Post-retirement riddle: insurers are missing an opportunity to expand their current focus on growing savings to include managing income during retirement.

As the U.S. population ages and life spans continue to increase, more and more people are waking up to a new retirement challenge--not the traditional challenge of accumulating savings for retirement, but of managing income during retirement.

Despite the growing importance of longevity risk management and retirement income planning, there has been comparatively little action taken to date by consumers, advisers or financial intermediaries (including lid insurers) to address these issues. For example, sales of income or payout annuities, a product well suited to meet individual retirement income needs, are a small fraction of accumulation-oriented annuity sales, while annuitization rates on deferred annuities remain very low. Meanwhile, individuals overwhelmingly continue to take their 401 (k) retirement money in lump sums.

Market participants remain firmly focused on retirement savings and accumulation. While this is not entirely surprising given the current retirement landscape--seismic shift from defined benefit plans to defined contribution plans among employers, volatile capital markets, and growing attention on Social Security solvency and potential reform--the retirement income market today remains a largely untapped opportunity and an underserved need.

So why hasn't this burgeoning need for retirement income and longevity risk management translated into a vibrant commercial marketplace? Significant barriers exist both with consumers and distributors. Today, many consumers are focused on asset accumulation for retirement and are truly unaware of, or unprepared for, the risks of retirement income management. Individuals are choosing to self-insure longevity risk, believing that they can manage their retirement portfolio and fired their retirement income needs more effectively than an insurance company or other financial intermediary. Clearly, at the consumer level, changing this dynamic will be an enormous educational and behavioral challenge.

Furthermore, most financial advisory business models locus on asset gathering and investment management. In this model, there is typically limited incentive for agents, brokers, planners and other financial advisers to steer their clients toward purchasing an income annuity, since this involves transferring assets from the client's portfolio to an insurance company. Given the emphasis on maintaining assets under management, the adviser may be far more inclined to advocate an alternate approach (such as systematic withdrawal) to retirement income management.

So what is the key to solving the retirement income riddle? Retirement income management is a service insurers are uniquely positioned to provide, but the journey to capturing consumers' hearts and minds is likely to be long and difficult. However, the prize should be well worth the trip. With 76 million baby boomers approaching their golden years, the retirement income market potential is enormous.

The right product/service model is likely to contain a number of elements:

* A segmented model that differentiates consumers' needs and services according to their financial states. For some people, estate planning considerations will trump retirement income needs. Others may have significant retirement income needs but insufficient assets to monetize. The key for any insurer is to have an efficient model for triaging its prospective customers.

* A strong educational component designed to increase consumer awareness of longevity risk and solutions to manage that risk.

* An integrated approach to retirement income planning that considers all available sources of income, individual risk tolerances, asset allocation strategies, and expenses. This approach should be initiated earlier in an individual's life cycle, and updated continually to reflect changes.

* Flexible, broad-based product solutions that include income annuities as only one part of the retirement income plan. Serving this market will require much more than a single product-based solution.

* A selling approach that addresses consumers' reluctance to deal with retirement planning, especially when it involves spending large sums of money today to deal with a long-term future issue.

* A distribution model that appropriately rewards sales, especially for those involving asset "decumulation."

With an opportunity to recapture some of the ground lost to mutual funds and investment management firms over the past decades, insurers should aggressively position themselves to be the providers of choice for retirement income and risk management services.

Contributor Eric W. Speer is a managing director for the Tillinghast business of Towers Perrin. He can be reached at [e-mail].