Designing Successful Target-Date Strategies for Defined Contribution Plans E-Book

Stacy L. Schaus

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 528

Veröffentlichungsjahr: 2010

Beschreibung

The ultimate guidebook for navigating the new world of pensions and retirement plans In the wake of the explosive growth of defined contribution (DC) plans invested with target date strategies, and the understanding of how important these strategies can be in effectively meeting retirement income goals, plan sponsors are seeking more optimal target date approaches. This timely book provides you with in-depth answers from the nation's most qualified and experienced experts to pressing questions about DC plan design. * Presents the views of individuals from all across the market * Includes a broad range of plan sponsors both in the corporate world and in the public/government sectors * Offers views from consultants and advisors from the most respected firms, academics who teach at leading universities, and other innovative leaders With a broad range of knowledge and insight, Designing Successful Target Date Strategies in Defined Contribution Plans helps you understand the evolution of DC plans, pulls together all angles of what it takes to develop custom target date strategies, and provides you with a look ahead to the future.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Introduction

SPEARHEADING THE NEED FOR MORE INFORMATION

WHY ARE COMPANIES TURNING TO CUSTOM TARGET - DATE STRATEGIES ?

KEY ISSUES INVOLVED IN OFFERING CUSTOM STRATEGIES

Acknowledgements

PART One - DC Plan Evolution and Design Trends

CHAPTER 1 - DC Plans in the American Retirement System

EVOLUTION OF DB AND DC PLANS

MAKING THE MOVE FROM A DB PLAN TO A DC PLAN

HOW DO WE MEASURE DC PLAN SUCCESS?

WHAT IS A QUALIFIED DEFAULT INVESTMENT ALTERNATIVE?

IS AUTOMATIC ENROLLMEMT ENOUGH?

AUTO-ESCALATION: HOW MUCH IS ENOUGH?

HOW MUCH SHOULD WE SAVE TO BEAT INFLATION?

PREPARING FOR RETIREMENT IN AN ECONOMIC DOWNTURN

WHAT THE FUTURE MAY HOLD FOR DC PLANS

IN CLOSING

CHAPTER 2 - Evolving DC Plan Design

INVESTMENT STRUCTURE OF DEFINED CONTRIBUTION PLANS

FUTURE OF DC PLAN INVESTMENT DESIGN

TIER I: QUALIFIED DEFAULT INVESTMENT ALTERNATIVES—ASSET-ALLOCATION STRATEGIES

TIER II: CORE INVESTMENT OFFERINGS IN DC PLANS

TIER III: BROKERAGE OR MUTUAL FUND WINDOW

TIER IV: PASSIVE INVESTMENT STRATEGIES?

EVOLVING STRUCTURES AND ALTERNATIVE INVESTMENT STRATEGIES

BRINGING IT ALL TOGETHER: DC INVESTMENT STRUCTURE AND GUARANTEES

IN CLOSING

CHAPTER 3 - Target-Date Strategies: Packaged versus Custom

WHY PLAN SPONSORS CREATE CUSTOM TARGET RETIREMENT-DATE STRATEGIES

INTEL: BUILDING IS BETTER THAN BUYING

VERIZON: WELL WORTH THE EFFORT

IN CLOSING

PART Two - Development of Custom Target-Date Retirement Strategies

CHAPTER 4 - Legal and Fiduciary Considerations

COMMON LEGAL QUESTIONS REGARDING DC PLANS

INVESTMENT POLICY STATEMENTS AND GOVERNANCE

TARGET - DATE STRATEGIES ON THE HOT SEAT

WHAT MAY LIE AHEAD IN LEGISLATION OF TARGET STRATEGIES

IN CLOSING

CHAPTER 5 - Record Keeping and Trust

TWO BASIC APPROACHES TO SETTING UP RECORD KEEPING TO SETTING UP RECORD KEEPING

CUSTOM TARGET STRATEGIES LEAD TO NEW RECORD-KEEPING APPROACHES

PROS AND CONS OF ALTERNATIVE OPERATIONAL APPROACHES

QUESTIONS TO POSE TO YOUR RECORD KEEPER

KEY CONSIDERATIONS TO DETERMINE WHICH APPROACH TO CHOOSE

ESTABLISHING AND MAINTAINING OPERATIONS

CONVERSION OF TARGET RISK TO TARGET DATE

FEE ALLOCATIONS AND DISCLOSURES

REBALANCING THE TARGET-DATE STRATEGIES

DELUXE CORPORATION : SEAMLESS OPERATIONAL SETUP AND ROLLOUT COMMUNICATION

HOW RECORD KEEPERS AND TRUSTEES SUPPORT OPERATIONS

IN CLOSING

CHAPTER 6 - Communication Challenges and How to Meet Them

COMMON MYTHS SURROUNDING CUSTOM TARGET-STRATEGY COMMUNICATION

COMMUNICATING THE BENEFITS OF TARGET-DATE STRATEGIES

COMMUNICATION : STRATEGIES TO KEEP IT SIMPLE

COMMUNICATION TOOLS

HELPING PLAN PARTICIPANTS TO VISUALIZETHEIR POSTRETIREMENT FUTURE

COMMUNICATIONS AND THE SWITCH TO DC CUSTOM STRATEGIES

COMMUNICATION CHALLENGES DURING AN ECONOMIC DOWNTURN

IN CLOSING

CHAPTER 7 - Evaluating Costs in Custom Strategies

WHY COSTS MATTER

HAVE YOU CALCULATED AND REDUCED TOTAL PLAN COST?

KEEPING FEES REASONABLE

UNBUNDLING CAN KEEP DOWN COSTS

CUSTOM STRATEGIES AND THE VALUE OF UNITIZING

EXPERTS DISCUSS FEE TRANSPARENCY

ERISA SECTION 404(C) AND FEE DISCLOSURE

COSTS OF IMPLEMENTING AND RUNNING CUSTOM TARGET STRATEGIES

IN CLOSING

PART Three - Designing and Benchmarking Custom Target-Date Strategies

CHAPTER 8 - Glide-Path Design

AN ACADEMIC LOOK AT CREATING OPTIMAL ASSET-ALLOCATION STRATEGIES

A PRACTITIONER’S LOOK AT CREATING OPTIMAL ASSET-ALLOCATION STRATEGIES

DC PLAN SUCCESS REQUIRES A NEW APPROACH

EVALUATING THE PROBABILITY OF MEETING DC RETIREMENT-INCOME GOALS

EVALUATING RISK-FACTOR EXPOSURES IN TARGET-DATE GLIDE PATHS

PLAN SPONSOR APPROACHES TO CUSTOM TARGET-DATE STRATEGIES

IN CLOSING

CHAPTER 9 - Asset Classes and Alternatives

CLEARING THE DECKS: OFFERING A BROKERAGE WINDOW TO PARTICIPANTS

TYPICAL DC CORE INVESTMENT OFFERINGS

SIMPLIFY, SIMPLIFY, SIMPLIFY

SIMPLIFY YET DIVERSIFY

SUGGESTED CORE INVESTMENT LINEUP

ADDING ALTERNATIVES TO TARGET-DATE STRATEGIES

IN CLOSING

CHAPTER 10 - Helping Protect DC Assets from Risk

HOW DO WE EXPERIENCE RISK?

2008 MARKET IMPACT ON DC PARTICIPANT ACCOUNTS

NO PLACE TO HIDE

WHAT ARE THE MAIN TYPES OF RISK?

HELPING PROTECT DC PARTICIPANT ASSETS FROM RISKS

IMPORTANCE OF TAIL-RISK HEDGING

IN CLOSING

CHAPTER 11 - Approaches to Benchmarking

INTRODUCTION TO TARGET DATE BENCHMARKING AND THE MEASURE OF SUCCESS

COMMON APPROACHES TO BENCHMARKING TARGET-DATE STRATEGIES

BENCHMARKING MANAGED ACCOUNTS

IN CLOSING

PART Four - Looking to the Future

CHAPTER 12 - Financial Education, Advice, and Retirement Planning

WHY PLAN SPONSORS PROVIDE EDUCATION AND ADVICE

IS ADVICE NEEDED WHEN A PLAN HAS AUTO - ENROLLMENT AND TARGET - DATE STRATEGIES?

EDUCATION AND ADVICE OFFERED BY PLAN SPONSORS

EVOLUTION FROM EDUCATION TO MANAGED ACCOUNTS

COMPARISON OF MANAGED ACCOUNTS AND CUSTOM TARGET - DATE STRATEGIES

ADVICE BEYOND ASSET ALLOCATION

ADVICE BEYOND ADVICE MODELS

WHAT IS FINANCIAL PLANNING?

FINANCIAL PLANNING PROCESS

FINANCIAL PLANNING FEES

IN CLOSING

CHAPTER 13 - Retirement Income and Guarantees

ENCOURAGE PARTICIPANTS TO STAY IN THE PLAN OR GO?

IN-PLAN GUARANTEED INCOME SOLUTIONS

PLAN SPONSORS EXPLORING GUARANTEES

ALLOWING CONSOLIDATION OF OUTSIDE ASSETS INTO THE PLAN

IN CLOSING

Conclusion

Notes

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more.

For a list of available titles, visit our Web site at www.WileyFinance.com.

Copyright ⓒ 2010 by by Pacific Investment Management Company LLC. Authored by Stacy L. Schaus, CFP®. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

This publication contains information obtained from sources believed to be authentic and highly regarded. Reprinted material is used with permission, and sources are indicated. Reasonable effort has been made to publish reliable data and information, but the author and publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. Certain information contained herein may be dated and no longer applicable; information was obtained from sources believed to be reliable at time of original publication, but not guaranteed. The views contained herein are the authors but not necessarily those of PIMCO. Such opinions are subject to change without notice. This publication has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The author or PIMCO may or may not own or have owned the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

This material contains hypothetical illustrations and no part of this material is representative of any PIMCO product or service. Nothing contained herein is intended to constitute accounting, legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Readers should be aware that all investments carry risk and may lose value. The information contained herein should not be acted upon without obtaining specific accounting, legal, tax, and investment advice from a licensed professional.

Library of Congress Cataloging-in-Publication Data

Schaus, Stacy L., 1975-

Designing successful target-date strategies for defined contribution plans : putting participants on the optimal glide path / Stacy L. Schaus.

p. cm.

Includes bibliographical references and index.

eISBN : 978-0-470-63288-8

1. Defined contribution pension plans-United States. 2. Retirement income-United States-Planning. I. Title.

HD7105.45.U6S355 2010

658.3’253-dc22

2009052169

To John, Robert, and Julia

Foreword

So often when we talk about investing, what we really mean is trading. But providing for one’s retirement is investing indeed, and awfully important investing at that, now that most Americans (and, increasingly, people elsewhere in the world) no longer receive traditional defined benefit pensions from their employers. Yet given the solemn duty most of us have to ourselves to ensure we will be able to pay our bills in our golden years, it is alarming how poorly armed we are when it comes to creating a retirement savings plan. Sure, we know that we have to “save.” Most folks also probably know they are supposed to generate something like 75 percent or so of their final years’ income from their retirement savings once they quit the working world. But how to go about creating that nest egg can stump even the most astute among us. The likelihood of many years of lower U.S. gross domestic product rates, a greater percentage of global growth coming from elsewhere, and more volatility everywhere in the post-financial crisis “New Normal”—and, therefore, lower portfolio returns—is not making that goal any easier to reach. And so employees must look to those they trust—defined contribution (DC) plan sponsors in particular—to put them on the path to reaching their retirement goals. Indeed, plan sponsors today have more control than ever as more of them craft custom target-date strategies for their participants.

This book is an essential resource for these important decision makers as well as their consultants, advisors, and service providers. Stacy Schaus, leader of PIMCO’s DC practice, not only provides a definitive overview of trends in the American retirement system, but she also expertly guides pension plan sponsors on how to establish, refine, and maintain the most effective DC plans. Stacy’s pension-industry leadership, based on nearly three decades of experience, is particularly on display in her discussion of how to design best-in-class target-date strategies that allow sponsors to effectively manage the DC assets for a diverse employee base, from the young factory employee to the near-retirement executive officer. Other issues critical to the building of custom strategies—costs, fiduciary duty, benchmarking, communication—enjoy an equally authoritative discussion. Underlying all of this is a commitment to a principle that has always motivated everything we do at PIMCO: investing for the long term and managing risk along the way.

If your job involves helping people create and sustain an acceptable standard of living in retirement, you play a role in one of this country’s most important long-term goals: dignity and respect. And so I urge you to invest in the ideas and expertise found in this book.

William H. Gross PIMCO Founder and Co-Chief Investment Officer

Introduction

Defined contribution (DC) plans have rapidly become the primary source of retirement income for the majority of workers in the United States. For most workers to meet their retirement-income goals, two key requirements must be met: They need to participate in DC plans at the appropriate savings level, and the plans must be managed well. Since the inception of the 401(k) plan in 1981, plan design has continually evolved to improve the success of these plans. Fueled in large part by the Pension Protection Act (PPA) of 2006, which supports automatic or default plan features to increase participation, contribution rates, and asset diversification, advancements in DC plan design have accelerated. Among the greatest advancements in DC plan design is the development of custom target-date strategies.

Importantly, the PPA helped drive the growth of an innovative investment strategy that automatically modifies plan participants’ asset allocation as they age, an investment approach referred to as “target retirement-date” or “life cycle” strategies. Target retirement-date strategies were blessed by the Department of Labor (DOL) as a Qualified Default Investment Alternative (QDIA), supporting plan sponsor decisions to automatically invest DC savings into this type of investment without explicit permission from participants. Today, target retirement-date strategies have become the primary investment default for DC plans. As a result, they have been growing rapidly in both prevalence and assets.

In many ways, target-date strategies have revolutionized DC plan investing. Rather than offer a lineup of investment choices from which plan sponsors hope participants will select wisely, sponsors can instead hire investment professionals to manage the asset mix for the participants, thus opening the door for more complex and sophisticated investment management. Target-date strategies not only offer the surface-level simplicity that participants desire but also the behind-the-scenes complexity to manage money using the most advanced institutional techniques and asset classes. Even though the first generation of these types of strategies has been criticized by the government and the marketplace, particularly for investment losses experienced by those nearing retirement in 2008, there is no doubt that this investment approach will continue to grow as a mainstay in DC plans. What is more, given the failure of many participants to actively modify their asset allocations as they approach retirement, some DC experts predict that over the next decade, investment in target-date strategies may capture upward of 60 percent of total DC plan assets.

The structure and management of these types of strategies warrant careful consideration. Most plan sponsors are no longer considering whether target retirement-date strategies make sense for their plans but rather how they can gain more control over what has rapidly become the most critical investment option in their plan. In essence, the target-date strategy choice will largely determine a plan participant’s ability to retire successfully. Plan sponsors know they need to make the right choice. Given the weight of this decision, more plan sponsors are looking to acquire increased control over the target-date investment options. They are seeking the ability to design an asset-allocation structure that fits their demographics as well as a way to control the lineup of underlying best-in-class investment managers and to drive down fees over time. Their desire for more control over this critical investment choice has driven the evolution of open architecture or custom target-date strategies.

This book is designed to help plan sponsors and their consultants as they consider how to create their own custom target retirement-date strategies. It is divided into four parts that take a close look at the ways in which DC plans are evolving and the relevant trends in plan design. Part 1: DC Plan Evolution and Design Trends begins with a look at how DC fits into the American retirement system, offering insights from individuals who represent our nation’s retirement leaders, such as Dallas Salisbury of the Employee Benefit Research Institute, David Wray of the Profit Sharing/401(k) Council of America, and Anna Rappaport, President of Anna Rappaport Consulting and Chairperson of the Society of Actuaries Committee on Post-Retirement Needs and Risks, whose valuable research highlights the increasing role of DC plans. This part then turns to DC plan investment structures, sharing how the range of investments has been modified over time. It also provides research and insights from record keepers and investment consultants, such as Pamela Hess of Hewitt Associates and Ross Bremen of NEPC. It concludes with a discussion of why plan sponsors are showing an interest in using a custom approach and an examination of the pros and cons of an open architecture approach versus buying an off-the-shelf target-date product.

Part 2: Development of Custom Target-Date Retirement Strategies outlines how to set up these custom strategies, starting with a discussion of legal and fiduciary issues with Marla Kreindler and Julie Stapel of Winston & Strawn LLP. It then shares in-depth alternatives to setting up custom strategies with plan record keepers and trustees, presenting insights from consultants such as Matt Rice of DiMeo Schneider & Associates, LLC and plan setup details from Tom Eichenberger of State Street Corporation and Marianne Sullivan of ING Retirement Services. This part also presents solutions for communication issues that arise when sponsors are trying to help plan participants understand target-date strategies. Mary Beth Glotzbach of Morningstar, Inc. and Barb Hogg of Hewitt Associates discuss how to approach these communication issues, including how to apply behavioral finance for better outcomes as well as the basics of designing fund fact sheets and positioning of the strategies on the Web. This part also includes a discussion with Lori Lucas of Callan Associates and others on the costs associated with the setup and ongoing operation of custom target strategies.

Part 3: Designing and Benchmarking Custom Target-Date Strategies delves into the heart of this topic, sharing the many philosophies of asset allocation and glide-path design. It provides insights on glide-path structure from Mark Ruloff of Towers Watson and Thomas Idzorek of Ibbotson Associates as well as from a range of plan sponsors, including Georgette Gestely of the New York City Deferred Compensation Program, Barbara Kontje of American Express, Dan Holupchinski of Deluxe Corporation, and others. This part also features an in-depth examination of the range of asset classes, including traditional assets, such as stocks and bonds, as well as nontraditional assets, such as real estate and commodities. Most importantly, Part 3 shares strategies that show plan sponsors how better to protect DC assets in various economic environments, including market shocks and periods of significant inflation. Stuart Odell of Intel Corporation, Michael Riak of Verizon, and David Fisser of Southwest Airlines Pilots’ Association, among others, discuss this important topic. Finally, this part lays out the many approaches to benchmarking target date strategies, at both the glide-path and the asset level. Experts such as Mike Henkel of Envestnet Asset Management and Phil Suess of Mercer Investment Consulting consider market indices, peer group ranking, and other benchmarking approaches.

Plan sponsors who prefer to offer other custom strategies, such as target-risk, will still find this book valuable, as many of these issues are the same as target-date options. Further, even plan sponsors who choose to offer packaged off-the-shelf target-date strategies will undoubtedly find this book helpful as they evaluate products in the market or benchmark the selection they have already made for their plan.

SPEARHEADING THE NEED FOR MORE INFORMATION

For years, we at PIMCO have been dedicated to helping our clients and the consulting community build more successful DC plans, including examining the questions and issues facing plan sponsors regarding custom target retirement-date strategies. In our monthly PIMCO DC DialogueTM series, we have interviewed dozens of retirement leaders and innovators including consultants, academics, lawyers, financial advisors, not-for-profit chief executives, and, most important, plan sponsors from both the private and the public sectors. Working together with this community of dedicated professionals, we aim to improve retirement security for American workers. These individuals have generously allowed their comments and observations garnered in the PIMCO DC Dialogues to be a part of this book.

In the spring of 2008 and 2009, PIMCO joined Pensions and Investments in hosting a series of custom target retirement-date strategy summits where keynote speakers and panelists addressed plan sponsors, consultants, and the investment management community across the country in San Francisco, Dallas, Chicago, and New York City. In this book, we share insights and leading-edge research as well as investment strategies from a wide variety of individuals who generously participated in these summits. We also owe a debt of gratitude to the professionals at AllianceBernstein Investments, BlackRock, Inc., Capital Guardian Trust Company, Wellington Management, and UBS Global Asset Management, who also joined us in hosting this important summit series.

At PIMCO, we also have conducted several DC Consultant Surveys as well as a DC Recordkeeping Survey, all of which aim to help our clients select consultants and record keepers who can support their desired plan design. In 2008 we were delighted to have 32 consulting firms representing over $1.5 trillion in DC assets participate in our consulting survey. In addition, 30 record-keeping organizations administering combined assets of $1.6 trillion shared details about the support they offered. The data and observations from these surveys are cited in several parts of this book.

In addition, we write extensive retirement and investment papers, including our PIMCO DC Research, DC Analytics, and Viewpoint series. Research and observations from these series is also woven into the various parts of this book. Yet it is important to emphasize that this book does not focus only on the philosophies or investment suggestions of those at PIMCO. Rather, it provides an overview of various perspectives from across the industry. To provide objectivity and balance, each chapter of the book has been reviewed and edited by professionals across the country.

WHY ARE COMPANIES TURNING TO CUSTOM TARGET - DATE STRATEGIES ?

Four key reasons have been cited for why companies are creating their own custom target-date for their DC lineup:

Reason 1. Control of asset management. Custom target-date strategies enable companies to design their asset allocation or glide path (i.e., how the asset allocation changes as a participant approaches retirement age, generally becoming more conservative over time) and select their asset classes, leverage the core investment options offered within the plan, and retain the ability to modify their strategies over time. Custom strategies also give them the ability to hire and fire the underlying plan managers, just as they always have been able to do, within both their DC and defined benefit plans.

Reason 2. Fee reduction is another driver toward customization. Fees often are driven down by leveraging both core DC investment offerings and defined-benefit assets, as well as by using lower-cost investment structures (i.e., separately managed accounts, collective investment trusts, and institutionally priced mutual funds).

Reason 3. Companies want greater ease of communication with plan participants, which custom strategies help facilitate. Since the strategies are comprised of allocations to the core investment offerings in the plan, communication of the strategies to plan participants is relatively straightforward.

Reason 4. Companies want fiduciary oversight and transparency. Often plan sponsors think, “Well, if I’m outside of a prepackaged product and I create my own custom mix, I may be subjecting my firm to greater liability.” With target-date strategies, you can not only protect your firm but also achieve the greatest level of transparency into the investments and more.

Many consulting firms are already supporting companies interested in creating custom strategies. In fact, in a recent PIMCO survey we found that the majority of firms are willing to provide this type of support. Over three-quarters of them provide glide-path creation. The majority will act as a fiduciary while nearly half will assume responsibility as a discretionary investment manager. The decision to hire a consultant or someone else in the capacity of the fiduciary and investment manager of its target-date strategies can place an organization on equal if not stronger footing with companies that are using packaged target-date mutual funds. This is especially the case when the overall package is simply a better investment product, offering greater control, lower fees, best-in-class managers, and transparency.

In terms of creating custom strategies, 27 percent of consulting clients are offering custom asset-allocation strategies. While many of the largest organizations in the world offer custom strategies, an organization is not required to have large plan assets to enjoy the advantages of this type of strategy. In fact, even plans as small as $1 million are using custom target-date strategies. For the most part, whether an organization can set up target dates depends largely on the support provided by the plan’s record keeper.

KEY ISSUES INVOLVED IN OFFERING CUSTOM STRATEGIES

There are certain reasons why organizations may hesitate as they consider whether they should offer a custom strategy. According to the consultants we queried, here are the six key concerns expressed by plan sponsors.

1. Operational setup. Many companies are concerned about how difficult it may be to set up custom strategies. How much time it will take? Who is responsible for what?

2. Asset allocation and oversight. Another key issue involves the question of who is going to create the glide path and who will be responsible for overseeing it over time.

3. Asset size. Some plan sponsors may question whether their plan is large enough to make custom strategies viable.

4. Liability. Others may worry who will be liable for the investment structure if the target-date strategies do not perform well.

5. Time. Many are concerned with how much time it will take to implement the strategies and whether they have the resources to dedicate to this project.

6. Communication issues. Plan sponsors may have many questions about how to communicate the new strategies to participants.

This book addresses all of these issues and more by drawing on recent research as well as the expertise of experienced retirement leaders and innovators across the country.

Custom target retirement-date strategies make sense for many plan sponsors, especially from the standpoint of plan cost and investment management control. As assets grow in these strategies, the approach becomes even more critical. While custom strategies are new in some ways, the methods of supporting both operational needs and communications between plan sponsor and participant are not. For decades DC plans have created blended manager options and ably communicated these investment blends to participants. If you are interested in this investment approach, this book should be of great assistance to you. Its goal is not only to help you understand the value of custom strategies but also to provide expert guidance through the setup and ongoing monitoring of these important strategies. This book provides the support you need and suggests resources to help make custom strategies a reality in your plan. Most important, the support provided will help you create a more optimal DC plan with a greater promise of delivering retirement security for your workers.

Acknowledgments

The inspiration for this book came from the plan sponsor community, including those who have established custom target-date strategies as well as the many who are considering setting them up and wanted all of the in-depth details. In 2006, we wrote a research paper entitled “A Sensible Approach to Custom Target Retirement-Date Strategies,” which was our first attempt to bring together experts to answer the many questions raised about establishing these types of strategies. Since that time, we have also written numerous PIMCO DC Dialogue pieces that have addressed a broad range of defined-contribution plan design topics, including custom target strategies. This book brings together the ideas of the many experts who contributed to the initial research paper, the Dialogues and summits, as well as others who have written independently on DC design or related issues.

Many people have contributed significantly to the creation of this book. Joy Parker, my collaborator and editor, encouraged the pursuit of this project and then worked with me tirelessly over the last year to make it a reality. Joy has done an outstanding job as the editor of our Dialogues for years, so her understanding of the issues and concerns shared in those pieces helped tremendously as she helped bring each chapter of this book to life. Summer intern Charlie Leisure, a bright student attending Georgetown University, helped lay out the chapters and identified the relevant content from three years of Dialogues and research papers.

My deepest appreciation is extended to the plan sponsors who have pioneered and led the way for others in creating custom strategies and have spent many, many hours of their time sharing the details via Dialogues, summits, and other forums. These plan sponsors include Karen Barnes at McDonald’s® Corporation, Charles Claudio at Ahold USA, Inc., David Fisser with Southwest Airlines Pilots’ Association, Georgette Gestely with New York City Deferred Compensation Program, Dan Holupchinski at Deluxe Corporation, Barbara Kontje with American Express, John LaCara (formerly the director of the Commonwealth of Massachusetts Deferred Compensation Program), Charlene Mims at Dole Foods Company, Stuart Odell with Intel Corporation, and Michael Riak with Verizon.

In addition, each chapter of this book brought together many experts, including a few who provided an in-depth review of the content. Special appreciation goes to David Wray, president of the Profit Sharing/401(k) Council of America, for endless data, review of material, and passionate support of DC plans; Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute for research and insights; and Pamela Hess, director of retirement research at Hewitt Associates. I also wish to thank the many others at Hewitt who provided invaluable input: Director of Retirement Communication Barb Hogg; DC Leadership Director Curt Young; and Mike Dubois, Jim McGhee (retired target-date operations expert), and Lisa Horuczi Markus (formerly of Hewitt) for providing survey data and careful review of the plan design, communication, operations, and advice chapters. I am also grateful to Matthew Rice, principal and chief research officer of DiMeo Schneider & Associates, LLC, as well as Thomas Eichenberger of State Street Corporation and Marianne Sullivan of ING Retirement Services for providing a foundation for and review of the record-keeping and trust chapter; Mary Beth Glotzbach at Morningstar, Inc. for review and content support of the communication chapter; Marla Kreindler and Julie Stapel at Winston & Strawn LLP for the review of the legal chapter and their input on several other parts of the book; Lori Lucas, DC practice leader at Callan Associates, for many helpful studies, suggestions, and chapter reviews, in particular, of the chapter on evaluating costs; Thomas Idzorek, chief investment officer at Ibbotson Associates, Mark Ruloff, director of asset allocation at Towers Watson, Joseph Simonian, DC analytics leader at PIMCO, and Somnath Basu, professor at California Lutheran University, for contributing to content, analytics and review of the glide-path chapter; Ross Bremen and Rob Fishman, partners at NEPC, Rob Arnott, chairman of Research Affil-iates, LLC, and Deena Katz, associate professor at Texas Tech University, for their help with asset classes and alternatives.

Additionally, I wish to thank Zvi Bodie, professor at Boston University, and Anna Rappaport, chairperson of the Society of Actuaries Committee on Post-Retirement Needs and Risks (among many other roles), for their wisdom, counsel, and insights on helping to protect participant assets. Thanks also to Mike Henkel, managing director at Envestnet Asset Management; Matt Ketchum, director at UBS Global Asset Management; Josh Cohen, senior consultant at Russell Investment Group; and Kamila Kowalke, formerly at Dow Jones Indexes, for their addition to content as well as their review of the benchmarking chapter; to Marv Tuttle, CEO, along with Lauren Schadle and Lance Richlin of the Financial Planning Association, for their inspiration, addition to content, and review of the advice and retirement planning material. Finally, I wish to thank Chris Raham, senior actuarial advisor at Ernst &Young, Jody Strakosch, national director at MetLife, Kelli Hueler, CEO of Hueler Companies, and Tom Streiff, retirement income leader at PIMCO, for their contributions and review of the final chapter on retirement income and guarantees.

Others to whom I am grateful for their contribution to this book include James Delaplane, Jr., partner at Davis & Harman, LLP, for his insights on the legislative landscape; Kurt Walten, senior vice president at the National Association of Real Estate Investment Trusts, Inc., for contributions to the real estate content; economic thought leaders and professors Richard Thaler at the University of Chicago, Shlomo Benartzi at UCLA, Sheena Iyengar at Columbia University, Jodi DiCenzo at Behavior Research Associates, LLC, Olivia S. Mitchell at the Wharton School of the University of Pennsylvania, and Paul Solman at the PBS NewsHour and Yale University, for their writings, research, and insights. I also wish to express my thanks to many in the consulting and advisory community for their contribution to content and thought leadership, including Kevin Vandolder, principal at Ennis, Knupp & Associates; Norman Boone, president of Mosaic Financial Partners, Inc.; Peter Grant, consultant at Towers Watson; Phil Enochs at Russell Investment Group; Phil Suess at Mercer Investment Consulting; Roger Williams, managing director at Rogerscasey; Steve Charlton, partner at NEPC; Charles Stunkard and Matt Radgowski at Wilshire Associates; and Susan Bradley, CEO of Sudden Money Institute.

I also extend a debt of gratitude to PIMCO leadership, including Tom Otterbein and John Miller, for their support of this project. As well as to others on our excellent professional team at PIMCO who individually invested time and energy, including adding to content, editing, designing, and listening to me talk endlessly about this project:

Chistopher Abram Candi Barbour Greg Bishop John Cavalieri Audrey Cheng Eugene Colter Bret Estep Steve Ferber Kevin Forhane Jana Fox Ying Gao Zoya Graves

Bob Greer Jessie Lombardi Erika Magaña Suzanne Oden Mark Olsen Mark Porterfield Marianne Shaver Doug Schwab Christina Stauffer Tom Streiff Joseph Yeon Den Pestarino

While I cannot name every person, I would like to thank all of the professionals who participated in the Pensions & Investments Target Date Summits as well as those at P&I, including publisher Chris Battaglia, for their support of these important programs. Chris’s encouragement of this project led to my introduction to literary agent Cynthia Manson and the interest in the book by John Wiley & Sons. Further, a large thank-you to David Pugh, Natasha Andrews-Noel, Emilie Herman, Tiffany Charbonier and others at John Wiley & Sons for editing and publishing this book.

Finally, my heartfelt thanks go to my family for the patience and support of this project, especially the many late nights and weekend hours that could have been spent with them.

PART One

DC Plan Evolution and Design Trends

CHAPTER 1

DC Plans in the American Retirement System

Someone once called defined contribution (DC) plans one of the “great social experiments of our time.” For many people, a DC plan is the only company-sponsored retirement plan they have, and for this reason, plan effectiveness needs to be more than merely an “experiment.” People need these plans to function because most will depend on them to provide adequate retirement income. The plans should also be designed to realistically take into account factors such as inflation.