There are some basic facts we can say with certainty about the retirement market. Demographic trends dictate an older population and a growing proportion of retirees. This older population controls a huge and growing amount of assets, much of which sits in defined contribution retirement savings plans. This major segment of the population is in serious need of advice and solutions to help them manage their assets for many years while optimizing the retirement income they derive from their assets.

The primary question each company must address in light of its own position and capabilities is: how and when to enter this market?

Sizing the Market
Consumers near or entering retirement (i.e., the 55 - 64 group) represent the fastest-growing age segment over the next five years — at 3.8% per year, or 4.5 times the rate of overall population growth. In five years, the number of those aged 55+ will exceed 71 million, or slightly more than 24% of the total US population.

As consumers age, they are more focused on providing for their retirement. Given this motivation, the length of time they've been saving, and the "magic" of compounding, it comes as no surprise that substantial assets are in the hands of the older population. Recent research by our firm indicates an estimated total of more than $6 trillion of investable assets (i.e., investments excluding equity in the home) are in the hands of the 55+ households.

These assets represent investments that are controlled by the consumer, and which will be used to help provide a stream of income after they retire.

Targeting the Opportunity
A significant portion of these investable assets are in defined contribution plans, and as individuals retire, they take substantial assets (distributions) out of these plans. Assets that are "rolled over" from defined contribution plans to IRA's represent a significant, event-driven choice where firms are competing to retain assets, or to capture them. Research by our firm, and others, has shown that most of these rollover assets are lost to the original 401(k) provider and are directed to a new investment manager at the time of distribution.

As people retire, they face three major financial concerns regarding the use of their assets:

1. Making the rollover decision, i.e., where to place their rollover assets.
2. Managing and protecting their assets within the constraints of their risk preferences and lifestyle choices.
3. Optimizing the retirement income they derive from their assets.

Successful companies will need to determine how they solve for each of these concerns, in a way that is suitable for each client's situation, leverages the company's capabilities, and differentiates it from competitors.

Retirees Need Help
With primary consumer focus remaining on "accumulation," there has been too little recognition of the need to provide for income or financial management during retirement.

There is a dawning realization by consumers that they will need help in this regard, and it is well along the way to becoming a critical issue for them. Once they are retired, individuals find themselves most concerned about healthcare and a variety of financial and protection issues.

It is abundantly clear that they are not adequately prepared to solve for these concerns. They need advice and help both prior to and during retirement. Consider, for example, these findings based on recent research:

• About 1/3 of workers do not have confidence that they will have enough money to live comfortably through their retirement years. (EBRI & ASEC, Retirement Confidence Survey, 2003).
• Of consumers concerned about outliving their assets, 41% don't know how to deal with this issue, and 39% don't know how they will deal financially with unexpected events in the later years of their retirement. (DSG "Annuitization 2000" survey of consumers age 60+, 2000).
• There is a definite disconnect between expectations of pre-retired consumers and the actual experience of retirees regarding spending levels after retirement. In a recent DSG survey, we asked consumers to estimate postretirement spending needs compared to their pre-retirement spending levels. Among the pre-retired individuals, only 3% believed that they would spend more after retiring, but of the retirees (with actual experience), 22% said they were spending more than at their preretirement levels.

Industry Response
Overall, the industry is beginning to react to the retirement market opportunity, albeit slowly. As might be expected, a few forward-thinking companies are already taking advantage of this gap in activity to build their markets and establish competitive advantage.

A few exampes from DSG research studies demonstrate the types of activity currently taking place:

• Of 45 variable annuity providers surveyed in 2003, 28 (or 62%) indicated that they expanded their focus on the retirement income market within the prior year.
• Nearly 10% of the 60+ population is currently receiving periodic annuity payments (excludes corporate pension payments).
• Approximately 12% of the 50+ population have already established a trust, and over 25% of them established their trust with the objective of managing their retirement finances.
• Some companies have been reorganizing to emphasize the retirement income market, creating "retirement income specialists," or in some cases, a retirement market division.

While activity in this arena has been increasing each year for the past four years, efforts are still modest. In part, this may be due to resource constraints brought about by recent market conditions or competing priorities. However, the biggest cause of inactivity for many companies is probably their own "inertia."

Looking to the Future
Building a successful business around the retirement income market opportunity requires a few simple (but not necessarily easy) steps. The successful competitor must:

• Decide to focus attention and emphasis on the retirement income market as well as the consumer needs that drive it.
• Commit sufficient levels of resources (people, dollars, effort, and persistence) to this market.
• Demonstrate throughout the enterprise, from the top down, that this is a priority.
• Determine the appropriate business model for the individual company to match with this opportunity, and take action.

This last step, specifying and applying the right business model, requires each firm to critically and honestly assess their situation, capabilities, and market image. Some critical considerations would include:

• Address specific needs of pre-retired consumers and retirees from the perspective of segmentation, life stages, lifestyle, and mind-set.
• Ensure that you have access to a portfolio of products/services/solutions appropriate for the different stages or needs of retirement.
• For financial intermediaries, raise their awareness and receptivity to the retirement income market while providing targeted education and sufficient financial incentives.
• Educate consumers to focus on retirement income management (beyond simply accumulation) and the financial implications of their own increasing longevity. In many cases, this education "flows through" the intermediaries.
• If your firm manages 401(k) or other defined contribution assets, you will simultaneously need to develop and implement retention strategies and tactics to identify, measure, and retain this business before it rolls over to your competitors.

Summary
The retirement income market represents a phenomenal opportunity for the financial services industry, resulting from an expanding older population, with trillions of dollars in assets, and sorely in need of help to turn those assets into a reliable, enduring stream of retirement income.

Many of these assets are held in defined contribution retirement plans, and will roll over to other investments with different companies. This presents companies with two mega-opportunities: the opportunity to capture assets as they move, and the opportunity to take steps to retain assets before they move.

All sectors of the financial services industry are beginning to act on these opportunities, but no one company dominates the market yet. Thus, there is room for substantial growth and profits for any firm willing to take concerted action in the near future.

This requires commitment of resources, focus of attention, and the decision to establish the retirement income market as a key priority. Companies that commit soon to this path can accelerate to a market leadership position.

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