Increasing Retirement Readiness through Financial Services

Manage HR Magazine | Thursday, October 13, 2022

Many pre-retirees have long prioritized accumulating assets, but providing a reliable income stream throughout retirement has become a serious concern.

FREMONT, CA: Financial readiness for retirement has primarily been a problem of financial inclusion and wealth accumulation. This view assumes that the only way to meet the challenge is for every worker to have access to a retirement savings account and be motivated to defer a significant portion of their savings into accumulation-oriented funds. Now, however, an issue that is arguably even more crucial is how to ensure a sufficient retirement income. Financial services companies must adapt how they prepare workers for retirement to meet this challenge.

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When accumulation was the dominant mentality, the primary innovations in defined contribution plans centered on expanding access and participation (auto-enrollment), increasing savings rates (auto-escalation), and enhancing long-term investment performance (professionally managed target date funds), due to these enhancements and the long bull market that followed the global financial crisis, the balances of defined contribution accounts and individual retirement accounts in the United States have reached $23 trillion over the past decade.

Pre-retirees (those 50 to 64 years old) must now deal with a second crucial retirement issue: decumulation, or the process of converting retirement savings into a steady and sufficient stream of income that lasts throughout retirement. Several macro factors exacerbate the difficulty, including rising inflation, market volatility, uncertainty regarding healthcare costs and assisted living in retirement and a significant wave of early baby boomer retirements. Recent nationwide surveys of nearly 9,000 US households indicate that as many as 80 percent of baby boomers may be unprepared for retirement. Moreover, many prospective retirees believe they lack the necessary assets and financial knowledge for a secure retirement.

The focus of the retirement industry over the past two decades has been on simplifying and enhancing how households save and invest. Consequently, numerous accumulation options are available on the market today, with target date funds being the most prevalent. Decumulation is different: the variety of products is limited, adoption rates are frequently low, and many savers are engaged outside the workplace.

Financial services firms can assist households in coordinating their use of "retail" products (wealth management or banking) and "workplace" products, such as group insurance or a 401(k), to increase retirement readiness among employees. The adage "set it and forget it" regarding target-date funds no longer applies to baby boomers nearing the end of the accumulation phase. Integrating their financial lives across accounts is a fundamental requirement, and financial services firms from all industries can compete for the integrator role.

However, financial services firms cannot cater to all retirees since baby boomers account for $29 trillion of total investable assets. Financial sufficiency segmentation is a valuable starting point for differentiation: Wealth managers and insurance companies primarily serve households with $17.5 trillion in investable assets, the segment deemed most likely to be financially secure. These providers earn higher margins, and their clients have fewer unmet needs but can benefit from customized solutions and a more comprehensive selection of offerings.

In contrast, the "near the line" and "at risk" segments, which collectively own $11.5 trillion in assets, are frequently underserved regarding wealth, health, and protection. Access to these segments can be gained through product innovation and enhanced personalization, an opportunity for workplace providers and banks. The "safety net" segment, with assets of only $100 billion, will continue to require assistance from public and social programs, but it may still be manageable, particularly if some of these individuals continue to work into their later years.

Financial services firms can help solve the decumulation challenge through three core innovation areas: confidence-boosting products and services, access to ecosystems of service providers through partnerships, and improved digital client experiences.

Check Out This: Global Financial & Leasing Services

 

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