Jerry Golden--often referred to as the father of variable life insurance and variable annuities--has had a distinguished career as an innovator and entrepreneur in both the insurance and personal retirement businesses.
Since leaving MassMutual in May, 2009, Jerry has been actively developing a new venture which will deliver yet another set of innovations to the personal retirement marketplace.
Jerry was kind enough to spend some time with us to share his views on the industry, his career and his most recent endeavors.
Annuity Digest: Can you briefly discuss your background?
Jerry Golden: The overriding theme of my career has been as an innovator in the life insurance industry, focusing most recently on developing retirement income solutions. I have always gravitated towards market-based products such as variable life insurance and annuities because these types of products are a win or lose proposition based on innovation, performance and marketing rather than on the product’s current crediting rate.
I have always been attracted to the “new, new thing” and most recently have been interested in delivering better solutions in the retirement income space.
The retirement income issue was clear to me in 1999 when I started Golden Retirement Resources and built the patent-pending RetireMentor system; however, this took place before large numbers of baby boomers and their advisors began considering how to convert their savings into retirement income, and in retrospect, I learned that RetireMentor may have been ahead of its time.
Annuity Digest: Please describe RetireMentor and Retirement Management Account (RMA) and the value of providing model mutual fund portfolios and lifetime income annuities in one account?
Jerry Golden: The Retirement Management Account (RMA) was the MassMutual branded version of RetireMentor that I created. RetireMentor was about providing a broader range of retirement benefits rather than simply retirement income. RetireMentor was conceived of as a system for converting assets invested in the market, e.g., a 401(k) account, into a personal retirement “benefit” plan including income, long term care and even health care.
There are several high-level drivers of a retirement benefit program. Basically, a retiree can be: a) alive and healthy; b) alive and not well, or; c) deceased with beneficiaries. As a result, there is a need for a retirement benefit system that includes and integrates income features, long-term care, life insurance, health insurance, emergency cash, etc.
What was implemented at Principal Financial Group (the Principal Income IRA) and at MassMutual (RMA) was just one element of RetireMentor - addressing rollover IRA assets and the income issue—the first leg of the overall vision for RetireMentor.
The RetireMentor system is about evaluating and implementing strategies for this conversion process. We learned through our research that in designing a retirement income solution laddering out of the mutual fund portion of the rollover IRA account and into a lifetime annuity happens to be very efficient in providing downside income protection and avoids complicated and expensive living benefit guarantees found in most variable annuities.
With its gradual shift from the market to secure income RMA was viewed by some knowledgeable in the employer sponsored retirement market as a legitimate default option out of 401(k) plans.
Annuity Digest: Can you describe what you learned about the relationship between interest rates and fixed income annuities? Please discuss the implications of laddered annuity purchases in various interest rate environments—particularly low interest rate environments.
Jerry Golden: At an industry conference on annuities a few months ago, a speaker said “it is probably not a good time to buy income annuities because interest rates are low.”
My own view is that markets, including the market for income annuities, are pretty efficient. As a result, I do not try to time the market personally and do not recommend market timing to others—one can really never tell whether it is a good time or a bad time to buy, particularly when you likely have to sell something at the same time. Interest rates are inherently market-driven so they (interest rates) are trying to tell us something.
To address this dilemma, investors shouldn’t try to change everything in their retirement savings account at the time they retire. For example, they should stagger or ladder income annuity purchases over time. It is roughly analogous to dollar cost averaging and will help mitigate the risk of putting all retirement savings eggs into one income annuity basket and then have your beneficiary lose all of that value if the annuitant “gets hit by a bus.”
Additionally, in low interest rate environments the mortality credit (or incremental income from insuring your longevity risk) can represent a relatively large part of cash flow so you are actually getting good mortality credit cash flow and absolute value when rates are lower.
There are times however, such as the early 1980s, when you are presented with a “no brainer.” I actually had quite a bit of success helping my mother lock-in an annuity purchase when interest rates were at 12% to 13%.
Related to this issue, RetireMentor provided an objective analytical tool that suggests when a person has an increased chance of success by locking-in annuity payments in a “high” interest rate environment.
The tool was simulation-based (Monte Carlo) and looked at possible outcomes in probabilistic terms (percentiles). RetireMentor was purely objective and product agnostic (as between mutual funds and income annuities) in terms of how the account should be allocated.
Annuity Digest: What you are working on currently?
Jerry Golden: At this point, I can describe some of the high level aspects of the venture that I’m working on with several other partners Essentially, we want to develop the most efficient administrative and sales platform for delivery of annuity products in the industry. Marketing, education and analysis tools will add value and lay on top of this administrative and sales platform.
In other words, we want to combine a very powerful, efficient delivery system with value-added marketing and analytic tools. The combined system will enable advisors and their clients to understand and operate products for both accumulation and de-accumulation solutions.
The platform will offer broad open architecture on the investment side, and will have multiple options in terms of product type.
The big picture we are focused on involves the trillions of retirement dollars that do not go to annuities because of complexity, fees, and overzealous selling.
Our story is starting to resonate with potential capital partners, although it is a challenge to find the right vehicle to build out the platform. Much of the execution challenge will involve regulatory issues and technology enhancements.
From an initial launch standpoint, late spring is optimistic and mid-to-late 2010 is more realistic.
We expect that the intellectual capital and key sales and marketing resources will be based in New York, while administrative and service operations will be in one or more locations outside New York.
Annuity Digest: In your opinion, does the retirement income industry even need to directly engage a mass consumer audience, or will financial advisors remain the primary communication channel?
Jerry Golden: At some point the consumer needs to be engaged directly. For example, 401(k) in-plan annuities will require an informed choice on the part of the consumer, with little if any advisor support. This obviously involves a mass audience.
There is a great need for the industry to simplify its offerings.
Basically, what is required to market on a direct-to-consumer basis is: desire of someone to do it; simplification; effective tools; and well-designed consumer education. There is also a clear need to get third party influencers to start talking about these consumer-oriented annuities in a favorable light.
Over time, simplified, effective annuity products can be distributed on a direct-to-consumer basis.
I would say Fidelity is doing a reasonable job engaging the consumer directly, although much of their annuity business appears to run through personal financial centers. This, however, is an assumption and I am not aware of the specifics.
Annuity Digest: Which types of financial advisors have the most potential when it comes to effectively communicating the value proposition of annuity-based solutions? Are registered investment advisors (RIAs) an untapped resource?
Jerry Golden: Our current efforts are focused on fee-based advisors where we will provide objective analysis to the advisors so that they are able to make informed decisions with our analytic tools.
On average, fee-based financial advisors are more sophisticated when it comes to asset allocation and, most importantly, their compensation is aligned with the interests of their clients. With alignment of interests there is a winning strategy. This is good for us and it is where the advisor industry is heading. Also, the customers of fee-based advisors generally tend to be a bit more high profile.
While there may be some inherent hurdles and annuity-related biases among fee-based advisors, I would prefer that our potential partners do not “fall in love” with our offerings before they hear our story. Often those with strong opinions (one way or another) can turn into your biggest advocates or fans.
In many ways, annuities just have not yet been designed to fit how fee-based advisors do business.
Over time, as we are able to generate content about the efficacy of the category, it will lead to education of financial advisors at a very high level—ultimately enabling advisors to develop their own strategies and be able to execute based upon their models of choice.
Annuity Digest: Many parts of the asset accumulation business—both product manufacturers and distributors—are highly scalable. In other words, a handful of people can gather significant assets and run a fund. The same cannot necessarily be said of retirement income product distribution where variable costs seem to move in lock-step with revenue. How does the retirement income industry address the issues of scale and complexity in the context of distribution?
Jerry Golden: As an annuity industry, we raise money one contract at a time.
The industry needs to spend more time on the services and education we provide rather than on product bells and whistles.
Our objective is to achieve scale through focus. Our model is practice-based. We are looking for a smaller number of advisors who seek to adopt products and services fully into their business practices rather than thousands of producers producing small amounts of business. Our efforts will be focused on generating more production from a few who are fully on board and we will have relatively few resources allocated to shotgun efforts.
Annuity Digest: What are your thoughts on the role of technology, online media and social media in light of product distribution and public awareness of the retirement income industry?
Jerry Golden: With the fee-based channel that we are focused on, there is a huge amount of web-based learning, e-wholesaling and technology delivery. The Internet is absolutely critical for us to be efficient and effective with our business.
On a related note regarding wholesalers, we will think about using a higher level specialist. It is about delivering intellectual property, objectivity, etc rather than just delivering product. This looks quite different than the classic product wholesaler.
Annuity Digest: Based on your experience, who are the most interesting and innovative people and/or companies in the retirement income industry today?
Jerry Golden: Much of what I see is coming from the mutual fund industry. An example would be the synthetic creation of insurance guarantees. To the extent that there is innovation, right now it seems to be coming from the fund business.
I am seeing less true innovation from annuity/insurance companies. They are sort of trapped, taking baby steps to protect their existing constituents.
Annuity Digest: What, in your opinion, could serve as a breakthrough or game-changing innovation in the industry?
Jerry Golden: When you see the Department of Labor saying we need to include annuities in 401(k) plans, this could serve as a platform for innovation. I could imagine a product or service being developed for this market that makes sense and the opening of this new channel. The innovation may be simplification - in-plan annuities or at exit - annuitization. This is a huge, huge opportunity.
Annuity Digest: What do you expect the retirement income industry to look like in 10 years and where are the biggest changes likely to come from during that timeframe?
Jerry Golden: Distribution will have shifted more to fee-based advisors.
There will be more direct-to-consumer sales.
There will be less commission-based business.
There will be more income-type options although the industry will still be dominated by accumulation products.
There will be more competition on the merits (fees, fund performance, reporting, service, etc.) rather than the usual product bells and whistles.
There will also be a new-new thing which none of us can yet predict.
Annuity Digest: Thanks very much Jerry.