LTSave New Retirement Seminar Presentation

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  • 1. The New Retirement Portfolio Management Strategies for Personal Retirement Planning October 4, 2006
  • 2.
    • Today’s Discussion
    • Mega-trends
    • Market responses: Accumulation Phase
    • Constructing the Accumulation Phase retirement portfolio
    • LTSave advice sequence
    • Constructing the Distribution Phase retirement portfolio
    • Distribution Phase advice, investment and planning products
    • Summary
    • About LTSave
  • 3.
    • The Personal Retirement Planning Landscape: Mega Trends
    • Market forces and legislative developments have combined to drive intense development and marketing activity in retirement investment products and planning services:
      • 70+ million baby boomers nearing/beginning retirement
        • Many significantly unprepared and under-capitalized for retirement
      • Competition for huge outflow of money from 401(k), 403(b) and traditional pension plans
        • Client/capital retention for incumbent providers
        • Client/capital acquisition for others
  • 4.
    • The Personal Retirement Planning Landscape: Mega Trends
      • Pronounced shift from traditional defined benefit pension plans to defined contribution (DC) plans such as 401(k) and 403(b)
        • Trend is accelerating due to:
          • Competitive pressures
          • Complex funding and accounting rules
            • Volatile year-to-year cash requirements/accounting results
          • Compliance/risk exposures
      • Employers’ desire to provide tools and education to help employees deal with completely shifted, unpooled investment risk inherent with DC plans
        • HR policy makers are advocating more corporate responsibility to optimize DC outcomes now that DB plans no longer cover large segments of the work force
  • 5.
    • Employees Need Help Preparing for Retirement
    • Only 19% of retirees in the US have properly planned for retirement 1
    • Investment concepts are difficult for the average person
    • Most have limited or no background in investing
    • Many employees:
      • Rely on family and coworkers for investment advice
      • Are misinformed about common investment risks
      • Are overwhelmed with choices and information
      • Choose conservative investment options because they are ‘safe’
    • Research shows that participants often use naïve or unsophisticated techniques in making investment decisions 2
    • Few employees monitor or adjust their investments over time, despite changing market, economic and personal circumstances
    • 1. Financial Literacy and Planning: Implications for Retirement Well-being, Lusardi and Mitchell, Pension Research Council, University of Pennsylvania, 2006
    • 2. Source: Shlomo Benartzi and Richard H. Thaler,The American Economic Review (March 2001).
  • 6.
    • The Personal Retirement Planning Landscape: Mega Trends
    • Impact of Pension Protection Act of 2006
      • Investment advice
        • Clear legal authority for plan sponsors to provide retirement investment advice through third parties
        • Protection to fiduciaries who prudently select and implement a compliant advice program
      • Automatic enrollment safe harbor helps plan sponsors to:
        • Instill savings behavior
        • Automatically grow the savings rate
        • Avoid certain compliance tests
      • Default investment safe harbor
        • Provides guidance and protection to plan sponsor
  • 7.
    • Market Response: Advice and Investment Products
    • Third party, independent investment advice providers
    • Mutual fund and other investment companies
    • Broker/dealers
    • Non-financial advice
  • 8.
    • Market Response: Advice and Investment Products
    • Third party, independent investment advice providers
      • Unaffiliated with investment companies
      • Advice engine is typically computer based
      • Web delivery complemented by on-site enrollment and call center support
      • Fees are independent of investments selected
      • Self-directed advice and ‘managed account’ services
      • Under ‘managed account’ approach advice provider
            • Gives specific portfolio mix and fund recommendations from among investments available
            • Makes initial rebalancing transactions
            • Rebalances each quarter as needed to restore originally recommended portfolio mix
  • 9.
    • Market Response: Advice and Investment Products
    • Mutual fund and other investment companies are offering target date and lifestyle funds and/or third party, captive investment advice
        • Target date funds (also called life cycle or age-based funds)
          • Professional management of asset allocation in fund becomes more conservative as retirement ‘target date’ nears
          • Most often a ‘fund of funds’
        • Lifestyle funds :
          • Professional management of asset allocation in fund to match investors particular life stage and risk profile at time of initial investment
          • Overall portfolio mix does not typically change over time
          • Most often a ‘fund of funds’
        • Third party ‘captive’ investment advice
          • Examples: Fidelity offers Financial Engines TIAA-CREF offers Morningstar/Ibbotson
  • 10.
    • Market Response: Advice and Investment Products
    • Broker-dealers , others with products to sell:
      • One-on-one planning and advice
        • Some use computer-based tools for consistency
        • Sales agenda for particular investment products
    • Non-financial advice :
      • Emergence, proliferation and marketing of tools, education, and services that provide broader planning assistance by life stage but whose typical goal is investment product placement/asset gathering:
        • Life stages typically covered
          • Just starting out
          • Intense savings years
          • Near retirement years
          • Early / active retirement
  • 11.
    • Market Responses: Plan Sponsors and Investors
    • Many employers now offering retirement investment advice to optimize value and performance of their DC retirement plans through:
      • Captive mutual fund advice providers, or
      • Independent advice providers
    • Trend likely to accelerate given PPA clarifications /protections for fiduciaries
    • Investors are attracted to target date and life stage funds because of their simple to understand design and their auto-pilot approach
      • Recent research by Financial Research Corporation shows that:
        • Assets in target-date retirement funds have risen dramatically from $14.5 billion in 2002 to $86.7 billion in May 2006
        • Assets in lifecycle funds have risen from $54.6 billion in 2002 to $145.9 billion in May 2006
  • 12. Constructing the Accumulation Phase Retirement Portfolio
    • Personalized Retirement Plan
      • Annual income at retirement from retirement plan, Social Security, and other retirement assets
      • Comparison of current and recommended portfolio
    • Portfolio Construction and Security Selection
      • Asset allocation based on investment options available in buy-list
      • Specific fund recommendations and allocations based on client goals and risk profile
    • Ongoing Account Management
      • Quarterly analysis and rebalancing of portfolios
  • 13. Constructing the Accumulation Phase Retirement Portfolio Using Modern Portfolio Theory (MPT)
    • Advice is developed around return and risk expectations for broad asset classes
    • Six broad asset classes cover majority of clients’ needs and can be expanded
    • Risk is controlled by diversifying among asset classes
    • Recommended portfolio is matched to client’s risk tolerance
    • Client’s retirement horizon is one consideration in determining risk tolerance
    • Mutual funds chosen are representative of the asset classes
    • Funds with glaring faults are avoided
    • Portfolio optimizer is used to make final selection and to weight funds appropriately
    Risk-Return Spectrum (Efficient Frontier)
  • 14. Outcome Analysis Utilizes Stochastic Modeling
    • Investment returns are treated as uncertain
    • Two thousand return scenarios are run to calculate possible wealth outcomes for client
    • The median outcome (50 th percentile) is taken as the forecast of the client’s portfolio value at retirement
    • The 5 th percentile outcome (“Downside”) quantifies the risk of loss
    • Both are displayed in an easy-to-comprehend format
    • Process represents “best-in-class” investment practice used for financial planning
    Stochastic Distribution of Wealth Outcomes
  • 15. Solution is Personalized to Client
    • Based on personal goals for desired retirement age and income level
    • Reflects appropriate risk level for each user
    • Takes current account holdings into consideration
    • Includes estimated Social Security income and may include other tax-deferred assets, rollover, IRA, Pension
    • Includes benefits and Social Security income for a spouse or domestic partner
    • Establishes appropriate portfolio allocations for all investment assets
    • Selects specific investments to create the recommended portfolio
    • Provides specific buy/sell instructions to achieve desired result
    Optimization and Solution Profile Define Goals Risk Tolerance Current Investments
  • 16. Fund Selection
    • Review investments available in buy-list
    • Apply quantitative and qualitative criteria applied to create a list of appropriate investments for portfolio construction
    • Rank screened investments by criteria including tracking error with respect to asset class benchmarks and expense ratio
    • Run portfolio optimizer to determine asset allocations and specific investments for each portfolio
    • Generate appropriate solution for each user. Implement and store in database. Review quarterly and implement changes if necessary.
    Application to Portfolios Buy-list Screen Rank within Asset Class Determine Optimal Asset Allocation
  • 17.  
  • 18.  
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  • 20.  
  • 21.  
  • 22.  
  • 23.  
  • 24.
    • Constructing the Distribution Phase Retirement Portfolio
    • Similar to Accumulation Phase approach but special attention paid to:
      • Re-measurement of risk profile (usually more conservative)
      • Safe withdrawal rates considering
        • Longevity risk
        • Retirement lifestyle and related income needs
      • Inflation protection
      • Long term care risk
      • Survivor benefits/income
      • Required minimum distributions
  • 25.
    • Distribution Phase Advice, Investment, Planning Products
    • Mutual fund, other investment companies and advice providers are now offering automated distribution phase planning tools
        • Typically used by an adviser not the consumer
        • Usual goals:
          • Incorporate retirement spending patterns and special expenditures
          • Take into account all sources of retirement income
          • Optimize draw down among available assets, e.g.,
            • Maximize duration of tax deferred accounts
            • Minimize taxes
          • Anticipate and handle Required Minimum Distributions (after age 70 ½)
          • Preserve portfolio value to guard against outliving assets
          • Inflation protection
          • Client/capital retention for incumbent providers
  • 26.
    • Distribution Phase Advice, Investment, Planning Products
    • Emergence and proliferation of tools, services and education that provide lifestyle planning assistance, for example:
      • Retirement readiness and goal setting
      • New careers / education
      • Fitness, sports, health
      • Volunteering
      • Retirement real estate / communities
      • Travel
  • 27.
    • Summary
    • Mega trends are driving intense marketplace activities
    • Market responses clarifying around distinct phases:
      • Accumulation Phase
      • Distribution Phase
    • Advice and investment services differentiated by:
      • Fee for service providers
      • Product sellers / asset gatherers
    • Investment advice increasingly available to mass affluent as part of employer’s retirement plan bundle
      • Pension Protection Act of 2006 will accelerate plan sponsor adoption
  • 28.
    • Summary
    • Most advice available through employers uses similar approach:
      • Computer model delivered over the web
      • Participant risk profiling and income needs analysis
      • Modern Portfolio Theory
      • Captive investment line-up under employer’s retirement plan
      • Monte Carlo simulation
    • Major differences between Accumulation Phase and Distribution Phase portfolio construction:
      • Re-measurement of risk profile
      • Safe withdrawal rate/portfolio preservation
      • Longevity risk
      • Inflation protection
      • Survivor income
    • New services and products focus on lifestyle and other non-financial aspects of retirement
  • 29.
    • About LTSave
    • Provides investment advice services to help employees cost-effectively plan and manage assets for retirement
    • Uses proprietary computer-based model
    • Independent of fund companies and remains objective in providing investment advice
    • SEC-registered investment advisor. Acts as a co-fiduciary for its advice
  • 30.
    • Selected Research on Current Trends in Retirement Planning
    • “ An Update on Private Pensions,” by Alicia H. Munnel and Pamela Perun, Boston College Center for Retirement research at Boston College, August 2006, http://www.bc.edu/centers/crr/ib_50.shtml
    • “ Managed Accounts and Participant Portfolios,” Vanguard Center for Retirement Research, July 2006, http://vocuspr.vocus.com/vocuspr30/Temp/Sites/51047/523ba23c1f5047e292c5f110d0358939/CRR%20Managed%20Accounts%2007-2006.pdf
    • “ Plan Investment Options and Participant Behavior,” by Mimi Lord, TIAA-CREF Institute, June 2006, http://www.tiaa-crefinstitute.org/research/surveys/rs060106.html
    • “ Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion,” by Wolfram J. Horneff, Raimond Maurer, Olivia S. Mitchel, and Ivica Dus, July 2006, http://www.tiaa-crefinstitute.org/research/grants/comp2_horneff.html