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The Retirement Income Opportunity: ROLES FOR FINANCIAL SERVICES PROVIDERS

The Retirement Income Opportunity: ROLES FOR FINANCIAL SERVICES PROVIDERS. Jerome P. Kenney. February 12, 2007. Demographics Are Eye-Popping: Retirement Age Population Will Increase 63% From ‘00 – ‘20. Assets Will Double by ‘12. Change in Population Growth 2000 – 2020.

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The Retirement Income Opportunity: ROLES FOR FINANCIAL SERVICES PROVIDERS

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  1. The Retirement Income Opportunity: ROLES FOR FINANCIAL SERVICES PROVIDERS Jerome P. Kenney February 12, 2007

  2. Demographics Are Eye-Popping: Retirement Age Population Will Increase 63% From ‘00 – ‘20. Assets Will Double by ‘12 Change in Population Growth2000 – 2020 Assets Held by Investors Over Age 60 ($ Trillions) 38.1 Million CAGR 2006 – 2015: 12.1% 16.1 Million 10.1 Million 6.1 Million GrowthRate 12% 8% 13% (5%) 9% 76% 56% ’00-’20 Source: US Census Source: Cerulli Associates – Retirement Edge, November 2006 1

  3. Retirement Plan Assets = 44% of US Fin Wealth. These Plans + Taxable Assets of People >55 (56%) = $25.2T or 75% of Total Total Financial Wealth – Q3 2006 $33,375 Taxable Assets $18,538 56% Retirement Plan Assets $14,837 44% Dep, CDs,MMFs $6,071 EQ, FI, Ins, MFs $12,467 IRAs $3,958 DC $3,420 PrivateDB $1,842 Gov’t Plans $4,026 Annuities $1,591 Age 20% 80% 53% 47% 55% 45% >55 74% 26% 39% 61% 64% 36% 50% 50% <55 Source: Federal Reserve Flow of Funds, ICI and Merrill Lynch segmentation estimates 2

  4. Growth In The Retirement Market Will Come From Retail-Oriented Programs: DC, IRAs, Annuities DB Annuities DC IRA ($ Trillions) $2.7 $1.9 $0.9 3.6% 2.6% 7.4% 7.4% 6.5% 7.8% 10.7% 10.6% Growth Driver: • Market appreciation only • Retirees seeking income • Contributions • Auto enrollment • Auto escalation • Rollovers • Contributions The Individual Will Shoulder Responsibility For Retirement Savings, Investments, And Creating Income From Assets 3

  5. The Outlook for Net Flows Is Positive For IRAs, DC & VA’s. In ‘07 Expect >$180 Billion in Flows From These Products Net Flows ($ Billions) IRAs DC VariableAnnuities DB Source: Department of Labor, Federal Reserve, Cerulli Associates and Merrill Lynch estimates on variable annuities. 4

  6. The Pension Protection Act (PPA) Of 2006 Will Help Increase DC Savings • Contributions to 401(k) accounts can grow based on inflation index each year. Higher contribution limits made permanent. • Auto-enrollment is legal in all 50 states. Estimate increase in participation from 66% to ~90%. • Investment default options favor lifecycle funds vs. cash • Expect a marked decline in money market funds and stable value to a lesser degree as default options. • Automatic deferrals likely to start at 3% with auto-escalation of 1% for 3 years for plans to escape non-discrimination testing. • PPA allows for greater level of advice in DC plans through managed accounts and one-on-one counseling. • IRA plans can be combined with other IRAs, DB cash value plans, profit sharing and IRAs passed on to heirs. 5

  7. The Median American Family Is In A Net Financial Deficit. The Average Baby Boomer Fares Better Largely Due To House Appreciation Financial Position For The Median American Family – 2004 ($ ‘000) Financial Position For The Average Baby Boomer – 2004 ($ ‘000) Source: Survey of Consumer Finances 2004, Federal Reserve Source: Cerulli Associates – Advisor Metrics 2006 6

  8. Just 1% Of Retiree Households Are HNW (>$2.5MM Fincl Assets), But These Households Control $4.7T In Assets Retiree Asset Segmentation 2005 2020 NotHNW NotHNW HNW HNW Total = $12,344 Billion Total = $35,419 Billion Most Wealth Is Concentrated In A Small Percentage Of Households. Baby Boomers Are Generally Not Well-Positioned For Retirement. 7

  9. Nearly 2/3 Of 401(k) Assets Are Held By Participants In Their Peak Earning Years (40-59), But 70% of Balances Are <$50,000 • 2005 balances: average = $58,328; participants in their 60s = $180,988 401(k) Assets by Age Group2005 401(k) Balances by Size of Account 2005 <29 >$100,000 >65 30 to 39 60 to 64 <$10,000 $50,000 to $100,000 40 to 49 50 to 59 $10,000 to $49,999 Source: Cerulli Associates, Retirement Markets 2006 Source: Cerulli Associates, Retirement Markets 2006 Here Lie The Seeds Of A Retirement Crisis For Workers Who Don’t Adequately Plan For Retirement And Do Not Understand The Risks Of Outliving Assets 8

  10. * Maximum SS: $25,392 Average SS: $12,528 Social Security & Pensions Generate 58% of Retirement Income. With DB Declining, Individuals Must Rely on Other Income Sources Private Active DB Participant as % of Private-Sector Workers 2005 Sources of Retirement Income Retirees vs Pre-Retirees - 2005 Aggregate Retiree Income By Source – 2004 Other (incl. Public Assistance) 22.1% 17.7% Asset Income(incl DC, IRA) Social Security * Earnings Total Private Sector 101.4mm 113.7mm Workers DB Pensions Source: Cerulli Assoc, Retirement Markets 2006 Source: LIMRA – Retirement Planning 2006 Source: Cerulli Assoc, Retirement Markets 2006 New Retirement Income Products and Decumulation Services Will Take the Place of Traditional Pensions 9

  11. For Many People, Retirement Planning Consists Of Estimating Income & Expenses. Only 22% Of Pre-Retirees Surveyed Created An Income Plan Retirement Planning Activities Sources Consulted For Retirement Planning – 2005 = Source: LIMRA – Retirement Planning 2006 Source: LIMRA – Retirement Planning 2006 Boomers who sought professional assistance and developed a retirement plan reported that they had saved twice as much ($1.8mm vs. $950,000) as the group who did not seek professional advice. LIMRA / Ameriprise 10

  12. Retirement Planning Should Address Risks Facing Retirees, But There Is an Advice Gap With Respect to Solutions Retirement Risks Advice Gap • Rising health care costs • Longevity – outliving assets • Inflation • Long-term care • Asset allocation • Asset withdrawal rate Source: Fidelity – Adapting a Practice for Retirement Income Planning Health care is the second largest expense in retirement (following housing) and is perhaps the biggest risk to the success of a retirement income plan. Fidelity 11

  13. Firms Who Have Expertise in the Broader Aspects of Retirement Will Be Able To Differentiate Themselves Health care is the second largest expense in retirement (following housing) and is perhaps the biggest risk to the success of a retirement income plan. Fidelity Differentiating Advisor Expertise • Critical illness insurance • Long-term care insurance • Longevity insurance • Reverse mortgages • Asset drawdown strategies • Knowledge of Medicare, Social Security, Medigap plans • Prescription drug plans • Tax implications associated with asset withdrawal • Income strategies • Estate planning The advisor’s role will become more akin to an HR benefits specialist where the advisor helps retirees administer their retirement. 12

  14. Where Do You Fit In Terms Of The Retirement Income Opportunity?

  15. There Are A Number Of Ways To Participate In The Retirement Market Opportunity • Recordkeeper • Technology firm outsourcer Service Provider Product Provider Asset Gatherer / Financial Advisor • Asset management • Insurance • Income products • Retail orientation • Advice • Attract and grow assets – DB, DC, IRA • Scale / efficiencies • Penetrate retail and institutional channels • Best of breed • Rollovers • Complete product & service array • End-to-end solutions 13

  16. In DC Administration, Opportunities Are Shrinking As Consolidation Continues, Similar To Global Custody • Aside from the big 4, asset managers have exited recordkeeping to focus on being product suppliers • Only 2 banks and 4 insurers are in the top-tier Assets Under Administration ($ Trillions) Top DC Recordkeepers – 2006 DC Global Custody $3.1 $8.7 $2.3 Top 50 Top 25 Top 10 Top 5 Source: Pensions & Investments. 14

  17. Technology-Oriented Processors Are Gaining Market Position by Providing Outsourcing Capabilities To DC Recordkeepers Full Outsourcing Segment Rationalization($ Millions) American Funds FASCore Bank of America ADP/Aegon Mercantile Bank BISYS Morgan Stanley ADP/Fidelity PaineWebber MFS Fifth Third Bank FASCore GE BISYS ING DST Federated FASCore Am Express FASCore ($5-$50) Merrill Lynch BISYS (<$3) Prudential BISYS (<$3) TR Price Trustar (sm plans) US Bank BISYS (sm plans) Delaware BISYS (sm plans) Schwab Local TPA’s (<$20) AIM DAC and CPI Franklin Res FASCore Source: 401(k) Exchange 15

  18. For Product Providers, It’s Still Early. Focus Will Shift From Accumulation To Distribution & Towards Guaranteed Income Guaranteed Income Achieved Through Investment Products Insurance Products Processes • Principal protection • TIPs • Annuities • Stable value • Systematic Withdrawal Income Programs (SWIPs) 16

  19. For Asset Gatherers, The IRA Market Is Underpenetrated: The Top 5 Firms Capture 40% Of Rollover Dollars; The Top 10 – 55% Market Share of Firms Receiving Rollover Dollars Job Changers Retirees Fidelity Fidelity MerrillLynch All Others All Others Wachovia Vanguard MerrillLynch Charles Schwab Ameriprise MorganStanley Prudential /CIGNA CitiStreet RaymondJames Edward Jones Edward Jones Charles Schwab CitiStreet Wells Fargo Ameriprise Wachovia Source: LIMRA Staying in the Game: Retaining Rollover Assets, August 2006. Based on respondents with corporate DC plans who (A) rolled their money to IRAs or took lump sum cash distributions and saved some or all of the money and (B) identified the firm receiving the plan assets. 17

  20. A Handful Of Firms Will Provide End-to-End Retirement Solutions, Driven By Advice • Products • Lifecycle Funds • Principal Protection • Annuities • Reverse Mortgages • LT Care Insurance • Trust • Process • Investment strategy • Asset drawdown • Budget • Income distribution • Income mgmt accounts • Risk mgmt Advice • Investments • Health Care • Insurance • Estate Planning 18

  21. For Financial Advisors, Client Wealth Tiers Will Drive Retirement Strategies, Products And Advice Delivery Source: Tower Group and Merrill Lynch 19

  22. Retirement Is Shifting From Institutional To Individual Responsibility • A) The individual is the ultimate client, so products need to be: • Easy for an advisor to explain • Easy for the individual to understand and use • Best in class B) People will need advice on assets, income, health care, insurance • Client wealth tier will determine product and advice offering. • Differentiating your firm is crucial; e.g., • Full product and service range • Benefits expertise • Retirement services specialist • Product providers need to maximize distribution • Registered Investment Advisors (RIAs), Financial Advisors (FAs) • Platforms: DC, annuities, DB; or separate accounts, IRAs, annuities • Distribution alliances • Service providers need to attract, grow and retain assets • Distributors should focus on becoming primary advisor; asset consolidator • Advisors need to acquire expertise in all aspects of retirement. 20

  23. Bear in Mind 1. People are more apt to plan a vacation than their retirement. 2. The mass market / mass affluent are known for spending – not saving. 3. Most people just want advisors to tell them what they should do. 4. Most people will need to create their own retirement income. 5. Products on autopilot work well. 6. It’s a new balancing act – assets, income, protection, expenses. 7. The first 4 years of retirement are crucial to a portfolio’s success. 8. The employer is where individuals are first exposed to retirement products. 9. Health care costs will likely be a bigger issue for retirees. 10. There’s still time. We are only at the beginning of the retirement income opportunity which peaks in 2026. 21

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