Mining the Retirement Income Market

Mining the retirement
income market

Financial Services

Contents

i Foreword

1 Introduction

2 Future growth opportunity: the emerging retirement income market

6 A need for innovation

7 Product

8 Advice

9 Sales

11 Service and customer experience

13 Financial services companies: positioning and challenges

16 Take action to win

Foreword

Dear Colleague:

The baby boom generation, which has shaped societal mores and economics for decades, is
reaching retirement as we experience the most profound financial crisis since the Great Depression.
As a result, a disproportionately large segment of the population is at or near retirement at a time
when the asset value of their holdings has significantly declined. This convergence has highlighted
the extent to which boomers are vulnerable to income risks in retirement and made clear the need
for innovative market offerings to provide more secure retirement incomes.

The drop in asset values has shaken consumer confidence across the board and precipitated
fundamental restructuring of the financial services industry. Leaders in every sector have been
humbled. However, for those who are strong enough to survive, industry restructuring provides a
rare opportunity to build capabilities strategically that may help fuel future growth.

Because of the size of the baby boomer segment and the value of the assets they control, the
retirement income market represents a potentially powerful growth engine for financial services
companies seeking to rebuild reputations and consumer relationships that have been damaged
by the financial crisis. A burst of innovation is likely as the economy recovers and financial services
companies refocus on the long-term growth opportunity of the retirement income market.

Innovation in the retirement income market will likely focus on the unique needs and challenges
presented by baby boomers. This generation’s needs are different from those of their parents’
generation – both because boomers are expected to spend much longer in retirement and because
many may have to rely more on their personal investments, rather than on defined benefit plans
and Social Security. Baby boomers will need to convert their savings into a reliable stream of income
and to protect their income against the uncertainties of retirement.

It is anticipated that mass-affluent boomers likely will present the greatest opportunity – and the
greatest challenge – in the retirement income market for financial services providers: Serving this
market profitably may require fresh ideas and new ways of doing business.

In this report, we examine the size and characteristics of the retirement income market, highlight
innovation opportunities, assess the competitive landscape, and lay out action steps that financial
services companies should consider taking to position themselves for leadership in this market.
We hope you find this report valuable and encourage you to contact us with questions or for
further discussion.

Best regards,

Jim Reichbach
Vice Chairman
U.S. Financial Services Leader
Deloitte LLP

Mining the retirement income market i

Introduction

The financial market crisis that began in 2008 has These changes will likely occur within the context of
devastated many individuals’ savings and undermined a dramatically restructured financial services industry.
consumer confidence in our financial institutions. Giants in every sector have failed, been dismantled, or
Significantly affected are those at or near retirement who acquired. Disruptive though it may be, such industry
counted on the value of their 401(k) plans, IRAs, home restructuring may provide stronger players a once in a
equity, and other personal savings to pay for their basic lifetime opportunity to rebuild strategically their capabilities
living expenses in retirement. The decline in value across and focus on the growth engines of the future. The field is
all asset categories has made this generation of retirees’ wide open for those financial services companies capable
vulnerability to risks clearly evident. of rebuilding confidence by delivering real value in the
retirement income market.
2008 was also the year that the leading edge of the baby
boom reached retirement. Since the 1960’s, the needs and The following discussion focuses on what financial services
preferences of this oversized generation have significantly companies will likely need to do to translate the emerging
influenced marketplace demand. Their need for new and retirement income market into a future growth engine, by:
innovative products and services that provide greater
• Providing insight into the special retirement needs of
security for retirement income is likely to be a major growth
the baby boom generation and how these vary by
opportunity for those financial services companies that not
market segment
only survive the current crisis, but have the creativity and
• Highlighting ways in which financial services companies
capabilities necessary to respond.
can innovate their offerings to achieve market leadership
• Assessing the competitive landscape and the
A series of new retirement income solutions is likely to
organizational challenges of marshalling required
emerge as the economy recovers and financial services
capabilities effectively
companies refocus on long-term growth opportunities.
• Outlining the key action steps that financial services
Innovation may be more substantive and profound than
companies should consider taking to position themselves
any that has occurred to date, and will likely influence all
to win in this market.
aspects of market offerings – product, advice, sales, and
service features and delivery.
For those who choose to compete, the ability to commit
resources and a willingness to innovate and adapt will be
essential for success.

Mining the retirement income market 1

Future growth opportunity: the
emerging retirement income market
New retirement needs of the baby boom generation However, retirement will present baby boomers with many
As the financial crisis has shown, severe capital market additional financial challenges. In retirement, their focus
fluctuations do occur and can quickly erode individuals’ will likely shift to addressing the complex financial issues
retirement savings. Boomers’ vulnerability to retirement associated with converting accumulated assets into a
income risks is greater than that of their parents’ stream of income that will be sufficient for the rest of their
generation – both because boomers are expected to spend lives. This income will need protection from multiple risks,
much longer in retirement and because many may have including investment risk, inflation, rising health care costs,
to rely more on their personal investments, rather than and longevity.
defined benefit plans and Social Security.
The leading edge of the baby boom generation is now
Boomers who are still working are primarily concerned with beginning to retire, moving from the asset accumulation
maximizing the size of their asset base for the future. phase to the asset payout phase. As a result, they likely will
need a broad spectrum of products and assistance that
span the breadth of financial services, including:
• Planning (e.g., financial, tax, risk, estate)

“Because of the size of the baby boomer •
•
Risk assessment
Asset management
segment and the value of the assets they •
•
Insurance (e.g., longevity)
Asset monetization (e.g., reverse mortgages)
control, there is a tremendous market and • Transaction processing and management

revenue opportunity for financial services •
•
Long-term care financing
Health care financing
providers that can successfully address Because of the size of the baby boomer segment and the
these emerging needs.” value of the assets they control, there is a tremendous market
and revenue opportunity for financial services providers that
can successfully address these emerging needs.

2

Baby boomer assets and market segmentation As shown in Exhibit 1, the mass-affluent ($100k to $1M)
In 2007, the most recent year for which household financial own 52 percent of total baby boomer retirement payout
data are available, baby boomers had $14.0 trillion in assets, and this figure rises to 76 percent when the core
investable financial assets1. But Deloitte estimates that affluent ($1M to $3M) are included. These households
only 62 percent of this sum consists of “payout assets,” i.e. have significant assets to convert to income for retirement.
assets that will be transformed or invested to produce a Individuals in the mass and core affluent segments
stream of income to support planned expenditures during comprise the most significant potential market for
retirement. The remaining investable assets will be saved assistance with retirement issues, including:
and transferred to the next generation.
• Assessing how much income they will need to maintain
their living standard
Ultra high net worth individuals (those with greater than
• Timing asset drawdowns to match financial needs that
$5M in investable assets) may not need to convert a large
can change over time
portion of their assets into income because investment
• Balancing income protection and growth objectives
returns likely will provide sufficient income during
• Insuring against capital market and longevity risks
retirement. (Indeed, total investable assets for this segment
• Absorbing shocks, such as a debilitating illness or the
historically have continued to grow, rather than decline,
death of a spouse
during retirement.) Most other boomers, however, are
• Monetizing home equity
likely to use a significant portion of their investable assets
• Contending with ever-rising health care costs
and may also monetize some non-financial assets, such as
• Addressing estate and tax issues
homes, to meet their retirement income needs.

Exhibit 1. Retirement income market size and segmentation
Exhibit 1: Retirement income market size and segmentation
Assets used for retirement income and assets not Retirement payout assets
used for retirement income (households aged 45-64) (households aged 45-64)

2,500
$1,450 B
2089
2,000 1926
$2,089 B
Payout assets ($ B)

1518
1,500
Assets not Payout assets
used for used for 1156
retirement retirement 1,000 804
$5,270 B $8,773 B 646
$4,600 B 634
500

0
<100 100- 250- 500- 1,000- 3,000- 5,000
Total investable 249 499 999 2,999 4,999
financial assets = $14,043 B
$634 B
Mass Mass affluent Core High Ultra
affluent net high net
High/ultra high net worth 17% Mass affluent 52% worth worth

Core affluent 24% Mass market 7%
Investable asset segment ($000)

Source: Federal Reserve Board, Survey of Consumer Finances, 2007, and Deloitte analysis

1
Investable financial assets, as defined in the Survey of Consumer Finances, include the following: transaction
accounts, certificates of deposit, savings bonds, other bonds, publicly traded stocks, pooled investment funds
(excluding money market funds), retirement accounts, and cash value life insurance, other managed assets and
other financial assets. Source: Federal Reserve Board, Survey of Consumer Finances, 2007.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries.
Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.


Attitudes on retirement: Deloitte’s findings Two key findings of the study are:
Deloitte’s research shows that segmenting the retirement
• While we found that High Asset consumers were more
income market based primarily on economic criteria
likely to be comfortable about retirement than Low
is useful in sizing the aggregate market opportunity.
Asset consumers (68 percent versus 41 percent), many
However, this approach fails to provide financial services
consumers in both asset classes were worried about
companies with the deeper consumer insight necessary
retirement. More often than not, the level of retirement
to develop and market innovative solutions. A study
preparedness was found to be a stronger indicator of
commissioned by Deloitte2 examined the concerns and
consumer attitudes and behavior than relative asset level.
attitudes of retirees and near-retirees in two groups: Low
Asset, individuals with less than $250,000 in investable
• Those in the study who were comfortable share similar
assets, and High Asset, those with investable assets of
attitudes, regardless of asset class, and these attitudes
$250,000 or more. (See Exhibit 2.)
differ distinctly from those who were not comfortable.
Regardless of assets, for example, respondents who were
comfortable were more than twice as likely as those who
were not comfortable to be satisfied with the information
on retirement products and services they received.

Exhibit 2. Retiree and near retiree attitudes about retirement, by asset class and comfort level

Comfortable Not comfortable

Higher Lower Higher Lower
Respondent perceptions/behavior asset asset asset asset

Most critical financial objective is “ensuring adequate income during retirement” 52% 48% 74% 73%
Biggest threat to financial future after retirement is “significant health problem” 32% 31% 26% 34%
Satisfied with financial game plan (top 2 on a scale of 1 to 7) 60% 52% 16% 10%
Usefulness of information sources (top 2 on a scale of 1 to 7): face to face 49% 42% 48% 42%
Always prefer doing research on financial items myself (top 2 on a scale of 1 to 7) 33% 35% 24% 27%
Very confused about alternative financial products and services (top 2 on a scale of 1 to 7) 5% 9% 19% 21%
Satisfied with information received about retirement products, services, and investment options 46% 38% 20% 15%
(top 2 on a scale of 1 to 7)
Satisfied with financial advisor and assistance received with retirement planning 66% 61% 43% 44%
(top 2 on a scale of 1 to 7, for those who have a financial advisor)
Have established a retirement budget 63% 67% 39% 34%
Have calculated how much in total retirement savings, pensions, and social security is needed to 76% 69% 60% 45%
cover expected retirement expenses
Have identified whether any gaps exist(ed) between what is needed in retirement and what 69% 64% 44% 40%
is available

Source: Deloitte research commissioned through The Diversified Services Group, Inc., “Consumer Attitudes & Perceptions About Retirement Income,
Lower Investable Asset Consumer Segment,” August 2006

2
Deloitte research commissioned through The Diversified Services Group. Inc., “Consumer Attitudes and
Perceptions about Retirement Income,” July, 2006; and “Consumer Attitudes & Perceptions About Retirement
Income, Lower Investable Asset Consumer Segment,” August, 2006.

4

Analysis of the data demonstrates that the comfort level The retirement income market challenge
of individuals regarding their preparedness for retirement One of the most important implications for financial
is a key determinant of how they will react to product services companies is that the retirement income market,
offerings, financial advice, marketing messages, and, though large and potentially attractive, is notably different
in general, of the kind of help they will want regarding from the asset accumulation market they are accustomed
retirement income solutions. A lack of comfort is correlated to serving. Important issues and distinctions include:
with lower levels of satisfaction with products/solutions
• The basic difference between key customer objectives:
and advisors, implying that the Not Comfortable segment
maximizing return on assets versus maximizing a reliable
is motivated for change. While the greatest opportunities
lifetime income
appear to reside in the Not Comfortable segment, there
• The financial significance of the mass-affluent market.
are sub-segments within the Comfortable categories where
Mass-affluent market boomers are not merely a large
opportunities can be found.
share of households; they represent the majority of the
assets that will be converted to retirement income
Companies that want to carve out their share of this market
• The importance of understanding end-consumer
might make a more immediate and effective impact if they:
attitudes and behaviors when developing innovative
• Pay close attention to the more highly motivated rather than incremental solutions for this new market
segments
• Serve them with messages, products, and advice that fit Financial services providers that want to realize the
their particular needs potential of the retirement income market must consider
• Do this in a way that closely reflects consumers’ own carefully the major degree of change and investment that
perceptions and attitudes may be required in order to compete successfully.

Doing this, however, requires digging beneath the
economic aggregates and developing original insight into
consumer needs, perceptions, and attitudes regarding
retirement income solutions. Companies that focus on
“One of the most important implications
understanding the wide range of differing end-consumer for financial services companies is that
needs and behaviors will be better positioned to serve their
clients by truly meeting their needs and ultimately building
the retirement income market, though
the foundation for substantial growth in the retirement
income market.3
large and potentially attractive, is notably
different from the asset accumulation
market they are accustomed to serving.”

3
Deloitte research commissioned through The Diversified Services Group Inc., “Consumer Attitudes & Perceptions
About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.


A need for innovation

Current state: incremental market innovation Insurers have emphasized their ability to provide insurance
The marketplace has already seen several new product against non-diversifiable risks; they have introduced riders
introductions targeted to the emerging needs of the to annuities that dramatically increase investor liquidity,
retirement income market. Mutual fund companies investment control, and value at death. The advantages
have begun to market retirement income funds – “self- include:
annuitized” solutions intended, but not guaranteed, to
• Living benefit riders that allow consumers access to their
provide a stream of income for a period of years.
annuities’ cash value in special circumstances, such as a
Examples include:
catastrophic health event or the need for long-term care;

• FMR LLC’s (“Fidelity Investments”) Income Replacement
• Guaranteed minimum withdrawal benefits that give
Funds, which are designed to provide withdrawals from
investors the ability to withdraw funds at a specified
savings over a set time period, after which all investment
annual rate that is guaranteed not to decline.
gains and principal will be exhausted;

Such enhancements helped stimulate growth in assets
• The Vanguard Group Inc.’s Managed Payout Funds,
under management for insurers. But individual annuities
which are intended to provide a monthly distribution
are estimated to represent only 6% of total investable
while preserving principal over the long term; and
financial assets.4

• Charles Schwab & Co., Inc.’s Retirement Income Fund,
Clearly, greater innovation will be required to capture
which provides monthly income by paying dividends on
substantial market share in the retirement income market.
a monthly rather than a quarterly basis.
Significant consumer needs remain unanswered, and no
financial services company has yet figured out how to
None of these offerings, however, provide protection
profitably serve the mass-affluent market.
against risks, such as longevity risk or capital market shocks,
that cannot be fully diversified through asset management.
Future state: a burst of innovation
As financial services companies recover from the immediate
crisis and focus on future growth, there will likely be a
burst of innovation in the retirement income market. As a
result, change may be significantly more substantive than
any seen in this arena to date: It will likely be profound, not
incremental, across multiple dimensions of the business,
including product, advice, sales, and service.

“Significant consumer needs remain
unanswered, and no financial services
company has yet figured out how to
profitably serve the mass-affluent market.”

4
Deloitte analysis of data from Federal Reserve Board, Survey of Consumer Finances, 2007, and
LIMRA International, The 2007 Individual Annuity Market.

6

Product

One effect of the financial crisis has been to elevate Not all insurers are willing to provide an unbundled GMWB
consumers’ risk consciousness, particularly heightening for reasons related both to complexity of execution and
their aversion to capital market risk. Consumers’ immediate strategic positioning. Increasingly, however, we expect
response has been to demand more insured investments to see other types of risk protection unbundled from the
(e.g., FDIC insured accounts, fixed annuities) and to shun management of retirement assets, permitting customers
equities. Insurers, other than the federal government, have to purchase some insurance without having to relinquish
struggled with the cost of hedging in such volatile markets, ownership and control of their assets. For example, Deloitte
and many are raising prices and/or redesigning benefit has a patent pending on a product, Life Options, which
guarantees. Eventually, we expect to see new products would allow consumers to purchase insurance against
emerge to mitigate investment risks and to address the capital market downturns and longevity risk (Exhibit 3).
challenges of other risks to retirement income, such as Products like Life Options should be easier to administer
longevity, long-term care, and health care costs. As product than an unbundled GMWB and may be strategically more
innovation intensifies, we expect to see greater development attractive to some insurers.
of unbundled products that can be sold a la carte or
assembled into packages to meet specific customer risk Unbundled products may be used as components of
preferences. broader retirement solutions that will be assembled by
retirees, financial advisors, or product manufacturers.
Most often, insurance against many retirement-specific risks Whether bundled or unbundled, the next generation of
has been bundled with asset management services in the products will likely be packaged and marketed as simpler
form of riders to annuity products. Only recently have we and easier to understand, and be available for sale via less
begun to see attempts to unbundle annuity products. expensive distribution channels.

Some insurers have begun offering a guaranteed minimum Strategic relationships across financial services sectors, such
withdrawal benefit (“GMWB”) that is separate from their as insurance and asset management, will likely continue to
annuity products. This product provides consumers with increase as competitors explore and invest in new product
the guarantee of a future minimum income stream when development that incorporates attributes beyond their own
they invest in the selected funds of asset managers who competencies or capabilities.
have contracted with the insurer.

Exhibit 3. Unbundled products

Life Options*
Life Options* Unbundled GMWB
Unbundled GMWB

This product separates asset management from longevity This product unbundles a guarantee for lifetime minimum
and capital market risk protection, thereby allowing withdrawals from the underlying variable annuity and allows
customers to buy insurance without relinquishing control it to be provided on mutual funds, managed accounts, and
of their assets. other investment vehicles.

• Life Options provides an income benefit in any year that the • This product provides an income benefit starting at a certain age
principal and accumulated returns of a market index that reflects subject to certain restrictions (e.g., generally require asset allocation
the asset allocation selected by the investor are inadequate to fund choices, withdrawal each year is subject to a maximum) for life.
provide the investor’s planned spending level.
• Positive investment experience can be locked in once a year on the
• Life Options provides an income benefit if the client survives to the contract anniversary so the guaranteed minimum amount of income
terminal retirement age and market returns have not exceeded the can go up but never down.
assumed investment returns. An income stream is provided for the
remainder of the individual’s lifetime. • At least two insurance companies are working with asset
management companies to launch this guarantee on certain
• The cost of Life Options would be approximately 10% of managed accounts.
the initial outlay for an annuity.

* Patent pending, Deloitte


Advice

Pre-retirees and retirees alike need advice, education, Financial services companies, including Massachusetts
and solutions as they look to balance the financial and Mutual Life Insurance Company and Fidelity Investments,
emotional aspects of a major life transition. And, they are are beginning to create retirement management
looking to their advisors for help in devising strategies accounts that consolidate retirement income sources and
that provide control of their retirement futures in these expenditure outflows in order to simplify and improve asset
uncertain times. Consequently, the role of the advisor/ and liability management. The evolution of consolidated
financial planner is shifting from selling products to accounts is expected to make it easier for retirees and
consulting on life goals. The Ameriprise Financial, Inc. their advisors to monitor investment performance and
“Dream Book,” a guide that helps individuals articulate planned versus actual spending, as well as to make timely
their retirement dreams and goals, is an example of this adjustments to maintain needed income levels.
approach.
Given the potentially significant changes in the role of
Given that the average baby boomer may spend 25 to advisors and the development of new and restructured
30 years in retirement, planning will become more of an products designed for asset drawdown rather than asset
ongoing educational process than a point-in-time event. growth, advisor compensation models will need to evolve
The advisor will likely focus on assembling solutions to as well. The result of these changes will likely be better
meet a broad array of needs, then adapt these solutions alignment of advisor incentives with consumer objectives.
as client needs evolve through the various phases of We have already seen the growth of fee-for-service models
retirement. for high-end consumers, such as those by The Ayco
Company, L.P. In the middle market, Citigroup Inc.’s “myFi”
As products are unbundled, advice becomes more critical advisors are salaried and deliver financial advice primarily
to formulating the most cost-effective solution for a via call centers in exchange for a monthly fee.
particular client. At the same time, advisors may be faced
with what could become a daunting a la carte menu from Although there may be considerable resistance to
which to select. Practical considerations, quality assurance, compensation changes among established advisors, the
and compliance are likely to foster development of advice conditions are ripe for new players to shift from asset-
“modules” to help advisors craft solutions efficiently while based fees and commissions to a system that encourages
ensuring that solutions suit the needs of each client. For maximizing a reliable income stream during the retirement
example, modularized advice is being linked to specific payout phase while customer assets are being drawn
investment solutions as a means of serving less affluent down. This approach is expected to be supported by the
customers economically. emergence of new and innovative sales channels.

Today, advice and financial management tend to be
fragmented, but new solutions are being developed to
provide greater integration. For instance, there are new “Given that the average baby boomer
financial modeling tools designed to help advisors and
their clients assess tradeoffs among different categories of
may spend 25 to 30 years in retirement,
risk under a range of possible scenarios. These products planning will become more of an ongoing
work by providing risk-adjusted solutions that incorporate
insurance and investment options balanced across these educational process than a point-in-time
product categories.
event.”

8

Sales

The restructuring of the financial services industry is forcing • Provisions of the Pension Protection Act of 2006
a consolidation of retail distribution and a reduction in the encourage plan sponsors to assume more proactive
number of investment brokers and financial advisors. Face- roles than in the past.
to-face selling will most likely continue to be the dominant
means of distributing financial services and advice to baby Deloitte also anticipates an expanded role for non-traditional
boomers. Other channels, however, will likely increase in retail channels. Just as we have seen in other maturing
importance – especially those that serve the mass-affluent industries, retail selling may evolve from a few dominant
segment. models to a wide range of options.

The challenge, across all channels, is to enable consumers Many of these new options are expected to be oriented
to obtain retirement income advice and products more toward the needs, preferences, and economics of the
easily and affordably. To date, the economics of asset- mass-affluent market. Mass-affluent consumers are less likely
based fees and commissions have tended to make serving to have a financial advisor,6 and recent research suggests
low asset customers less than attractive. Although some that although they still prefer face to face buying, they may
companies have prospered serving low asset consumers, be receptive to non-traditional approaches.7 Therefore,
more financial services companies have tended to focus on alternative marketing channels will likely become more
affluent and high net worth customers. But because mass- important, including:
affluent consumers own the majority of retirement payout
assets, we will likely see innovation in sales channels and • Part time and/or niche-oriented sales forces
compensation models that will make selling to this segment • Hourly fee-for-service planners and advisors
more profitable. Notable examples include expanded use of • Social networking, both online and community-based
the employer group channel, development of non-traditional • Affinity groups
retail distribution outlets, and increased cross-channel • Use of direct channels, especially call centers and
combinations. the Web.

Changes in attitudes among pre-retirees, plan sponsors,
defined contribution investment managers, and public
regulators favor expanded use of employer plans to “Because mass-affluent
distribute products and advice after retirement. Consider
the following:
consumers own the
• Sixty percent of lower-asset consumers believe that their
majority of retirement
employer has an obligation to provide retirement planning
assistance, and 40 percent believe that this obligation
payout assets, we will
extends to their post-retirement years.5 likely see innovation
• Similarly, the asset managers of defined contribution in sales channels and
plans have a strong incentive to prevent plan participants
from entering the retail market through vehicles, such as
compensation models that
graduated purchase annuities and guaranteed minimum
withdrawal benefits.
will make selling to this
segment more profitable.”

5
Deloitte research commissioned through Diversified Services Group, Inc. “Consumer Attitudes & Perceptions
About Retirement Income, Lower Investable Asset Consumer Segment,” August, 2006.
6
Deloitte research commissioned through Diversified Services Group Inc., “Consumer Attitudes & Perceptions
About Retirement Income” July, 2006; and “Consumer Attitudes & Perceptions About Retirement Income, Lower
Investable Asset Consumer Segment,” August, 2006.
7
Peter Tufano and Daniel Schneider, “Using Financial Innovation to Support Savers: From Coercion to Excitement,”
HBS Working Paper, April 2008.


In addition to an increase in the number of sales channels, need to be switched to a live investment advisor to select
the retirement income market, like the broader financial and purchase an appropriate product, without obliging
services market, will likely see an evolving array of the customer to start all over with the next contact in their
approaches that reflect different combinations of channels overall customer experience.
(direct and face to face), media (Internet and telephone),
and location (home and store). Exhibit 4 illustrates potential Financial services players will likely have to decide how
elements of a multi-channel sales strategy. much to invest and how to allocate resources across
multiple distribution channels. Managing this broader
The reality is that companies will have to master the ability spectrum of options in order to create a positive and
to switch clients smoothly from one channel to another competitively advantaged customer experience will be a
during a single encounter. A consumer, for example, who major challenge.
accesses a customer service center to make an inquiry, may

Exhibit 4. Elements of a multi-channel sales strategy

Strengthen focus
• Develop goal-based customer dialogues
of Internet presence
on retirement • Launch target-segment-focused destination experiences

• Re-engineer process to eliminate problems commonly experienced
by retirees
Enhance call center
customer/producer • Enhance service to sales reps and retirement advisors by providing
experience multiple levels of relationship management support and service
• Employ predictive modeling to present real time service/sales
options starting with high value customers/producers

Drive growth in • Improve services and support for advice-oriented financial planners
retirement through Deepen institutional and retirement face-to-face representatives
customer-focused, distribution • Brand/differentiate financial planning and retirement
multi-channel, partnerships solution tools
engagement
strategies • Distribute innovative products and solutions as packaged bundles

Expand/increase • Launch non-traditional talent acquisition and development
efficiency of own programs
sales force:
• Make selective ongoing distribution acquisitions
- Employer plans
- Institutions • Develop a common retirement sales process and integrated
- Individuals support platform

Utilize advisors • Expand growth-segment-targeted products/distribution
as branded (Emerging affluent, Hispanic, Asian)
face to face • Expand general retirement/advisory site links/relationships/
retirement channel/ distribution access
advisor platform of
choice • Expand incremental cross-distribution relationships

Source: Deloitte analysis, 2008

10

Service and the customer experience

Consumer confidence in our financial services institutions has Building brand differentiation through customer experience
been severely shaken. Financial services companies are under requires keen insight regarding consumers – to define the
pressure to differentiate themselves as sources of superior nature of the experience, to understand the key aspects of
value and to again earn their customers’ confidence. New the experience that can be differentiated, and to translate
products, new customer segments, and the need to manage this intelligence into “moments of truth” that can be
costs will only intensify the impact of these trends in the managed during the service interaction.
Advanced analytics will be critical to developing this insight
A dependence on new product offerings and pricing and to designing and managing the overall customer
strategies as the sole means of differentiation is likely no experience. Advanced segmentation and predictive
longer enough; the ability of competitors to mimic easily modeling can transform the ability of companies to group
new product features has undermined efforts to differentiate customers into meaningful segments that buy differently,
on these grounds alone. In the retirement income market, prefer different product offerings, and seek different
customer service can be an important differentiator as service experiences. Financial services companies seeking
competitors seek to rebuild consumer confidence and to differentiate themselves may increasingly use these
establish their credentials as stewards of assets and sources tools to align new products, distribution, and customer
of advice and services, specifically for this market. service operations to the needs of specific segments of the
Providing a good customer service experience is no small
challenge: The performance of financial services companies At call centers, predictive modeling systems are being used
in delivering a consistent customer service experience, increasingly to integrate real-time information (interactive
much less experiences that are differentiated by customer voice responses and initial requests from the caller) to form
segment, has been mixed. Many have struggled to balance an offer from the advisor handling the call with a likely
costs against the apparent demand of their customers for an higher probability of being accepted by the customer. At the
increasingly diverse mix of service options. same time, Internet protocol-based systems are enabling the
virtualization of call centers, liberating call centers from the
Recent market trends toward independent financial advice physical constraints of geography by integrating all members
tend to reduce product manufacturers’ direct control of customer support units into a single team, regardless
over the customer experience at the point of sale. Even of location. This development can be used to help contain
companies with proprietary sales forces often limit face- expenses, for example, through the use of cost-efficient
to-face customer service for routine transactions. As a home or mobile service representatives.
result, the customer service contact/call center is a principal
interaction point where many financial services companies Many financial services companies have been slower in
can deliver a distinctive customer experience. adopting these service capabilities than organizations in
other industries. This scenario opens the door for a disruptive
play by a technology-savvy new player.

“In the retirement income market, To deliver a competitively advantaged customer experience,

customer service can be an important many financial services companies will likely need to
significantly upgrade their call center capabilities. Given the
differentiator as competitors seek to pace at which the technology is advancing and the degree
of catch up required, some financial services companies
rebuild consumer confidence and establish have turned to outsourcing as a means of accelerating their

their credentials as stewards of assets and access to the rapidly evolving technology that is crucial to
supporting highly differentiated customer service delivery.
sources of advice and services specifically Whether insourced or outsourced, significant investment,
complex choices, and continuous technology upgrades may
for this market.” all be a part of meeting the customer service challenges of
the retirement income market.


“The nature of the
retirement income market
calls for financial services
companies to cross
traditional boundaries –
within their organizations
and across industry sectors
– in order to meet the
challenges of this market
and succeed.”

Financial services companies:
positioning and challenges
The pace and nature of innovation, coupled with the need • Other companies are redrawing their organization charts
to serve mass-affluent customers more effectively and to bring related retirement products into the same profit
profitably, are expected to have major implications for center. Companies with large defined contribution plan
financial services companies that decide to compete in the businesses, for example, may consolidate IRAs and/or
retirement income market. The nature of the retirement retail annuities into a single retirement business line to
income market calls for financial services companies to facilitate rollovers from employer plans to retail accounts.
cross traditional boundaries – within their organizations A risk of this approach is that it may complicate the
and across industry sectors – in order to meet the task of managing retail channels that are used both for
challenges of this market and succeed. retirement products (such as annuities) and other retail
financial services (e.g., life insurance).
In-depth organizational change
Financial services companies positioning themselves How well either of these structural approaches works will
for the retirement income market are struggling with depend on the commitment of leadership, the talent of
important organizational issues. Most companies that managers and employees, and the processes that enable
strive to become more customer-centric find that their them to succeed.
existing operating models, oriented to support products
and services, create silos that undermine a consistent, Competing across the financial services sectors
company-wide approach to serving customers. The retirement income market opportunity cuts a clear
path across traditional financial services sector boundaries.
The problem is particularly acute in the retirement income Banks, insurance carriers, mutual fund companies, and
market. The transition to retirement typically involves the brokerage/investment managers all have established
movement of assets from an employer group/institutional positions managing assets and providing administrative
plan to a retail IRA, annuity, or other savings product. services both for retail retirement accounts and defined
Moreover, retirees require a wide range of advisory, asset contribution plans. All are at risk that the retirement of the
management, insurance, and transactional services that often baby boom generation will disrupt their existing retirement
reside in discrete product organizations across a company. businesses as retirees move assets out of their current
retirement accounts and into new, income-generating
Financial services providers are taking several approaches to products. And companies in every sector hope to capture
bridging the silos. For example: a disproportionate share of this “money in motion” and
establish an even more robust position in the retirement
• Some companies are creating the role of “retirement income market.
czar,” an individual who is charged with identifying
opportunities and issues, and making the case for Traditional sector boundaries are being redefined by
innovation within the individual business units. Much industry restructuring. Already we can observe some
like a brand manager in a consumer products company, shifting among the sectors of capabilities that are
these executives use persuasion and influence to marshal important in the retirement income market. Because
resources and gain support for retirement-oriented industry restructuring is fundamental and ongoing, the
initiatives. A risk of this approach is that the business full impact may not be understood for some time. In
units often don’t move beyond discussion to strong light of these uncertainties, we have chosen to assess the
commitment and major investment. retirement income market strengths and weaknesses of
each sector as traditionally defined. Although the specifics
will vary from company to company, the sector competitive
profiles suggest the breadth of capabilities that will be
required and potential opportunities for cross-sector
investments, partnerships or other types of relationships.


Banks Insurance carriers
• Banks have an opportunity to build upon their extensive • Retirees are more concerned than ever about risks
penetration of households (approximately 90% of to retirement income, giving insurers an opportunity
the population has a checking account8) and their to develop new products designed to mitigate these
strategic position at the center of checking and credit risks. Insurers face a critical decision about whether to
card transactions. This opportunity can allow banks to unbundle insurance coverage from asset management
establish a role in planning and managing retirement offerings and how best to achieve this, as their ability
income and expenditure flows through retirement to assume these risks is a core strategic advantage over
income accounts. On the down side, banks are exposed players in the other sectors.
to erosion of their core account base if competitors make
major strides in developing and marketing such accounts. • Insurers’ principal advantages in pursuing the retirement
income market opportunity are expertise and brand
• Key advantages include a wide array of CDs and other recognition for managing risk, existing payout products,
low-risk, FDIC-insured products; frequent customer touch access to face-to-face distributors (agents and
points; and the ability to provide reverse credit products independent advisors) who have consultative selling
to monetize real estate assets. skills, and significant employer group relationships.

• Some banks, however, may be challenged to position • Obstacles that may hamper the ability of insurers to
themselves as knowledgeable retirement planners given realize market potential include limited brand permission
the limited advisory skills of their sales staff (outside for investment advice, relatively few customer touch
of private banks) and their current lack of payout and points, distance from the end customer, and a historical
retirement-specific risk protection products. slowness to innovate.

Mutual fund companies
• The dominant position of the largest mutual fund
companies (as measured by assets under management)
in the defined contribution plan market means that this
sector has the greatest exposure to asset erosion as the
baby boom generation retires. But they are also in a
potentially good position to capture rollover assets.

• Many of these large mutual fund companies have
well-developed direct distribution channels and a
reputation for customer service and low-cost delivery.
These advantages, coupled with their asset management
capabilities (though potentially tarnished in the current
financial crisis), may help them capture rollover assets,
especially when the market recovers.

• Still, mutual fund companies will likely need to reposition
and broaden their brands for the retirement income
market. Key issues to overcome include a historical
reliance on growth-oriented investments and associated
expertise, the absence of risk protection products and
features, and a lack of strong personal financial advisor
relationships.

8
Federal Reserve Board 2007 Survey of Consumer Finances

14

Brokerage/investment management firms • Major weaknesses include the absence of payout
• The brokerage/investment management firms have a and risk protection products, their growth investment
potentially strong competitive advantage in their ability orientation, and comparatively limited employer group
to capture the rollover assets of affluent retirees, given relationships.
their deep penetration of this segment.
Given the potentially significant investment and degree
• Other strengths include face-to-face consultative of change that may be required, not all financial services
selling skills, asset management skills, and expertise in companies can or should choose to compete in the
managing income and expenditure flows through CMAs. retirement income market. Those considering whether to
Finally, their historically favorable position with more enter this market should look beyond its aggregate size to
affluent customers may mitigate the need to develop ensure they understand what actions they will need to take
capabilities to access and serve the mass-affluent market. to be successful.

Exhibit 5. Retirement income market positioning by financial services sector

Opportunity Advantages Challenges

Banks • Management of retirement • 90% household penetration* • Lack of guarantees and
transaction flows • CD’s/FDIC insured products retirement-specific insurance
• Fixed income investments • Frequent customer touch • Limited consultative selling/ financial
• “Reverse” credit products advisory skills
• Mortgages/credit products
• Limited employer group relationships

Insurers • Payout/annuity products • Existing payout products • Limited brand recognition
• Insurance against retirement risks • Expertise/brand recognition for for investment advice

• Financial guarantees risk management • Infrequent customer touch
• Agency/broker network • Slowness to innovate
• Employer group relationships

Mutual funds • Capture rollover from defined • One third of household investable • Limited personal advisor relationships
contribution plans assets under management* • Lack of guarantees and
• Target date and payout funds • Employer group relationships retirement-specific insurance
• Financial planning/advice • Direct sales channel • Growth focus
• Perceived low cost

Brokerage/ • Capture rollover from defined • One third of household investable • Lack of guarantees and
Investment managers contribution plans assets under management* retirement-specific insurance
• Target date and payout funds • Face-to-face consultative selling skills • Growth focus
• Financial planning/advice • CMA accounts • Lack of employer group relationships

Source: Deloitte analysis, 2008
* Source: Federal Reserve Board 2007 Survey of Consumer Finances


Take action to win

Baby boomers likely represent the largest and richest retirement income market in history. The opportunity it presents has been
long anticipated. Those companies that are willing and able to take advantage of this future growth engine will need to take
action: The leading edge of the baby boom is beginning to retire.

Financial services companies that want to succeed in this market will need to innovate in their offerings and adapt their
operating model to deliver their products and services consistently and efficiently.

Exhibit 6. Mining the retirement income market

Customer knowledge Product development IT infrastructure

Positioning Channel optimization Culture

Brand Advisor education Performance measurement

Service model

Source: Deloitte

Key actions financial services companies should consider include:

1) Build your end customer knowledge. When the 3) Define and communicate your brand. Get started;
task is to address new and unmet needs, the past may it can take a long time to establish a brand. Craft a value
not be a reliable guide. Insight into consumers’ concerns, proposition – product and customer experience – that
preferences, and behaviors is necessary to understand is customized to the needs of your target market and
what is lacking in the current market and to develop that differentiates you from the competition. Develop a
creative solutions that fill the gaps. Start by capturing message and select media that address the distinctive
and analyzing information from your existing customer perceptions and attitudes of your target segment. For
interactions and transactions. Supplement internal data example, if pitching to consumers who are uncomfortable
with primary consumer research and external consumer about retirement, the message might be about taking
databases. the worry out of retirement rather than promoting an
adventure-filled retirement.
2) Decide where you want to play. Segment and size
the market to identify customers, products, services, and 4) Enhance your product development capabilities.
channels that offer your company the greatest opportunity Whether a product leader or follower, you will likely need
for profitable growth. Analyze your current and target to bring products to market more quickly and efficiently
businesses to understand overlaps and differences, and in the future. Involve your customers and distributors
better position your company to chart a viable path from up front to test market concepts and features. Engage
where you are today to where you want to be. IT, operations, risk management, and legal early in the
development process to prevent downstream problems
and rework. Simplify where possible and reduce low
value-added variation by utilizing a common “chassis” and
reusable “components” wherever possible.

16

5) Align sales and distribution channels and 8) Strategically align the IT infrastructure. Technology
incentives. Analyze the cost to serve of distribution is a critical enabler across all aspects of the operating
alternatives and understand the sensitivity of these model – advanced consumer analytics, retirement income
economics to changes in such factors as volume, planning tools, risk management and compliance, product
compensation structure, and consumer acceptance administration, customer contact centers – and the list of
of new media and channels (e.g., Internet). If you rely needs and potential costs can appear endless. Resist the
on independent distributors, evaluate them as you pressure to respond to changes in business needs with
would end-consumers (i.e., segment distributors to systems and solutions that are deployed with tactical
understand both their business needs and their potential objectives, as this commonly leads to duplication of
for generating profitable revenue from your target infrastructure across business units and departments.
customers). Focus on the most profitable channels, craft Focus on a long-term portfolio of initiatives that
value propositions for them, and be prepared to manage balances short-term benefits with sustainable long-term
multi-channel approaches. restructuring.

6) Equip your financial advisors. Financial advisors 9) Develop a reinforcing culture. Whatever your
have a critical role in assembling appropriate solutions brand positioning – high service, low cost, innovation –
for their clients and may need assistance understanding infuse the core values in your culture. Begin with a clear
how the issues and options in retirement differ from those articulation of the vision from leadership, understand
during the asset accumulation phase. Ensure that financial what capabilities and attributes your employees will
advisors who represent you have the education, tools, and need to deliver it, and align your recruitment, training,
incentives to provide advice and service to end-consumers performance measurement, incentives, and organizational
that is appropriate and consistent with your brand. structure to reinforce these values.

7) Adapt your service delivery model. Start with 10) Measure performance and modify your approach:
an audit to assess the quality and consistency of your The retirement income market is just emerging and how
current customer experiences and identify gaps with it evolves will depend in part on how financial services
your brand promise. Analyze the cost of alternative companies respond to the challenge. Ensure you have
solutions versus the pricing inherent in your product/value appropriate “learning loops” in place to evaluate how
proposition. Common improvement opportunities include consumers are responding to your value proposition, and
expansion of channel choices, seamless inter-channel be prepared to modify and adapt your approach on an
routing, real-time customer analysis, automation, tighter ongoing basis.
management of routine execution, and realization of cost
economies (e.g., operational consolidation, relocation,
outsourcing, spend reduction).


The retirement income market represents a powerful future growth engine
for financial services companies seeking to rebuild reputations and consumer
relationships. The financial services companies that choose to mine the
retirement income market will need to innovate, build new capabilities,
and commit to the long-term process of establishing their brand promise
and ensuring their ability to deliver on it. Deep insight into consumer needs
and preferences, creativity and innovation, a clear market strategy, and
an unflinching commitment to continuously assessing their strengths and
vulnerabilities will be essential to success.

18

Author
Ann M. Connolly
Director
Deloitte Consulting LLP
+1 212 618 4325
aconnolly@deloitte.com

Contributors
Richard Berry Mary Kearney Priti Rajagopalan
Director Director Manager, Deloitte Research
Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Services LP
+1 212 313 2622 +1 617 437 2684 +1 609 806 7420
riberry@deloitte.com marykearney@deloitte.com prajagopalan@deloitte.com

Joe Guastella Don McNees Dan Rosshirt
Principal Principal Principal
Insurance Consulting Leader Deloitte Consulting LLP Deloitte Consulting LLP
Deloitte Consulting LLP +1 212 618 4578 +1 212 618 4586
+1 212 618 4287 dmcnees@deloitte.com drosshirt@deloitte.com
jguastella@deloitte.com

Financial services leadership team
Jim Reichbach Rebecca C. Amoroso
Vice Chairman Vice Chairman
U.S. Financial Services and U.S. Insurance Industry Leader
U.S. Banking & Securities Leader Deloitte LLP
Deloitte LLP +1 973 602 5385
+1 212 436 5730 ramoroso@deloitte.com
jreichbach@deloitte.com

Cary Stier
Dorothy Alpert Vice Chairman
Vice Chairman U.S. Private Equity, Hedge Funds &
U.S. Real Estate Leader Mutual Funds Leader
Deloitte LLP Deloitte LLP
+1 212 436 2784 +1 312 486 3274
dalpert@deloitte.com cstier@deloitte.com

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial,
investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should
it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your
business, you should consult a qualified professional advisor.

Deloitte, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright ©2009 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu.

Item #9057
May 2009

Mining the Retirement Income Market

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