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Aging Boomers: Moving from Savings Accumulation to Savings Distribution

For the better part of two decades, U.S. baby boomers have been focused on saving money for retirement. As this decade winds to a close, they'll actually begin to retire, presenting a tangled mix of challenges and opportunities for the stable value industry.

On the down side, boomers leaving their jobs will shift their attention from savings accumulation to savings distribution. Many will cease making contributions to their retirement accounts, including the stable value funds in those accounts.

On the plus side, boomers faced with the prospect of living off their retirement nest eggs are likely to be more conservative with that money than they were when retirement was still a distant goal. That's promising for stable value managers, since stable value funds are attractive to conservative investors because of their promise to protect principal while providing returns that exceed those of money market funds.

The challenge, of course, will be to retain a fair share of boomer assets once they leave their employers and, in many cases, roll their 401(k) assets into Individual Retirement Accounts.

"Right now, we have access to the boomer's money in the 401(k) market, but we don't have the same access once he moves it to the IRA market," explained Donna Marsella, a director and product specialist with stable value manager Deutsche Asset Management. "While some of us in this industry have developed IRA products, there haven't been a lot of them. If we don't innovate and get our message out to the public, we're going to lose this opportunity."

Speaking at the 2000 National Forum of the Stable Value Investment Association in October, Marsella said the IRA rollover market is expected to be a $4.6 trillion opportunity by the year 2008, when the first boomers reach 62 years of age.

Stable value managers aren't the only members of the pension community who will be impacted by the exodus of the baby boomers from the work force, according to Sylvester Schieber, a vice president with the consulting firm Watson Wyatt Worldwide and director of its Research and Information Center. Plan sponsors and plan providers will feel the shift, too.

Plan sponsors, Schieber said, will find themselves facing higher social insurance costs. Economic and demographic considerations, he said, will continue to drive employers toward the elimination of early retirement subsidiaries and retiree health care benefits.

Meanwhile, Schieber said, pension plan providers can expect the nation's reliance on defined contribution plans to continue to grow, which gives them a continued opportunity to grow their own business. But plan sponsor clients, he warned, will be increasingly sensitive to the cost of managing plan operations, making for a competitive marketplace. Also, policy makers will become more focused on the choices available to retirees in the annuity market, as well as their cost and use, he said. "If plan providers don't get this right," he said, "we may see government intervention."

Scott Macey, a founder of the employee benefits consulting firm ASA and now its senior counsel, predicted that the financial services industry could also be confronted with new regulations curtailing the ability of retirees to take large lump sums from pension plans (spurred by research showing that more people than ever are taking lump sum distributions rather than rolling assets into an IRA). In fact, he said, the government could impose regulations requiring the annuitization of defined-contribution plan benefits.

In short, the stable value industry, along with the rest of the pension community, faces a changing marketplace in which adaptability and innovation will be critical to success.

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