LTSave New Retirement Seminar Presentation


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LTSave New Retirement Seminar Presentation

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