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In the coming months, I will be writing about the evolving intersection between asset management and insurance. The larger story in this context is the growing sophistication that is about to be brought to bear on managing general account assets. With some notable exceptions, most insurance assets are managed just as they were a generation ago: It is as if all the institutional asset management innovations of the past decades count for naught. (But that is a topic for another column.) In this column I want to address an insurance product, and the effect, or more accurately, the threat that it poses to the asset management community.
We have already seen the impact that terminal annuities are having on the corporate defined benefit market, specifically in the General Motors and Verizon transactions of 2012. It is clear that the overwhelming majority of defined benefit plans are busily de-risking, and that will occupy most of them this next decade. At this point, terminal annuities are merely the sound of distant thunder: Most asset owners will de-risk through their investment managers, not through insurance companies.
Retirement income is another challenge altogether. Historically, the fast-growing defined contribution market feeds its massive accumulations through rollovers into the IRA marketplace, like a river flowing to the sea. An entire industry feeds off this flow: Advisors and mutual fund complexes exist in no small part to manage these post-workplace assets. Indeed, many of the principal players in the defined contribution marketplace price their recordkeeping/asset management services with the expectation that they will retain these assets as they flow out of workplace defined contribution plans into IRAs.
This massive confluence of vested interests is threatened by retirement income solutions. While far from universal, there is growing sentiment among insurance companies (unsurprisingly), regulators (crucially), and a handful of sophisticated asset owners (of which United Technologies, recognized by aiCIO in 2012 for its commitment to innovation, is at the fore) that the responsibilities of plan sponsors lies beyond the accumulation phase of defined contribution plans. Best-in-class sponsors like IBM have long offered retiring participants the option of buying an institutionally priced annuity upon retirement, but few could resist the allure of a lump sum. Now, the thinking goes, retirement income solutions should be baked into the new generation of target-date funds, which are beginning to establish themselves. Come retirement, these accumulation vehicles will convert into income-generating vehicles; there will be no rollover, per se.
None of this is a given. Expense is the principal issue—guarantees are expensive. But retirement income fits the retirement industry’s present zeitgeist: We are witnessing the triumph of financial behaviorism in the defined contribution market today, as the workers of the next generation are automatically defaulted into target-date funds, have their contributions automatically increased as their salaries rise, and yes, are defaulted into retirement income vehicles when their needs shift from accumulation to income.
Asset managers will fight this trend to the last. And then they’ll co-opt it, just as they fought open architecture and then, as they ostensibly surrendered to it, busily sought to undermine it. But the secular trend toward retirement income is coming into sight, and it is one more straw in the wind as to the growing relevance of insurance in the asset management space.
Charlie Ruffel—founder of aiCIO and Asset International’s other media brands—is a global authority on retirement, asset management, alternative investments, and securities services issues. He is now Managing Partner at Kudu Advisors, which provides M&A and strategic advisory services to institutional asset management and global asset servicing businesses.