00:00:00:00 – 00:00:27:27

Hello and welcome. We are here to talk about lifetime income and innovation within the defined contribution space. Yet ARS is not a well-known company by name. And joining us in studio today is Dave Paulsen, CEO of ARS. So, to start off, Dave, welcome. Thank you for being here. Can you tell me a little bit about yourself, your company and essentially why you feel you’re uniquely positioned to offer these products to consumers?

00:00:27:29 – 00:00:54:02

Yeah, well, thanks for having me. And, first and foremost, I’ve been in this industry for 30 years, and I’ve been in kind of a unique position where I’ve managed annuity businesses, I’ve managed asset management businesses, I’ve managed retirement 401K businesses, and very few people have actually had that kind of experience across all businesses.

00:00:54:04 – 00:01:18:24

And about four and a half years ago, what we did is, we created this company, ARS, which is, the genesis of our organization was from a much larger, company that actually, is well known for the design and distribution of lifetime income products to individuals. And when the SECURE Act passed in late 2019, we decided to form this company and take that expertise into the defined contribution space as well.

00:01:18:27 – 00:01:41:14

And we have a kind of a unique approach because we’re not an asset manager, we’re not an insurance company, we’re not a recordkeeper. You need all of those entities to come together to bring this to life. However, we’re taking it from a third-party view. And so we don’t have a proprietary lens. We actually put the participant first, the plan participant, the investor, we put them first and decide what do they need.

00:01:41:16 – 00:02:01:27

And then from there, we bring it back to those partners. Dave, you mentioned some of your partners before, off camera, I would love to hear more and hear you expand about the partnerships that you have within the industry. Yeah, so we’ve been really fortunate. As I mentioned before, ARS isn’t very well known. Although we have leadership that’s been in the industry for a long, long time, so we know what we’re doing.

00:02:01:29 – 00:02:20:24

But we have partnered with some of the top, asset managers in the world, such as State Street, American Funds, Nationwide Investment Management. We also partnered with some of the top insurance companies out there with, Nationwide, one of the oldest insurance companies in the industry and Athene which is an Apollo owned organization.

00:02:20:27 – 00:02:39:09

And then we have, a trust company, which is a Global Trust Company out of Boston, which is very well known and very well established. That creates the collective investment trust that we wrap this all-together in. And then we’ve partnered with others to help us do some of these calculations. And so, there’s some work that occurs behind the scenes.

00:02:39:12 – 00:02:59:28

We make this really easy for the participant. But there is work that occurs behind the scenes. And so we have people like Milliman and a value serve and others that are out there that are doing kind of daily calculations for us as well. When you bring all this together, what happened is we created a way that this works within the ecosystem of the defined contribution business.

00:03:00:00 – 00:03:20:21

We didn’t try to take an old annuity product and retrofit it to make it try to fit on an investment platform because that, as I mentioned before, is kind of clunky. What we did is we built this so that it speaks the same language as a retirement recordkeeping platform. Everything is in units and unit values, which is how those administration platforms work.

00:03:20:23 – 00:03:46:28

And because of those great partners we have, we end up delivering, really, I think the best of both worlds, which is the most accumulation that you can get through the superb asset management and asset allocation. You get lifetime income that’s completely flexible for the participant that they can turn on and turn off, and then we made it so that it fits within the confines of the industry by speaking the same language is as the industry speaks today.

00:03:47:01 – 00:04:11:03

You’re in an interesting position given your experience and also the way you’re kind of packaging these products for your partners. But, can you help to put things in perspective? Essentially what I’m looking for here is could you provide a brief history of lifetime income and essentially what the products are? And in your opinion, where do you feel the market is going in regard to delivering products and how they can kind of turn the tide for retirement income in the future?

00:04:11:03 – 00:04:34:28

Yeah, the need for lifetime income has been around for a long time and it’s not ever going to go away. But unfortunately, as an industry, I’m a little bit embarrassed about how we’ve solved this problem because we talk about innovation, but there really hasn’t been innovation. We’ve been using yesterday’s solutions to solve today’s problems. And typically, what happens is people want to categorize lifetime income in-plan into three categories.

00:04:34:29 – 00:04:52:05

They talk about products that should be annuitized, which means that you’re going to give up control. You get an income stream, but you never get access to that money ever again. There’s the other types of solutions. You wrap the whole solution with a guarantee, but when you do that, you wrap the entire investment with an extra 1% or so in fees.

00:04:52:07 – 00:05:11:28

You end up with less growth. And kind of the third category is you just take an annuity and slap it on to the portfolio alongside everything else. I call it a side car annuity. Well, that’s kind of what I call first generation solutions. And it hasn’t been successful. It’s been really low adoption across investors and primarily because there’s been tradeoffs.

00:05:12:00 – 00:05:39:23

Well, what we did at ARS is we took a different approach. We said, okay, how can we provide lifetime income and most importantly, the best overall outcome for each investor without having them make tradeoffs along the way? We’ve been talking a lot about annuities in this insurance segment that we’ve been doing in this program that we’ve been putting together, and I’m baffled by when you learn more, when you sit with the professionals and think, oh, I think I want an annuity, why aren’t we doing more of this?

00:05:39:23 – 00:05:59:08

And you speak to some really strong points where it’s like, the industry hasn’t done a great job of selling this, because when you talk to people who really know what they’re doing, you’re like, this seems like it adds a lot of value. Why would we not want guaranteed lifetime income? And it comes to the point that you’re saying where you know, well, the 1%, or you can’t touch it, there’s reasons why it hinders people from adoption.

00:05:59:08 – 00:06:30:04

And that’s not a good thing. But, you know, how do we kind of as an industry move from first generation solutions to these next generations that you mentioned? What do those look like? How do you package them and how do businesses provide them to their customers? Yeah, I think that’s a really good question. I think it starts with us, the industry recognizing that we don’t have to use yesterday’s solutions to solve today’s problems, that that is innovation that can be brought to light and then you start thinking about what does the participant really need and most importantly, what will they utilize.

00:06:30:11 – 00:06:49:02

Because there’s a lot of times where we solve a need, but people never actually act on it. So, the first thing participants told us is nine out of ten of them want lifetime income in their 401K plan. It seems reasonable. Yeah, it seems logical, right? But then you ask the next question, which is what are you willing to give up or trade off to get that lifetime income?

00:06:49:06 – 00:07:07:11

And ten out of ten would tell you they don’t want to give up anything, which is why adoption has been really low, throughout the last 20 years. So, then you start listing off the things that are normal tradeoffs. So first and foremost, they want growth. They don’t know if they’re going to use lifetime income. So, what they don’t want to do is sacrifice long-term growth.

00:07:07:14 – 00:07:23:21

And every solution that I know to date, except for the one built by ARS, sacrifices long-term growth. And so, you get lifetime income, but you end up with less money in case you want to cash it all out. The second thing they said to us is they wanted control all the way to and through retirement, which means that they want it to be liquid.

00:07:23:21 – 00:07:47:05

It doesn’t mean they’re going to cash it out, just means there is an emergency. They want to be able to access those assets. I mean, it is their hard-earned money. And then the last thing they said is, really, I don’t want to make any decisions in this part is really key because every, every solution that I’ve seen, especially first-generation solutions, require the participant, the investor, to make some sort of decision along the way.

00:07:47:07 – 00:08:09:09

And if I asked you, are you ready to buy an annuity? How much annuity are you going to buy? When are you going to turn it on? Nobody knows the answer to that question. So human nature, when you’re asked questions like that and you don’t know the answer, is do nothing. So as an industry, we have to start by retraining ourselves and saying, okay, we don’t have to use yesterday’s solutions to solve today’s problems.

00:08:09:16 – 00:08:28:13

Let’s think about how we can develop something that has the best overall outcome for the participant. Without those tradeoffs that I was talking about. They’re all important tradeoffs too. You know, usually you have to sacrifice something for long-term growth, but you bring up a good point, the questions that one needs to ask themselves as an investor, when do I want this.

00:08:28:20 – 00:08:47:28

And having access to your capital is very important, but does next generation ever mean a younger generation in the sense that oftentimes no one under the age of 40 is thinking about an annuity or retirement income? Do you ever try and address a different generation given that it is a different product? Yeah, that’s a really good question.

00:08:48:00 – 00:09:16:23

We like to think about it across all the ages, across the whole spectrum of people planning for retirement. Even, you know, my kids who are in their early 20s aren’t thinking about this yet. Right? However, if you build a solution that can be lasting across all stages of life, then incorporates lifetime income when it’s appropriate later in life, but doesn’t need to do that early in life, you will end up with one solution for all stages of life, regardless of age and if you focus on those three things that it has to grow.

00:09:16:23 – 00:09:37:20

It has to grow like any other investment. Because the only way to get the best outcome is to grow your pot of money to the biggest pot you can grow it to, and then apply a really high-income percentage to it, and yet make it flexible along the way. So, we do think about this across all generations or all age categories, and making sure that we’re developing the best overall outcome for their retirement.

00:09:37:26 – 00:10:04:13

That makes sense. And what do you feel are the most common misconceptions, in today’s industry when it comes to these lifetime income solutions? Yeah. So one of the key themes in our industry, which drives me a little crazy, is, our industry experts and I kind of use experts in air quotes. Because once again, I think, those experts have to pull themselves out of yesterday into 2024 and that kind of, line of thinking.

00:10:04:15 – 00:10:24:10

And one of the biggest things I hear all the time is they’re complicated or complex, and they really don’t have to be like, we’ve made them complex. First of all, we call them an annuity. And that scares people. Let’s call it what it is. It’s lifetime income. It’s lifetime income that has a growth component before you turn it on as well.

00:10:24:18 – 00:10:57:29

So, I think the industry is out there talking about how complex and complicated things are and how there’s too many decisions. We focus a lot on education of the participant. And I think there’s a direct correlation between how much education you need to provide and how many decisions a participant has to make. So, if everything is done by a fiduciary for them, if you put an investment fiduciary on top of all of this, who has their best interests in mind and they’re the ones picking all the assets, including picking lifetime income for the participant, then the participant doesn’t have to make any decisions at all.

00:10:58:01 – 00:11:19:01

And then all of a sudden, the need for educating them on a complex solution doesn’t exist anymore, because somebody is doing it for them that knows what they’re doing. And I guess it comes down to trust. In that situation and obviously fiduciary by design needs to have your trust. Yeah. But how do you convert an entire industry to understand like, oh, it’s not complex.

00:11:19:01 – 00:11:39:03

If the sound bites around it requires so much information distribution to get anyone to sign on. Yeah. So, it’s not easy but we’re up for the fight. So far, it’s been one at a time. Two at a time, ten at a time, 100 at a time. And we start by, having some really strong partners.

00:11:39:06 – 00:11:58:26

So even though ARS isn’t well known in the industry, we have partners, two of the top five largest asset managers in the world. We have a handful of the largest and well-known insurance companies in the world. We have strong recordkeeping partners, and they’re out talking to the employers. They’re talking to advisors and consultants, and we’re doing the same thing.

00:11:59:03 – 00:12:20:09

So, it really is, kind of a grassroots effort of bringing people along and getting them to understand and like with any anything that’s new, you’re going to have early adopters. And we have found some really strong early adopters, people that are proponents of what we’re doing. And, and then we take those and almost teach them to go teach others.

00:12:20:09 – 00:12:42:16

But it’s not easy. We’re changing the narrative. We’re changing the industry. And that takes time. Yeah, that takes a lot of time. Dave, talk to me about product design. That’s a big part of the equation here. So, what are the most important features to consider when creating a solution and why. Yeah. So, most solutions that are out there, I call them first generation solutions, have taken an annuity that’s already in existence.

00:12:42:21 – 00:13:04:20

Typically, it was designed to be sold by an individual financial advisor to an individual customer. And they’ve taken that type of solution and applied it to what I’m going to call a group asset management platform, because a defined contribution plan is just a big investment platform, and it’s been clunky and cumbersome, and we’re asking participants to make decisions on questions that they don’t know the answers to.

00:13:04:23 – 00:13:22:25

And so what we did, which is very different than the rest of the industry, is we created a way to take one big group annuity and have it valued every day like a mutual fund. So, if I was selling this to an end investor, you could buy into this annuity today at today’s price. And I could buy it tomorrow with a different NAV.

00:13:23:01 – 00:13:46:17

So it trades like a mutual fund. And nobody’s ever done that before. Now once you can make this its own asset class, which is what we’ve done. Then instead of going to the participant, the employee, and asking them how much annuity do you want to buy? We don’t have to do that. We can actually go to the investment manager, the person who is managing the entire portfolio, the one that picks all of the underlying investments to begin with.

00:13:46:17 – 00:14:06:09

On behalf of that participant. And now that investment manager is purchasing what we call Lifetime Income Builder on behalf of the participant. So the participant owns the fund. They get all the underlying benefits of the fund. So they get all the growth components of all those of the fund as well as the fund gets lifetime income. And if you’re on that fund, you get lifetime income as well.

00:14:06:09 – 00:14:29:21

It’s just a very unique way that we’ve solved this problem. And it really takes all that decision making out of the hands of the participant. Why do you think other others have not gotten on this? It seems like such a concise solution. It doesn’t seem that complicated, but you constantly hear about the complication and the difficulties in articulating this to investors.

00:14:29:21 – 00:14:46:24

Yeah, I think it comes from the lens that you’re viewing it through. And so, when I go back to when I worked in the corporate world, if I went to our annuity team and I said, hey, we need a lifetime income product for the for the 401K team, they would say, just grab one off the shelf and slap it on.

00:14:46:26 – 00:15:04:14

And if I went to the asset management team, I would say, hey, we need lifetime income for the 401K world. And they’d say, well, we can manage the assets. So it pays out almost like a guarantee, but they can’t use the word guarantee. And then I would go to the 401K team and they’d say oh yeah we need it, but nobody’s really adopting it.

00:15:04:14 – 00:15:32:04

And so based on the lens that we’ve been solving this problem through as an industry, kind of determines what the product structure looks like. Because ARS isn’t any of those things, we are able to solve this from the lens of the participant, which is really key. And then we challenge ourselves, to do something different. And if you’re going to build a business from the ground up, you better make sure you have a really good idea and you better have some big partners behind you, and you better have regulatory wins behind you.

00:15:32:04 – 00:15:48:15

And all those things have lined up for us. Oh, that’s good to hear. And how do you address a lot of these factors in a single product? All of the things that we’ve been talking about, you kind of put it in a bucket of how it’s more like mutual fund, and you take the fiduciary and let them make the decisions as opposed to an individual.

00:15:48:17 – 00:16:09:00

But is there anything else that we should touch upon or let viewers know? Yeah, I think there’s a couple of things. So first and foremost, what we did is we created a target date fund. A target date fund is what, about 70% of 401K investors invest in today, all the decisions are made for them and it follows a glidepath that gets them on path to their retirement.

00:16:09:00 – 00:16:29:09

So the idea is to accumulate a bunch of assets, de-risk as you get closer to retirement, so that if there’s some downturns in the market, you’re protected a little bit. What we did is we packaged everything in a target date fund. We have that investment manager on top making all the decisions. But then we also are capturing all the gains on a quarterly basis.

00:16:29:12 – 00:16:46:09

So, we call it a high-water mark. And what we’re doing is, is at 3 to 5 years before retirement, if the market takes a downturn, if you’re going to retire, you either have to learn to live off of less money or you have to push your retirement date out. They call it sequence of return risk.

00:16:46:12 – 00:17:09:09

Now, most investors wouldn’t know what that means. Sequence of return risk. But I’ll tell you, if anybody retired in 2022, they know exactly how it feels. And so, what we did is we eliminated the sequence of return risk by having a quarterly high- water mark that your income is based off of. We allowed the participant to not have to make tradeoffs along the way, so their fund is going to grow like any other target date fund.

00:17:09:09 – 00:17:25:26

And when they go to retire, they could cash the whole thing out if they want to, or they could roll it over to an IRA or to a financial advisor, or they could leave it in plan and begin to take 6% income that they could turn on and turn off. And so, they’re in complete control all along the way.

00:17:25:28 – 00:17:42:29

That’s so interesting. Yet it’s being managed by a portfolio manager, or some sort of fund manager for this. And at the same time you are in control. Yeah. It’s your money at the end of the day, which seems like a pretty good deal. But, I wanted to ask you about the complexity of these lifetime income products.

00:17:42:29 – 00:18:01:18

That’s a big thing. We have been harping on this, and I don’t want to repeat the question, but how do you address complexity through the product design? You mentioned a couple points, but it seems like it’s so simple. Again, I keep going back to why have others not done this? Is it because of the corporate structure and it’s just too big, and you’re not nimble enough to make these decisions quickly.

00:18:01:18 – 00:18:16:19

And I think we have to be creative. We live in a world where we have regulation. And so people always talk about being creative, thinking outside the box. I always think about we have to be creative in the box. We have regulations that we have to follow, but it doesn’t mean that we have to be so stringent.

00:18:16:19 – 00:18:36:00

We can be creative inside that box. And we worked closely with Groom Law Firm, recently, to talk about the rules of the fiduciary, the person that is responsible for selecting this investment. And a lot of times people want to make it more complex than it is. And Groom has said it doesn’t have to be that complex.

00:18:36:00 – 00:19:04:13

And that matter of fact, a lot of this can be solved with how the solution is designed. And so the way we designed our solution, it alleviates a lot of the fiduciary responsibility of the employer, of the consultant. And it all falls on the shoulders of, a trustee, a Collective Investment Trust trustee. And so I don’t think it has to be complex, but I do think the industry has to recognize we have to pull ourselves out of yesterday.

00:19:04:15 – 00:19:23:16

That’s kind of refreshing to hear to be creative within the box because most people are like, oh no, just move the goalposts, move the regulation. And that doesn’t always work out best for anyone involved. And sometimes it does, but not in all circumstances. So it is an innovative solution at its core. And are there any other types of innovations that you see in today’s market that are exciting to you that stand out?

00:19:23:19 – 00:19:50:20

Yeah, so I think innovation takes a lot of forms. So first of all, I think one of the things we’re trying to do is create enough material, thought leadership material, to talk about how we can capture high-water marks, how we can produce better outcomes, how we work with people like Groom Law Firm, how we work with people like CANNEX to create a whole bunch of content that makes it easier for the advisor and the consultant and the plan sponsor to offer this to their employees.

00:19:50:22 – 00:20:11:07

Most people wouldn’t think about that as innovation, but how you package it together, I think, can be innovative. It makes everybody’s job easier. I also think there’s a strong movement towards personalization and this idea that people want, what the industry calls it managed accounts, which is I’m going to pay a little extra for you to give me a personalized portfolio.

00:20:11:10 – 00:20:31:15

And I believe that that managed accounts and personalization is going to continue to grow. But as I said before, the need for lifetime income is never going to go away. So, bringing those together, for the 15 or 20 or 30 percent of the population that wants that personalized portfolio but still need lifetime income makes a lot of sense.

00:20:31:17 – 00:20:51:03

And then for the other 70% of the population that is invested in target date funds today like they normally would, if you had a target date fund to perform like any other target date fund, but at the end gave you the option of completely flexible income that you can’t outlive, it seems to make sense, right? Most reasonable people would get on board with that.

00:20:51:06 – 00:21:08:25

Dave, if there’s one thing you would like people to take away from this discussion today, what would that be? I would just try to challenge the industry to think a little differently. I think we throw out the word innovation all the time. But a lot of times what that means is we just put a fresh coat of paint on something that’s been around for a long time.

00:21:08:28 – 00:21:28:00

And I’m a little embarrassed of the industry. The fact that, this probably won’t go over well in the industry, but the fact that we talk about innovation and it really isn’t. I’ve only seen one or two truly innovative solutions out there in the industry. And this old saying, don’t throw the baby out with the bathwater.

00:21:28:03 – 00:21:48:09

Just because what you knew about annuities, five years, ten years, 20 years ago doesn’t mean that that’s the same thing that we have to offer today. So, if you didn’t like them five years ago, you have to give it another shot. You have to give it a look because participants, nine out of ten of them want lifetime income, ten out of ten of them don’t want to give anything up to get lifetime income.

00:21:48:11 – 00:22:19:10

And we found a way to deliver all that. Creativity within the box. I like it. Dave, thank you so much for your time and your insight. Thank you for being here in studio. And once again, I was joined today by Dave Paulsen, CEO of ARS. I’m Erin Real, and you’re watching Asset TV.