Is your customer brave enough to log into their 401k or IRA accounts to check the balance? While the answer might have been a resounding “no” a year back, consumers are slowly and hesitantly ready to look into their retirement accounts. The fact that nearly 50% of retirement assets were wiped out during the financial crisis has changed the attitude of consumers, employers, advisors, financial service providers and the policymakers.
With the baby boomer generation entering their retirement years, the industry was already bracing for a number of changes that have only accelerated with the financial crisis. Players in the retirement industry must focus on three essential mind-shifts to cope and prosper in the “New Normal” environment.
1. Understand your customers and their behavioral traits: Most insurance carriers are more heavily focused on their distribution channels, and rely on them to understand the consumers. Insurers must shift from this channel-centric view to understand the consumers better. In the New Normal, they need to understand the behavioral psychology of their consumers—their preference for spending now versus saving for the long-term future, the emotional drivers for making retirement savings and annuitization decisions, the desire for loss aversion etc. Some insurance carriers are using behavioral economics, a field of study that combines behavioral psychology with classical economics, to understand how consumers really make financial decisions, as opposed to how economists think they should make these decisions. For example, insurers such as MassMutual have used the fact that consumers tend to procrastinate when it comes to signing-up for 401k plans to use mobile devices and enroll consumers immediately after an open enrollment session to substantially increase participation rates.
2. Close the “recognition gap” by developing retirement solutions: Today, in addition to being channel-centric, carriers also are product-centric. They have developed a wide array of different products with all kinds of variations (literally an alphabet soup of products – GMWB, GMIB, GMAB, etc.) making it incredibly complex for the consumer to understand. As a result, they need to rely on an extensive network of distributors, each specializing on a particular class of products. Even though there might be a “right” product for each consumer need, the consumer can’t recognize that a solution meets their needs. Insurers must close this recognition gap by adopting a solution perspective and satisfying consumers’ retirement planning and retirement income management needs. Financial service providers and industry bodies, such as RIIA (Retirement Income Industry Association) are moving in this direction by promoting a more comprehensive view of managing the household’s human capital (e.g., ability to work part-time or extend one’s working life beyond 65) and social capital (e.g., social security), in addition to financial capital. Financial service providers, such as, New York Life along with Ibbotson Associates, are developing comprehensive solutions (e.g., Lifetime Wealth Strategies) that looks at a Client’s Total Economic Wealth (including their human capital or earning potential) to optimize retirement portfolios. Other life insurance and asset managers also are adopting similar techniques for offering needs-based comprehensive advice.
3. Enhance your reach with rich, interactive and community-based education and advice: Given the nature of the products and the distribution of these products, carriers have traditionally conveyed their messages through their advisors or agents in face-to-face meetings and printed product material. After the financial crisis, consumers are understandably less trusting of the intermediaries, and are seeking to understand the products themselves. Some retirement players have started addressing these needs by making the process more interactive through rich media and interactive tools. In addition, advice is more personalized and community-based. Consumers can calculate how much money they need for their retirement, not through meaningless percentages of their final year salaries (typically around 60%-85% of final year salaries in most retirement calculators) but based on their current expenses and how they might change during retirement. In addition, consumers can look at how “people like them” save and how they invest their retirement assets. Mint.com is a good example of a site that offers a rich and personalized set of tools for self-directed retirement planning along with a platform that allows individuals to tap into their broader community for advice.
Carriers who are successful at executing these three mind-shifts will be able to capture a greater share of the retirement market and retirement assets.
Are you well placed to make these mind-shifts? Is your business model and operations ready to handle them? We would love to hear more about how your company is placed to handle these mind-shifts?
Anand Rao is a partner at PwC's Diamond Advisory Services. Jamie Yoder is the managing partner of Diamond’s insurance practice.
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