Retirement: A Field in Flux

The Retirement Income Industry Association’s “View Across the Silos” means that members call looking for advice and examples that go beyond what they usually see inside their own business niche and model. Recently, members have been asking questions about how to structure their companies to take advantage of the retirement income opportunities that they can now see more clearly than before.

The issue is important but it is also contentious because it presents particular difficulties to members that have traditionally enjoyed very high margins and low balance-sheet risk business models (e.g. investment management). In comparison, retirement income looks like a lower margin and higher balance-sheet risk business model to them. However, given the current crisis of the investment management business and the promise of the retirement income business, they cannot ignore the issue.

Over the last few years, RIIA has seen member and non-member companies address retirement income opportunities with taskforces and projects. Some stayed in this phase for years. Others took only months before they moved to the next phase of development. Several companies did not go further because the margin and balance-sheet risk profile of the retirement business paled in comparison to their core investment/accumulation business. Since September 2008, many of these companies are revisiting their earlier conclusions.

The companies that moved beyond the project phase face two important choices:

o Should the new unit be a cost center or should it have its own P&L?

o Should the unit be product-focused or should it be process-focused?

As you would expect, cost-center units are harder to manage. Borrowing people from other business P&Ls to make your unit successful enough so that it can become its own P&L stresses the natural limits of human cooperation. It can be done but can also signal lukewarm institutional commitment. We have not seen many transitions from a cost center to a new P&L. On the other hand, we have seen several cost centers reach the limit of institutional patience. They usually end up merged into one of the institution’s core P&Ls.

Cost-centered or not, there is also the difficult issue of non-core business units. Companies typically have a core business and occasionally, managers will seek to diversify their business model risk beyond this core business. Non-core businesses are hard to manage to success. They can be starved in a budget process that does not recognize their cash-flow or working-capital requirements, especially if they differ markedly from those of the core business. On the other hand, successful non-core businesses can be too successful and muddle the company’s strategic focus and capital allocations. Companies need to ask themselves: Is retirement income a core business or a non-core business for us?

Cost-centered or P&L-driven, core or non-core, those who focused on product solutions started with proprietary and comprehensive solutions that were often little more than putting new labels on old wine. Results have generally been below expectations for all involved. Other product-focused companies have tried developing more commodity, rather than proprietary, product solutions. This development started more recently and it is too early to judge results, especially in light of the current crisis that makes apples-to-apples comparisons more difficult.

The companies that focused on process solutions started with proprietary processes for retirement management. There again, results have been disappointing. More recently, process-focused companies are looking at creating more open platforms.