systematic withdrawal, no matter how much you have, when you run a Monte Carlo simulation, there's always a chance you'll run out of assets," he said. "Only the insurance industry can guarantee you won't."

Gary Parker, a senior vice president in product development, said Lincoln made a significant commitment to retirement income three years ago, when it developed Income4Life. It continues to devote significant amounts to the commercialization of the successor product by developing and training its wholesalers and broker-dealers. One reason for early commitment is that the market Lincoln serves is older and more affluent than that of other insurers. "As a result, we're closer to that transition point [turning assets into income] than most other companies are," he said.

Emphasis on Advice

ING U.S. Financial Services in 2001 launched ING's Financial Horizons, a business based in Hartford, Conn., focused on investment advice and retirement services for people approaching retirement. Its goal is to work with a large part of the 15 million or so households in the United States with assets of $100,000 to $1 million. "It's a fairly underserved market in terms of advice, planning and retirement income," said Shawn Matthews, president of Financial Horizons and chief marketing officer for the financial-services company. ING's U.S. business includes defined-contribution plans, payout management and annuities. It distributes through 200,000 producers in its own broker-dealer network, registered representatives, independent and career insurance agents, regional and wirehouse brokerage firms, banks and direct sales.

ING Financial Advisors, formerly Aetna Financial Advisors, piloted Financial Horizon activities. An ING survey conducted last summer, "Boomers Still on the Brink," was a follow-up to a 2001 survey. It found that many boomers continue to be ill prepared for their golden years.

"What blows me away is the number of people who say they need professional advice but haven't sought any, and the number that are avoiding advice altogether," said Matthews. "To me, it's the next big thing in financial services. We're very committed to becoming a player and a strong product provider to third-party distribution." The company has already invested nearly $30 million and will continue to invest in information technology, new products and lots of training. In particular, it will try to keep its advice capability fresh and dynamic, Matthews said. Momentum has accelerated since the end of the bear market, he added.

Ayers said educating advisers is very important." If you don't apply the resources, you won't produce the results," he said. "Eighty to 85% of people planning for retirement will go to somebody for advice. If those advisers aren't attuned to retirement income, they won't recommend it. They'll go where their comfort zone already is. Right now, there's a lot of talk but not a lot of resources dedicated."

The country in general suffers from lack of a well-defined retirement policy at a social level, Matthews said. "There's an ongoing debate, and you see people in Congress trying to deal with it," he said. "I'd love to see Congress and the industry raise the level of noise on this issue."

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Current Primary Investments

Boomers continue to rely on employer pensions/retirement
plans, but the value they assign to individual
retirement accounts has grown the fastest.

                                                Percentage
                                                    of
                                                Respondents

                                                1993   2003

A pension or retirement plan through employer    65%    70%
Mutual funds                                     42%    44%
Individual Retirement Account (IRA)              17%    40%
Individual stocks or equities                    29%    30%
Stock options through your employer              n/a    21%
Life insurance                                   26%    20%
Real estate other than primary residence         16%    15%
CDs or other money market accounts               23%    14%
Bonds                                            12%    10%

na/not asked

Source: Axa Nest Egg Study of 701 baby boomers born from 1946 to
1964 with annual incomes of at least $75,000, surveyed August 2003.
Previous study in 1993 interviewed 600 boomers earning $50,000 or
more a year.