February 2010

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Banking Strategies for the “Shadow” Retirement Market

By Wayne Cutler

Banks have strongly emphasized retirement-related offerings as they pushed into wealth management in recent years. In an era when workers no longer can count on company pensions, retirement planning and investments meet a compelling customer need.

Though successful, banking expansion into the retirement business has proved problematic in the Great Recession. Despite recent market gains, most households are still hurting on their retirement investments. Meanwhile, wealth management providers are straining to retain customers and rebuild income.

While this story is all too familiar to banks, most are overlooking a major aspect of the retirement business that is sitting right under their noses. In an increasingly self-directed market, U.S. households have parked trillions of their retirement dollars in everyday banking products, such as certificates of deposit and various types of money market and savings accounts.

Often there is little or no effort to consciously manage this “shadow” retirement market by looking to larger customer goals. In turn, efforts to attract and retain this valuable business usually fall well short of their potential. Banks face a huge risk of future outflows as baby boomers retire and begin to draw down these savings.

Most immediately, banks need to investigate their own account base to identify retirement-earmarked product balances and their customer origins. For example, most bank CD portfolios have high concentrations of single-account customers, who can supply more than half of balances yet have only slender ties with the bank.

A serious effort also is needed in the area of product design, so that features and benefits are lined up with retirement-related goals, such as setting up a monthly revenue stream that will commence on a specified date. Longer term, banks will need to build stronger bridges between internal product units, so that wealth and traditional savings product divisions can develop a multi-faceted outreach to shadow retirement customers.