Successful Defined Contribution Investment Design E-Book

Stacy L. Schaus

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

Seitenzahl: 573

Veröffentlichungsjahr: 2017

Beschreibung

Start-to-finish guidance toward building and implementing a robust DC plan Successful Defined Contribution Investment Design offers a comprehensive guidebook for fiduciaries tasked with structuring and implementing a 401(k) or other defined contribution (DC) pension plan. More than a collection of the usual piecemeal information, this book seeks to offer a complete, contemporary framework for plan design, together with tested methodologies and analytic techniques to help streamline plan monitoring, management and improve participant outcomes. Examples from plan sponsors provide on-the-ground insight while suggestions from DC consultants add expert perspective. Views from ERISA expert counsel provide additional understanding--along with input from academic thought leaders. Finally, investment evaluation and analysis is joined with participant savings and asset allocation data to look prospectively at potential outcomes, and case studies illustrate real-world implementation of objective-aligned asset allocation such as custom target-date strategies. Though the focus is primarily on U.S. plan design, author perspectives from countries including Australia, the United Kingdom and Canada provide relevant and helpful viewpoints for both new and experienced plan fiduciaries. For the vast majority of workers, DC plans have replaced traditional defined benefit pension plans as the primary source of employer-provided retirement income. This book provides comprehensive guidance to help you construct a plan to help workers to retire with confidence. * Adopt a framework for DC evaluation and structure * Learn new methodologies for investment choice evaluation * Use the innovative PIMCO Retirement Income Cost Estimate--or PRICE--to help quantify the amount of money a worker needs to create and stay on track to building a real income stream in retirement * Examine methodologies used at major companies in the U.S. and globally DC plans are the most rapidly growing retirement market in the world, yet sources of consolidated structural and analytical guidance are lacking. Successful Defined Contribution Investment Design fills the gap with a comprehensive handbook that covers the bases to help you develop an objective-aligned defined contribution plan.

Leseprobe

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Successful Defined Contribution Investment Design

How to Align Target-Date, Core, and Income Strategies to the PRICE of Retirement

STACY L. SCHAUS, CFP® with

YING GAO, Ph.D., CFA, CAIA

Cover image: palm trees © mervas/Shutterstock; beach © Mikadun/Shutterstock

Cover design: Wiley

Copyright © 2017 by Pacific Investment Management Company LLC, Writer, Stacy L. Schaus, CFP. All rights reserved.

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-119-29856-4 (Hardcover/)

ISBN 978-1-119-30254-4 (ePDF)

ISBN 978-1-119-30256-8 (ePub)

This book is dedicated to all of the plan sponsors and defined contribution professionals who inspire us with your commitment to improve retirement security; to my husband, John, and children, Robert and Julia, and to all of our families and yours.

Disclosure

The author of this book is employed by Pacific Investment Management Company, LLC (PIMCO) at time of publication. The views contained herein are the author’s 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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This publication contains a general discussion of defined contribution plans and is intended for plan sponsors of such plans. The analysis contained herein does not take into consideration any particular investor’s or plan’s financial circumstance, objectives, or risk tolerance. Investments discussed may not be suitable for all investors or plans.

This book may contain hypothetical simulated data and is provided for illustrative purposes only. Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

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. This book includes discussions of financial concepts that are theoretical in nature such as the “risk-free rate” or “risk-free asset”; 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.

CONTENTS

Acknowledgments

Introduction

HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT

A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION

WHY SHOULD YOU READ THIS BOOK?

PART ONE DC Plans: A Cornerstone of Retirement

CHAPTER 1 DC Plans Today: An Overview of the Issues

PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN

DC PLANS: BECOMING THE NEW REALITY . . . NO TURNING BACK

SETTING GOALS FOR SUCCESS: INCOME REPLACEMENT TARGETS

REDUCING DC LITIGATION RISK: PROCESS AND OVERSIGHT

WHO’S A FIDUCIARY?

HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES

HIRING AN INVESTMENT CONSULTANT

GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE

PIMCO PRINCIPLES FOR DC PLAN SUCCESS: BUILDING AND PRESERVING PURCHASING POWER

MAXIMIZING DC SAVINGS: JUST DO IT!

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

CHAPTER 2 Aligning DC Investment Design to Meet the PRICE of Retirement

BEGIN WITH THE END IN MIND

WHAT IS A REASONABLE PAY REPLACEMENT TARGET?

CALCULATING THE INCOME REPLACEMENT RATES

HISTORIC COST OF RETIREMENT: PRICE IS A MOVING TARGET

A FOCUS ON INCOME, NOT COST

PRICE-AWARE: APPLYING PRICE TO CONSIDER DC ASSETS AND TARGET-DATE STRATEGIES

EVALUATING GLIDE PATHS

TRACKING DC ACCOUNT BALANCE GROWTH RELATIVE TO PRICE

SUMMARY: THE IMPORTANCE OF KNOWING YOUR PRICE

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

NOTE

CHAPTER 3 Plan Investment Structure

TIERS AND BLENDS: INVESTMENT CHOICES FOR DC PARTICIPANTS

TIER I: “DO-IT-FOR-ME” ASSET ALLOCATION INVESTMENT STRATEGIES

TIER II: “HELP-ME-DO-IT” STAND-ALONE OR “CORE” INVESTMENT OPTIONS

TIER III: “DO-IT-MYSELF” MUTUAL-FUND-ONLY OR FULL BROKERAGE WINDOW

CONSIDERING AN OUTSOURCED CHIEF INVESTMENT OFFICER

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

NOTES

CHAPTER 4 Target-Date Design and Approaches

TARGET-DATE STRUCTURES VARY BY PLAN SIZE

CUSTOM TARGET-DATE STRATEGIES

SEMICUSTOM TARGET-DATE

PACKAGED TARGET-DATE

TARGET-DATE SELECTION AND EVALUATION CRITERIA

NO SUCH THING AS PASSIVE

LOW COST AND LOW TRACKING ERROR DOES NOT EQUAL LOW RISK

FRAMEWORK FOR SELECTING AND EVALUATING TARGET-DATE STRATEGIES: THREE ACTIVE DECISIONS PLAN SPONSORS MUST MAKE

ACTIVE DECISION #1: HOW MUCH RISK CAN PLAN PARTICIPANTS TAKE?

ACTIVE DECISION #2: HOW IS THE RISK BEST ALLOCATED ACROSS INVESTMENT CHOICES?

ACTIVE DECISION #3: SHOULD RISK BE ACTIVELY HEDGED?

TAIL-RISK HEDGING STRATEGIES

INSURANCE

TARGET-DATE ANALYTICS: GLIDE PATH ANALYZER (GPA) AND OTHER TOOLS

GLOBAL DC PLANS: SIMILAR DESTINATIONS, DISTINCTLY DIFFERENT PATHS

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

NOTES

PART TWO Building Robust Plans: Core Investment Offerings

CHAPTER 5 Capital Preservation Strategies

CAPITAL PRESERVATION: IMPORTANCE

CAPITAL PRESERVATION: WHAT IS PREVALENT AND WHAT IS PREFERRED?

THE $1 NAV: SHARED BY STABLE VALUE AND MMFs

STABLE VALUE OFFERS MORE OPPORTUNITY IN A LOW-INTEREST-RATE ENVIRONMENT

LOOKING FORWARD: THE CHANGING ROLE OF STABLE VALUE

MAKING LOW-RISK DECISIONS: VIEWS FROM THE FIELD

WHITE LABELING: A CAPITAL PRESERVATION SOLUTION

AN ANALYTIC EVALUATION OF CAPITAL PRESERVATION SOLUTIONS

SHORT-TERM, LOW-DURATION, AND LOW-RISK BOND STRATEGIES

INCLUSION OF STABLE VALUE IN CUSTOM TARGET-DATE OR OTHER BLENDED STRATEGIES

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

NOTE

CHAPTER 6 Fixed-Income Strategies

WHAT ARE BONDS, AND WHY ARE THEY IMPORTANT FOR RETIREMENT INVESTORS?

WHAT ARE THE DIFFERENT TYPES OF BONDS IN THE MARKET?

WHAT TYPES OF BONDS SHOULD BE OFFERED TO DC PARTICIPANTS?

INVESTMENT-GRADE AND HIGH-YIELD CREDIT

BOND INVESTMENT STRATEGIES: PASSIVE VERSUS ACTIVE APPROACHES

ANALYTIC EVALUATION: COMPARING BOND STRATEGIES

OBSERVATIONS FOR FIXED INCOME ALLOCATION WITHIN TARGET-DATE STRATEGIES

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

CHAPTER 7 Designing Balanced DC Menus: Considering Equity Options

WHAT ARE EQUITIES AND HOW ARE THEY PRESENTED IN DC INVESTMENT MENUS?

GETTING THE MOST OUT OF EQUITIES

CONSIDER DIVIDEND-PAYING STOCKS

EVALUATING EQUITY STRATEGIES

LESS IS MORE: STREAMLINING EQUITY CHOICES

SHIFT TO ASSET-CLASS MENU MAY IMPROVE RETIREMENT OUTCOMES

ACTIVE VERSUS PASSIVE—THE ONGOING DEBATE

STRATEGIC BETA: CONSIDER ADDING FUNDAMENTALLY WEIGHTED EQUITY EXPOSURE

CURRENCY HEDGING: AN ACTIVE DECISION

OBSERVATIONS FOR EQUITY ALLOCATIONS WITHIN TARGET-DATE STRATEGIES

IN CLOSING

QUESTIONS FOR FIDUCIARIES

NOTE

CHAPTER 8 Inflation Protection

WHAT IS INFLATION AND HOW IS IT MEASURED?

WHY INFLATION PROTECTION IN DC?

HISTORY OF INFLATION: INFLATION SPIKES UNDERSCORE NEED FOR INFLATION-HEDGING ASSETS

INFLATION PROTECTION WHEN ACCUMULATING AND DECUMULATING, AND IN DIFFERENT ECONOMIC ENVIRONMENTS

ECONOMIC ENVIRONMENTS CHANGE UNEXPECTEDLY—AND REWARD OR PUNISH VARIOUS ASSET CLASSES

CONSULTANTS FAVOR TIPS, MULTI-REAL-ASSET STRATEGIES, REITS, AND COMMODITIES

HOW SHOULD PLAN SPONSORS ADDRESS INFLATION RISK IN DC PORTFOLIOS?

IMPLEMENTATION CHALLENGES

EVALUATING REAL ASSET STRATEGIES

SUMMARY COMPARISON OF INDIVIDUAL AND MULTI-REAL-ASSET BLENDS

INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS

OBSERVATIONS FOR INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS

IN CLOSING

QUESTIONS FOR FIDUCIARIES

CHAPTER 9 Additional Strategies and Alternatives: Seeking Diversification and Return

WHAT ARE ALTERNATIVE ASSETS?

A WIDER LENS ON ALTERNATIVES

CONSULTANT SUPPORT FOR ADDITIONAL STRATEGIES AND ALTERNATIVES

BACK TO BASICS: WHY CONSIDER ALTERNATIVES?

LIQUID ALTERNATIVES: TYPES AND SELECTION CONSIDERATIONS

IMPORTANT CHARACTERISTICS IN SELECTING ALTERNATIVES: CONSULTANT VIEWS

ILLIQUID ALTERNATIVES: TYPES AND CONSIDERATIONS

CONTRASTING LIQUID ALTERNATIVE STRATEGIES WITH HEDGE FUND AND PRIVATE EQUITY INVESTMENTS

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

PART THREE Bringing It All Together: Creating Retirement Income

CHAPTER 10 Retirement Income: Considering Options for Plan Sponsors and Retirees

ADVISOR AND CONSULTANT RETIREMENT INCOME SUGGESTIONS

WHY DON’T RETIREES LEAVE THEIR ASSETS IN DC PLANS AT RETIREMENT?

RETAINING A RELATIONSHIP WITH YOUR EMPLOYER IN RETIREMENT: AN INNOVATIVE AND CARING PLAN SPONSOR

MUTUAL BENEFITS: RETAINING RETIREE ASSETS MAY HELP BOTH RETIREES AND PLAN SPONSORS

TURNING DC ASSETS INTO A LIFETIME PAYCHECK: EVALUATING THE DC INVESTMENT LINEUP FOR RETIREE READINESS

EVALUATING PORTFOLIO LONGEVITY

TURNING DEFINED CONTRIBUTION ASSETS INTO A LIFETIME INCOME STREAM: HOW TO EVALUATE INVESTMENT CHOICES FOR RETIREES

GUARDING RETIREE ASSETS AGAINST A SUDDEN MARKET DOWNTURN: SEQUENCING RISK

WAYS TO MANAGE MARKET AND LONGEVITY RISK . . . WITHOUT ADDING IN-PLAN INSURANCE PRODUCTS

LIVING BEYOND 100: PLANNING FOR LONGEVITY

MANAGING LONGEVITY RISK: CONSIDERATIONS FOR BUYING AN ANNUITY

IMMEDIATE AND DEFERRED ANNUITIES: WHY OUT-OF-PLAN MAKES SENSE

IN CLOSING

QUESTIONS FOR PLAN FIDUCIARIES

NOTES

CHAPTER 11 A Global View: The Best Ideas from around the Globe for Improving Plan Design

DC PLANS: BECOMING THE DOMINANT GLOBAL MODEL

RETIREMENT PLAN COVERAGE AND PARTICIPATION

INVESTMENT DEFAULT AND GROWTH OF TARGET-DATE STRATEGIES

RETIREMENT INCOME: THE GLOBAL SEARCH FOR SOLUTIONS

DEFINED AMBITION IN THE NETHERLANDS

NEW SOLUTIONS IN AUSTRALIA AND BEYOND: TONTINES AND GROUP SELF-ANNUITIZATION

“GETTING DC RIGHT”: LESSONS LEARNED IN CHAPTERS 1 THROUGH 10

ANALYTIC FACTORS TO CONSIDER: SUMMARY BY ASSET PILLAR

IN CLOSING

NOTE

Closing Comments

PRIORITY 1: INCREASING PLAN COVERAGE AND INDIVIDUAL SAVINGS RATES

PRIORITY 2: MOVING TO OBJECTIVE-ALIGNED INVESTMENT APPROACHES

PRIORITY 3: BROADENING OPTIONS FOR RETIREMENT INCOME

NUDGING ONE ANOTHER ALONG A PATH TO SUCCESS

Index

EULA

List of Tables

CHAPTER 2

FIGURE 2.2

Expected Retirement Income from Public Pension

FIGURE 2.7

Cost for Future Retirement Income Stream

FIGURE 2.9

Estimated Income Replacement from Various Levels of Savings

CHAPTER 3

FIGURE 3.9

Comparing the Characteristics of Three Approaches to Investment Plan Design

FIGURE 3.13

Mutual Fund and Collective Investment Trust Fund Fee Differentials on an Assumed $50 Million Mandate

FIGURE 3.14

Comparison of Mutual Funds and Collective Trusts (CITs): Similar but Not Identical

FIGURE 3.16

Challenges in White-Label/Multimanager Investment Options

FIGURE 3.17

Factors Driving Growth in Delegated Services

FIGURE 3.18

Top Discretionary Services Growth and Availability by DC Plan Consultants

CHAPTER 4

FIGURE 4.2

Consultants’ View on Selection of Target Dates

FIGURE 4.9

Reports from Glide Path Analyzer

CHAPTER 5

FIGURE 5.7

Capital Preservation Strategies and Index Proxies

CHAPTER 6

FIGURE 6.13

Diversifying Approaches May Improve Risk and Return Opportunities

FIGURE 6.14

A Summary of Diversifying Fixed-Income Strategies and Benefits

FIGURE 6.15

Market Average Glide Path and Objective-Aligned Glide Path

CHAPTER 7

FIGURE 7.4

Lineup Design May Have Meaningful Influence on Asset Allocation Decisions

FIGURE 7.9

Performance and Risk Comparison for U.S. Large-Cap, Non-U.S. Developed, and Emerging Market Equities

FIGURE 7.11

How Different Equities Compare across Key Measures

FIGURE 7.12

Performance and Risk Comparison of Current Equity Portfolio and Consolidated Equity Portfolio

FIGURE 7.15

Strategy Performance and Risk Comparison

FIGURE 7.17

Top Performing Equity Managers Outperform Their Passive Peer Average

FIGURE 7.18

Add Fundamentally Weighted Equity Indexes

FIGURE 7.20

Consultants’ Views on Currency Hedging

FIGURE 7.22

Glide Path Allocation to Equities

CHAPTER 8

FIGURE 8.8

Key Questions and Metrics We Believe Plan Sponsors Should Evaluate

FIGURE 8.9

How Different Asset Classes Compare across Key Measures

FIGURE 8.11

Diversifying Real Asset Strategies and Index Proxies

FIGURE 8.12

Adding Inflation-Related Assets to a Traditional Nominal Stock and Bond Mix May Improve Portfolio Diversification (From January 1997 to December 2015)

FIGURE 8.13

Glide Path Allocation to Inflation-Hedging Assets

CHAPTER 9

FIGURE 9.1

Investment Strategies Defined as “Alternatives” by Consultants

FIGURE 9.10

Important Characteristics in Selecting Alternatives

CHAPTER 10

FIGURE 10.4

Consultants Report on Primary Concerns with In-Plan Insurance Products

FIGURE 10.5

Consultants Report on What Actions Plan Sponsors Should Take to Encourage Retirees to Retain Their Assets in the Plan

FIGURE 10.6

Asset Allocations: Target-Dates (At-Retirement Vintage) and Diversified Fixed Income

CHAPTER 11

FIGURE 11.5

Summary Evaluation Metrics

List of Illustrations

CHAPTER 1

FIGURE 1.1

Consider Distribution of Potential Income-Replacement Outcomes: Identify Both Target and Failure

CHAPTER 2

FIGURE 2.1

My 2013 Meeting with Dr. Harry Markowitz

FIGURE 2.3

Immediate Annuity Income: Real Payout Rate versus Nominal Payout Rate

FIGURE 2.4

Correlation of Real Annuity Rates with TIPS Ladder Retirement Income

FIGURE 2.5

Real Income in Retirement from a TIPS Ladder

FIGURE 2.6

PRICE Is a Moving Target: How Much Does a Participant Need to Replace 30 Percent of Final Pay?

FIGURE 2.8

Price Multiplier for Different Age Groups

FIGURE 2.10

S&P Index versus Retirement Liability

FIGURE 2.11

Long-Duration TIPS versus Retirement Liability

FIGURE 2.12

Considering Absolute Risk of Selected Assets versus Risk Relative to Retirement

FIGURE 2.13

Glide Path Asset Allocation

FIGURE 2.14

Correlation between Glide Paths and Retirement Liability

FIGURE 2.15

Accumulated Real Balance

FIGURE 2.16

Excess Return versus Tracking Error to Price (February 2004– December 2015)

FIGURE 2.17

Probability of Failure (Income Replacement Ratio <30 Percent)

CHAPTER 3

FIGURE 3.1

A Sample Diversified Glide Path Allocation

FIGURE 3.2

Indicative Glide Path of NEST Retirement Date Funds

FIGURE 3.3

U.S. Market Returns, 1981–2000

FIGURE 3.4

Typical DC Core Menu Choices—Driven by Bull Markets and a Need to “Fill the Style Box”

FIGURE 3.5

PIMCO Defined Contribution Consulting Support and Trends Survey 2016: What Is the Optimal Number of Core Menu Options?

FIGURE 3.6

Asset Class Performance Is Dependent on the Economic Environment

FIGURE 3.7

Balancing Investment Menu Risk by Adding Diversifying Assets

FIGURE 3.8

Core Lineup Trends in DC Plans: From Style-Box Focus to Risk-Pillar Focus

FIGURE 3.10

Active versus Passive Approaches in DC Plans

FIGURE 3.11

PIMCO Defined Contribution Consulting Support and Trends Survey 2016: The Importance of Active Management in DC Plans

FIGURE 3.12

Consultant Views on Management Approaches for Various Investment Strategies

FIGURE 3.15

Traditional and White-Label/Multimanager Investment Options Compared

CHAPTER 4

FIGURE 4.1

What Type of Target-Date Offering Will Be Selected Most by Plan Sponsors?

FIGURE 4.3

Consultants Suggest a DC Plan May Need to Replace 60 Percent of Final Pay

FIGURE 4.4

Suggested Process for Asset Allocation Strategy Selection or Creation

FIGURE 4.5

Participant Risk Capacity: How Much Can Participants Afford to Lose and Still Retire on Time?

FIGURE 4.6

Accumulated Real Account Balance: Staying the Course versus Moving to Stable Value

FIGURE 4.7

Market Average Glide Path versus Objective-Aligned Glide Path A. Market Average Glide Path B. Objective-Aligned Glide Path

FIGURE 4.8

Risk Factor Decomposition of Tracking Error

FIGURE 4.10

Which Is the Most Attractive Income Replacement Distribution?

FIGURE 4.11

Australian Balanced Allocation

FIGURE 4.12

UK Traditional Lifestyle Glide Path Allocation

CHAPTER 5

FIGURE 5.1

The Four Pillars of Well-Balanced Core Lineups

FIGURE A:

Impact of Money Market Reform on DC Plans

FIGURE 5.2

True Capital Preservation Needs to Include the Protection of Purchasing Power

FIGURE 5.3

Market Value of Underlying Investments Fluctuates, but a Stable Value Investment Option’s Assets Grow at a More Constant Rate

FIGURE 5.4

Stable Value Has Delivered More Return and Less Volatility Than Money Market Funds

FIGURE 5.5

Historical Performance of Money Markets, Stable Value, Short-Term, Low-Duration, and Low-Risk Blend Strategies (January 2006–December 2015)

FIGURE 5.6

Strategy’s Performance and Risk Comparison

FIGURE 5.8

Market Average Glide Path B. Market Average Glide Path with Stable Value Market Average Glide Path versus Market Average Glide Path with Stable Value

FIGURE 5.9

Potential Loss

FIGURE 5.10

Estimated Longevity

CHAPTER 6

FIGURE 6.1

History of Interest Rates and DC Plans

FIGURE 6.2

The Composition of the Global Bond Market, 2016

FIGURE 6.3

Balancing Investment Menu Risk by Adding Diversifying Fixed Income Assets

FIGURE 6.4

Consultants’ Recommended Fixed Income Offerings

FIGURE 6.5

Decline in Yield on BAGG Index (1996–2015) Shows That Forward-Looking Expected Returns Are Lower

FIGURE 6.6

Comparing Yields across Asset Classes

FIGURE 6.7

Global Bond Diversification

FIGURE 6.8

Composition of Barclays U.S. Aggregate Index

FIGURE 6.9

Plan Sponsors Prefer Active Management for Fixed Income by a Wider Margin Than for Equities

FIGURE 6.10

Active Core Bond Management May Improve Risk and Return

FIGURE 6.11

The Largest Actively Managed Strategies Have Beaten the Barclay’s Aggregate over the Past 28 Years

FIGURE 6.12

Decline in Yield and Rise in Duration of BAGG Index (2007–2015) Demonstrates Changing Risk Profile of Indices over Time

CHAPTER 7

FIGURE 7.1

Equity Style Box

FIGURE 7.2

2016 DC Consulting Trends Survey—Investment Recommendations: Equity

FIGURE 7.3

Equity Investment Trends

FIGURE 7.5

Correlation among Equity Styles Has Increased

FIGURE 7.6

Evolution of DC Plan Core Investment Structure

FIGURE 7.7

Size of Global Stock Markets

FIGURE 7.8

Emerging Markets Are Growing Fastest

FIGURE 7.10

Divided-Paying Equities May Be an Attractive Long-Term Income Solution

FIGURE 7.13

A Typical DC Core Menu Is Dominated by Domestic Equity Risk

FIGURE 7.14

Consolidate Domestic Equity Options and Add Global

FIGURE 7.16

Consultants Underscore Importance of Active Management for Equity

FIGURE 7.19

Portfolio’s Performance and Risk Comparison

FIGURE 7.21

Why Should Plan Sponsors Consider Hedging Their Non-U.S. Currency Exposure?

CHAPTER 8

FIGURE 8.1

Inflation Can Cripple Purchasing Power in Retirement

FIGURE 8.2

The Rising Cost of a Dollar over Time

FIGURE 8.3

U.S. Inflation 1900–2015

FIGURE 8.4

Asset Class Performance in Various Market Environments

FIGURE 8.5

During an Inflationary Environment, Commodities Outperform Other Asset Classes

FIGURE 8.6

Consultant Support for Inflation-Fighting Assets

FIGURE 8.7

A Range of Inflation-Hedging Strategies for Consideration

FIGURE 8.10

Real Asset Diversification for Inflation Protection

Figure A

Comparing Different Inflation-Hedging Assets

CHAPTER 9

FIGURE 9.2

Equity Risk Dominates Traditional Portfolios

FIGURE 9.3

Consultant Support for Additional Strategies and Alternatives

FIGURE 9.4

Defined Benefit and Defined Contribution Plan Returns

FIGURE 9.5

Alternatives May Improve the Efficient Frontier

FIGURE 9.6

Liquid Alternatives Come to Main Street

FIGURE 9.7

The Liquid Alternatives Landscape

FIGURE 9.8

Risks Are Often Idiosyncratic

FIGURE 9.9

In Alternative Strategies, Manager Skill Plays an Important Role

FIGURE 9.11

Liquid Alternatives Fees and Expenses Range Widely

FIGURE 9.12

Overview and Merits of Hedge Funds, Private Equity, and Real Estate Alternatives

FIGURE 9.13

Comparing the Benefits of Various Liquid Alternative Strategies

CHAPTER 10

FIGURE 10.1

Plan Sponsor Attitudes toward Retaining Client Assets at Retirement

FIGURE 10.2

Consultants Report on Support for Retirement Income Strategies

FIGURE 10.3

Retiree Assets May Be Building in Target-Date Strategies

FIGURE 10.7

Four Retirement Income Strategies and Their Correlation to PRICE

FIGURE 10.8

Four Retirement Income Strategies: Excess Return versus Tracking Error Relative to PRICE

FIGURE 10.9

Four Retirement Income Strategies: Downside Risk (VaR 95 Percent)

FIGURE 10.10

Asset Longevity in Retirement: 50 Percent Final Salary Annual Withdrawal Rate

FIGURE 10.11

Asset Longevity in Retirement: 30 Percent Final Salary Annual Withdrawal Rate

FIGURE 10.12

Four Retirement Income Strategies: Inflation Beta*

FIGURE 10.13

Extreme Events Occur More Often Than “Normal” Risk Models Predict

FIGURE 10.14

Out-of-Plan Annuity Buying Program May Offer More Advantages

CHAPTER 11

FIGURE 11.1

Retirement Plan Structures Vary Globally

FIGURE 11.2

Auto-Enrollment Improves DC Plan Participation Rates

FIGURE A

Non-ERISA and ERISA-Covered State Retirement Plan Approaches

FIGURE B

State-Administered Retirement Plans, Summary of Passed Initiatives

FIGURE 11.3

Target-Date Fund Strategies Capture Growing Share of Participant Account Balance

FIGURE 11.4

Tenure’s Impact on Target-Date Fund Usage and Average Balance

Closing Comments

FIGURE 1

FIGURE 2

Guide

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Acknowledgments

This volume was brought into being as a result of countless conversations about the increasing importance of defined contribution pension plan design for workers around the globe. My first volume, Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path, was published in 2010 and focused on designing and implementing custom target-date strategies within DC plans. This volume, in turn, broadens and deepens the dialogue about plan design—looking not only at custom target-date strategies, but also the whole of DC investment design from governance to investment defaults, through the core lineup and ending with retirement income. My goal in preparing this book is to further contribute to plan sponsors’, consultants’, and other professionals’ understanding of how to design a DC plan to help participants succeed in building adequate and sustainable retirement income.

Like its predecessor, this book is the result of extensive collaboration and participation among a very long list of colleagues, plan sponsors, consultants, lawyers, and investment and other DC professionals. Among my colleagues, Ying Gao, PhD, CFA, CAIA is noted on the cover as she has worked tirelessly over the past six years in developing and enhancing the PIMCO DC analytic toolset, including the methodology for PRICE. We worked together in coauthoring a long list of DC design papers; analytic work from these papers is updated and woven into the analytic sections of the book. Outside of PIMCO, I worked closely with talented financial editor Alexandra Macqueen CFP®, who skillfully guided the project and helped shape, refine, and polish every chapter. Her financial depth of understanding, coupled with superb writing skills, eased the process and improved the book’s readability.

Once again I extend my deepest gratitude to the plan sponsors whose passionate work to “get DC right” has paved the way for increasing the retirement success of workers today and tomorrow, and who have shared the details of their plan design through our PIMCO DC Dialogues and in the various summits, forums, conferences, and other ways in which they keep the DC conversation alive. My gratitude extends to Karin Brodbeck at Nestlé, USA; Judy Mares, formerly of Alliant Techsystems Inc. (now part of Orbital); Stuart Odell at Intel Corporation; Brad Leak, CFA of The Boeing Company; Sharon Cowher and Christine Morris at Halliburton; Cindy Cattin at Exelon Corporation; Karen Barnes of McDonald’s Corporation; Gary Park at Schlumberger; Dan Holupchinski formerly of Deluxe Corporation; Dave Zellner at Wespath Benefits and Investments (formerly United Methodist Church); Georgette Gestely at New York City Deferred Compensation Program; David Fisser formerly of Southwest Airline Pilots’ Association; and Pete Apor at Fujitsu.

Each chapter of this book delves into a specific topic and I have called upon the insights and expertise of many experts to review and comment on the content. For this volume, my appreciation for their assistance and global plan pension design insights, both in the opening and close of the book, extends to Brigitte Miksa, Head of International Pensions, and Greg Langley, Editor-in-Chief, Allianz PROJECT M, both of Allianz Asset Management AG; Sabrina Bailey, Global Head of Defined Contribution at Northern Trust Asset Management; and former PIMCO colleague Will Allport. For plan and investment design, I’m thankful for the expertise and careful review by Lori Lucas, DC Practice Leader at Callan Associates; Matthew Rice, Chief Investment Officer at DiMeo Schneider and Associates, LLC; Kevin Vandolder, DC Client Practice Leader, Partner, Investment Consulting, and Bill Ryan, Associate Partner at Aon Hewitt Investment Consulting; Ross Bremen, Rob Fishman, and Tim McCusker, partners at NEPC; Thomas Idzorek, Chief Investment Officer at Ibbotson Associates; Mark A. Davis, Senior Vice President, Financial Advisor at CAPTRUST Financial Advisors; Philip Chao, Pension Consultant and Chief Investment Officer at Chao & Company; Donald Stone, Director of DC Strategy and Product Development and Senior Consultant at Pavilion Advisory Group Inc.; Josh Cohen, Head of Defined Contribution at Russell Investments; Chris Lyon and Lisa Florentine, partners at Rocaton Investment Advisors, LLC; Tim Burggraaf, DC Leader at Mercer in the Netherlands; Jody Strakosch, Founder of Strakosch Retirement Strategies, LLC; Kelli Hueler, Founder of Hueler Companies; Susan Bradley, Founder of Sudden Money Institute; and Lee Baker, Financial Planner at Apex Financial Services.

In addition, I’m deeply appreciative of the extensive research, writing, and insights from many of the world’s most noted academic thought leaders, including Harry Markowitz, Nobel Prize winner, recognized Father of Modern Portfolio Theory, and professor of finance at the Rady School of Management at the University of California, San Diego (UCSD); Zvi Bodie, retired Norman and Adele Barron Professor of Management at Boston University; Richard Thaler, Charles R. Walgreen Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago Booth School of Business; Shlomo Benartzi, professor at University of California at Los Angeles; Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School; Olivia S. Mitchell, Professor of Insurance and Risk Management, International Foundation of Employee Benefit Plans, also Executive Director, Pension Research Council, and Director, Boettner Center on Pensions and Retirement Research, The Wharton School; Jeffrey R. Brown, the Josef and Margot Lakonishok Professor of Business and Dean of the College of Business at the University of Illinois in Urbana-Champaign, Illinois; Joshua Grill at University of California at Irvine; Michael Drew, Professor of Finance at Griffith Business School, Griffith University, and Partner at Drew, Walk & Co.; and Julie Agnew, Associate Professor of Finance and Economics at The College of William and Mary.

I also am thankful for the research, insights, and contributions to DC by many extraordinary professionals and organizations, including Jack VanDerhei, Research Director at the Employee Benefit Research Institute (EBRI); Lew Minsky, Executive Director at Defined Contribution Institutional Investment Association (DCIIA); Chris J. Battaglia, Vice President and Group Publisher at Crain Communications, Inc.; Joshua Franzel, PhD, Vice President, Research Center for State and Local Government Excellence; Juan Yermo, Deputy Chief of Staff to the OECD Secretary-General; Helen Monks Takhar at the NEST Corporation; Gina Mitchell, President of the Stable Value Investment Association (SVIA); and Hattie Greenan, Director of Research and Communications at the Plan Sponsor Council of America (PSCA).

I am grateful for the additions to content, thoughtful editing, and suggestions by ERISA legal professionals, including Marla Kreindler, Partner at Morgan, Lewis and Bockius; James Fleckner, Securities and Investment Management Litigator at Goodwin Procter LLP; David Levine, Principal at Groom Law Group, Chartered; R. Bradford Huss, Partner at Trucker Huss APC; and Sally Nielsen of Kilpatrick, Townsend and Stockton LLP.

PIMCO colleagues also contributed significantly to the content development, review, and editing of all of the chapters. I would like to extend heartfelt gratitude to Joe Healy, DC institutional leader for his review and contribution to the entire book; and Steve Sapra, PhD, and Justin Blesy for meticulous review of the glide path and benchmarking content found in multiple chapters. By topic, we thank: Steve Ferber and former colleague Michael Esselman for review of investment structure; Brett Gorman, Brian Leach, Paul Reisz, Ronnie Bernard, and David Berg for capital preservation and fixed income; Nick Rovelli for shaping and editing the fixed income chapter, plus David Fisher and Loren Sageser for their careful edits; Andy Pyne, Raji Manasseh, and Markus Aakko for contribution to content and editing the equity section; Bransby Whitton, Klaus Thuerbach, and Kate Botting for contributing to and editing the inflation chapter; John Cavalieri, Ashish Tiwari, and Ryan Korinke, as well as Rob Arnott and Lillian Yu of Research Affiliates for review of additional strategies and alternatives; Mike Cogswell and Theo Ellis for review of the retirement income section; and Ken Chambers and Chantal Manseau for their review of the closing. I also appreciate the review by colleagues in Australia, including Adrian Stewart, Sara Higgins, and Manusha Samaraweera; in Canada by Stuart Graham; and in The Netherlands by Patrick Dunnewolt.

PIMCO leadership, as well, stood behind the creation and fulfillment of this project, including Tom Otterbein, managing director and head of institutional Americas, and Rick Fulford, executive vice president and head of U.S. retirement. I also extend gratitude to PIMCO managing directors Susie Wilson; James Moore, PhD; Kim Stafford; and Candice Stack for their review of materials and support of discussions with consultants and plan sponsors.

In addition, our highly professional team at PIMCO tirelessly and individually had a hand in producing this final work, including reviewing, adding to content, editing, designing, and confirming numbers, names, graphics, and figures. These include Daniel Bradshaw and Carla Harris, who reviewed the entire book from a compliance perspective; Blayze Hanson, who worked on all of the charts and graphs throughout the book; Barry Lawrence, who contributed to analyses and helped shepherd the project; and Candi Barbour, who served as marketing assistant to the project. In addition, I would like to thank our editors who contributed to materials, including Steve Brull and Matt Padilla.

My partners at John Wiley & Sons, Sheck Cho, Judy Howarth, and Vincent Nordhaus assisted greatly in editing and publishing this book, and I owe them, too, my appreciation.

And last but never least, I owe a continuing debt of thankfulness to my family, whose generous patience, support, and encouragement helped me produce this work—through many time zones, late nights, weekends, and other moments and hours dedicated to this project. Thank you, once again, for allowing me the time to continue to contribute to global defined contribution plan advancement.

Introduction

Today, workers around the globe are increasingly dependent on defined contribution plans to reach their retirement income goals. In the United States, fewer than one in five workers have access to a traditional defined benefit pension program. To retire financially secure, workers need well-designed defined contribution (DC) plans—as most will rely on such plans for at least a third of retirement income. Those who have access to a well-designed plan and are contributing at a sufficient level are likely to succeed. Unfortunately, not all workers are offered a DC plan . . . and plans that are offered may have a less-than-optimal design.

As of 2015, we estimate that only about half of U.S. workers have access to a DC plan; in particular, people working part-time or for small employers often lack plan access. Some countries such as the United Kingdom and Australia have addressed DC plan availability by mandating that employers must offer and enroll employees into such programs. At this writing, we anticipate retirement plan availability will increase in the United States as multiple states and possibly the federal government will roll out compulsory programs or regulatory change to ease the burden of offering plans.

As plans become increasingly available, our hope is they offer an investment structure that places participants on a path to success.

This book is designed to assist plan sponsors and providers to structure investment menus that help participants meet their retirement goals. Our earlier book, Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path (2010), provided a framework for understanding the growing role DC plans have come to play for Americans planning for and transitioning into and through retirement. In that volume, we reviewed the origins of DC plans with a focus on building custom target-date strategies, an innovation that is now widely adopted, particularly within the largest U.S. plans. Our earlier book was a resource that helped plan sponsors and their consultants as they considered how to create their own custom target retirement-date strategies. It was written at a time when DC plans were experiencing significant growth in both prevalence and assets.

In the intervening years, the trends we identified have accelerated. Global DC assets in seven major markets (representing more than 90 percent of total assets) swelled to $15.6 trillion in 2015, a 7.1 percent 10-year annual growth rate that was more than double the 3.4 percent pace for defined benefit plan (DB) assets, according to Willis Towers Watson. At the end of 2015, DC assets in these markets represented 48.4 percent of combined DC/DB assets, up from 39.9 percent in 2005. With continued adoption of DC plans and higher contribution rates—fueled increasingly by automatic enrollment—DC assets will eclipse those of DB plans in the near future.

As contribution rates climb, DC assets will increasingly flow into investment defaults. In the United States, more than 80 percent of plans use a qualified default investment alternative (QDIA, an investment vehicle used for retirement plan contributions in the absence of direction from the plan participant); target-date funds dominate, being offered by about 75 percent of plans. According to PIMCO’s ninth annual Defined Contribution Consulting Support and Trends Survey (published in 2016 with data collected in 2015), 96 percent of consultants supported target-date funds as the QDIA.

As a result of the increasing popularity and importance of DC plans, plan sponsors, consultants, advisors, investment managers, attorneys, academics, and other professionals are keenly interested in DC plan design. But as they seek information and guidance, they often find only piecemeal information on how to thoughtfully structure a DC plan. They are left not knowing where and how to begin. To help answer the questions of those interested in and responsible for DC plans, this book offers a framework, information, analytics, and ultimately a guide to building successful DC plans.

Throughout these pages, we focus the discussion first and foremost on meeting the DC plan’s objective—which for nearly all plans today is to provide participants with sustainable retirement income. This retirement income objective may differ from the past when many plans may have been considered supplemental savings programs. Those days are over and new approaches are required. By identifying and focusing first on the plan objective, plans can be managed to meet that objective, both during asset accumulation and retirement-income drawdown.

We believe this outcome-oriented approach presents the best path to success. Our interest in focusing on outcomes extends from our collective experience over the past decade. We have learned that the old approaches to DC plan design are often misaligned to a plan’s objective and can present participants with untenable risk. By aligning investment design to the plan objective and managing both to maximize return and minimize risk, workers are likely to succeed; and what’s more, plan sponsors are able to meet their fiduciary duty to participants.

At PIMCO, we understand that meeting the objective of outcome-oriented investing may be easier said than done. To help plan fiduciaries grapple with this challenge, we have developed proprietary analytics and other resources to help inform and guide DC investment development. Our commitment to contribute to the effective design and success of DC plans for sponsors and participants alike is what motivates us to return to the printing press with a new book for 2017.

HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT

The book is divided into three parts. Part One (Chapters 1–4) provides the background that readers will need to build their understanding of DC plan design rudiments. Part Two (Chapters 5–9) sets out a guide to understand the overall DC investment structure and menu of choices plan sponsors and participants face. In Part Three (Chapters 10 and 11), we return to a focus on the individual, both in the U.S. and other markets around the world. In it we explore the specific plan features and investment choices retirees seek as they consider whether to stay in their plans, and how a DC plan balance could be turned into a lifetime of retirement income.

Here’s what’s happening, chapter by chapter:

Chapter 1

: We start with an overview of the new reality. For most workers success is up to the individual, as DC plans have replaced traditional pension plans as the primary source of employer-provided retirement income. While the objective is often the same, design around the globe varies significantly so we look at the types of plans by major market. Then we discuss what this shift means as fiduciaries design DC plans: What are a fiduciary’s responsibilities? How can consultants and advisors help? How can plans be designed to succeed? Where does a plan sponsor begin? This chapter includes an assessment of the extent to which workers globally may rely on DC plans for retirement income, showing how the audience for DC plans continues to expand. We discuss the challenges that plan sponsors face in governing plans and share views on the importance of both contribution and investment design. We also consider automatic enrollment and contribution escalation, and then turn our attention to investment design.

Chapter 2

: In this chapter, we introduce a framework for evaluating and structuring DC plans. We discuss how to align investment design to the plan objective and introduce the innovative PIMCO Retirement Income Cost Estimate (the “PRICE” approach) as a methodology to quantify both the historical and prospective cost of buying a lifetime income stream. The PRICE approach helps fiduciaries to identify the number, or amount of savings, a worker needs to retire. In this chapter, readers will be able to ask—and answer—the questions: What is the PRICE of retirement? Is your company’s DC plan on track? We also reach into the world of behavioral finance to help understand why numeric or quantitative frameworks can provide an important counterpoint to the biases that may otherwise shape our behavior.

Chapter 3

: Here we turn to plan investment structure, including an investigation of the number of tiers and investment structures available in plan design. We consider qualified default investment alternatives (QDIAs), including the types of investments and prevalence of each. Then we look at the core investment lineup, helping readers understand how to think about the number and type of investment offerings. We also consider active versus passive investment choices, and brokerage windows (whether full or mutual-fund-only). Finally, we consider the investment structure, whether mutual fund, collective investment trust (CIT), or separately managed account. We also explore white label or multimanager approaches, including considering when a delegated or outsourced chief investment officer approach might make sense.

Chapter 4

: In Chapter 4, we delve into target-date funds. We consider the types available, including packaged, custom, and semicustom. What type of fund may be desirable by plan size? Why may a custom or semicustom approach make sense? We review evaluation criteria and how to apply these during both selection and monitoring of the funds. Among the criteria, we include the objective of the fund, diversification, investor loss tolerance versus capacity, and more.

Chapters 5–9

: Part Two includes Chapters 5 to 9 in which we review core investment offerings in DC plans, including options for capital preservation, fixed income, equity, and real assets. In Chapter 9, we consider whether and how alternative assets fit within plan offerings. Together these chapters allow readers to gain insight into the full range of investment options for DC plans, and the trade-offs, benefits, and costs of different approaches—including how to evaluate plan options in the face of a changing regulatory and economic backdrop. How might an environment of equity levels at record highs and interest rates at record lows, for example, require plan sponsors to review their core lineups? What is the role of active strategies with global exposure, or the importance of inflation hedging? In these chapters, we evaluate how considering options from both return and risk perspectives can help provide the assortment of solutions retirees will likely need.

Chapter 10

: In Part Three, we shift from accumulation to distribution with a more in-depth look at the options available for retired plan participants. We grapple with how retirees make the decision to stay in or exit their plans; and we investigate what plan features and investment choices retirees need, both from the point of view of expert observers and the retiree. Questions include: What role should plans play in encouraging retirees to leave assets in the plan at retirement, and what features cause retirees to stay? How do individuals think about and accommodate the impact that increasing longevity may have on their retirement income plans?

Chapter 11

: We wrap up with the best ideas for improving defined contribution plan success, including a summary of suggestions made throughout the book. We will consider how retirement plan coverage might be improved, including ideas from outside the United States. Among potential improvements, we’ll look at increasing contribution rates, reducing plan leakage, and aligning investment design to a retirement objective.

Finally, in our closing comments, we’ll identify some top priorities for future action. These include 1: increasing plan coverage and savings rates, 2: moving to objective-aligned investment approaches, and 3: broadening options for retirement income.

As readers proceed through the book, they will find dozens of design examples and insights from plan sponsors such as Intel Corporation, The Boeing Company, and Nestlé USA, among others. We also draw on the rich insights and perspectives that DC plan design consultants can offer, including Aon Hewitt, Callan, Mercer, NEPC, Rocaton Investment Advisors, LLC, Russell Investments, and more.

In this volume, we have likewise turned to prominent and insightful academics in the world of retirement income planning—including the father of modern finance, Harry Markowitz. Through our interviews with these masterful observers, we broaden the scope of our discussion to include everything from the impact of the field of behavioral finance on individual behavior and DC plan design, to demographic issues such as the effect of increasing longevity for Americans on DC plan design and outcomes, among other topics.

And while this book focuses primarily on U.S. DC plan design, we intend that non-U.S. readers find the framework, case studies, and consultant insights relevant and helpful. We also hope that U.S. readers will be enriched by the information and insights we pull in from other economies around the world.

How should readers use this book? You might think of it as akin to a cookbook, or car-repair manual, to give two examples. While it has been designed to flow logically from start to finish, readers might find it most useful to dip into or refer to specific ideas or chapters—without necessarily reading in a linear fashion. To that end, we’ve written it so the sections and chapters can function independently, versus requiring you to build knowledge that carries from one section to another. And both the Contents and Index can help readers locate specific conversations that are of particular interest. All that said, readers should engage with this volume in whatever way best suits their needs.

A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION

By publishing this handbook, PIMCO is continuing our tradition of dedication to helping clients and the consulting community build more successful DC plans. We bring this commitment to life by identifying and exploring questions and issues active participants and retirees alike face in preparing to enter retirement, and by proposing ways in which we can work together to optimize outcomes for all participants.

Over the past years, we have produced a range of publications to help plan sponsors evolve their retirement programs. Our DC Design series focuses on ways plan sponsors can modify plan lineups to promote the potential of improved participant outcomes, and examines issues plan sponsors face in globalizing their plan offerings.

In 2006, we launched the PIMCO DC Dialogue to showcase the thinking of a wide range of retirement leaders and innovators including consultants, academics, lawyers, financial advisors, not-for-profit executives, and, most important, plan sponsors from both the private and public sectors. In this volume, as in our previous volume, we draw upon the generous contributions we have gleaned from our Dialogue series to contribute to readers.

In addition to our Dialogue series, PIMCO also publishes targeted research and analytic papers that carefully examine elements of DC plan structure. These include our PIMCO DC Research, DC Analytics, and Viewpoint series. In this volume, we use the findings pinpointed in these series to more fully develop our analysis—however, as in our earlier volume, our motivation is not to promote only the suggestions or philosophies of PIMCO, but to add PIMCO’s voice to the various perspectives cultivated from across the industry. In addition, we note that in order to preserve an objective and balanced viewpoint, each chapter of this handbook has been reviewed and edited by professionals from across the country.

Over the past decade, PIMCO has also undertaken an annual Defined Contribution Consulting Support and Trends Survey to help plan sponsors understand the breadth of views and specific consulting services available within the DC marketplace. Through this survey, we capture data, trends, and opinions from 66 consulting firms across the United States, which in 2016 served over 11,000 clients with aggregate DC assets in excess of $4.2 trillion. The data and observations from these surveys—10 in total—are cited throughout this book, providing practical “on the ground” intelligence about DC plans in America.

We have cultivated the input of these many voices because we recognize that there are a range of approaches, viewpoints, and solutions—both here at home and from around the world—that can contribute to plan sponsors’ and plan members’ understanding of defined contribution plans. And that enhanced understanding, in turn, can help produce plans that are more likely to succeed. So whether you are reading this as a plan sponsor who is new to DC plan oversight, a consultant with decades of experience, or an individual (perhaps planning for your own or another’s retirement) who is keen to learn about plan design, we hope engaging with the ideas in this book will be a valuable experience.

WHY SHOULD YOU READ THIS BOOK?

Finally, if you’re on the fence about whether to carry on reading beyond this introduction, we’ve compiled a partly tongue-in-cheek list of our top 10 reasons to continue. Without further ado, we think you should read this book to:

Understand and embrace a framework for considering the world’s most important retirement plan structure: the DC plan.

Develop the knowledge that will help improve retirement income security for employees.

Learn about how to reduce risk for all employees, as well as the cost of older workers who lack sufficient means to retire.

Get up to speed on a concrete approach to structure and benchmark target-date and other investment strategies for DC plans.

Receive plan design tips from many of the world’s largest employers.

Gain design insights and benefit from the diverse points of view and experiences of consultants and DC experts from around the world.

Quickly get up to date on recent DC design trends.

Stimulate your own thinking for how to evolve your plan.

Gather design concepts from peers and other experts.

And last but not least, in order to be able to discuss DC plan ideas and suggestions at cocktail parties!

PART ONEDC Plans: A Cornerstone of Retirement

CHAPTER 1DC Plans Today: An Overview of the Issues

PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN

I started my career in 1981, at the age of 21 . . . which also happened to be the year 401(k) plans were launched. As a new employee at Merrill Lynch Capital Markets, I had the great fortune of working with financial professionals who immediately recognized the power of tax-deferred retirement investing. One experienced colleague told me, “If you participate in this plan, you’ll be a millionaire someday.” That’s all I needed to hear to sign up for automatic payroll deductions into my plan—a practice I have never stopped. Today, I am among the many millions of workers around the world who will fund retirement primarily with my defined contribution assets. I am very fortunate to have been advised to start saving early, and to have ignored others’ suggestions to postpone retirement savings and “enjoy being young.” I’m also lucky that I’ve had access to an employer-sponsored plan funded via automatic payroll deduction, and to have a healthy investment menu from which to choose.

In short, I’ve spent my working years with a defined contribution (DC) pension, versus the “traditional” defined benefit (DB) pension. I believe that my personal experience, as someone who started working just as 401(k) plans came into being, has helped me understand the power and importance of “getting DC right.” In 1989, I joined Hewitt Associates in Lincolnshire, Illinois, and shortly thereafter turned 100 percent of my professional focus toward consulting to DC plan sponsors and research, including creating the Hewitt 401(k) Index to track participant reaction to stock market movements. Since that time, and in the 10-plus years I’ve spent working at PIMCO, getting DC right has not only been a personal but also a professional passion. As my career is exactly as old as 401(k) plans, this means that DC plans and I have “grown up” together.

Part of growing up for DC plans has been the evolution toward more institutional structures, which some refer to as “DB-izing” DC. This movement includes shifting away from retail-priced packaged products, such as mutual funds and closed-architecture target-date funds, and toward collective investment trusts, separately managed accounts, and custom multi-manager structures. These shifts can be beneficial for plan participants: Using institutional investment vehicles and improving asset diversification may lower plan costs and improve risk-adjusted investment returns for participants. For example, if an investor could earn an additional 100 basis points (1 percent), over a 40-year career, this expense and return difference adds up. Indeed, for someone starting with a salary of $50,000—and assuming annual real wage gains of 1 percent; contribution rates, including the employer match, of 9.5 percent (in the first 10 years) and 15.5 percent (for the next 30 years); and conservative portfolio returns of 4 percent per year—an additional portfolio return of 1 percent plus the reduction in expenses resulting from the shift from retail-priced products compounds after 40 years into about $210,000 when retirement starts. This extra sum may be sufficient to boost the retirement income replacement rate by 16 percent throughout retirement (that is, the extra sum can be used to provide yearly income in retirement that is equal to 16 percent of yearly preretirement pay).

To support the ongoing transition of DC plans toward more institutional structures, in 2010 I worked with Lew Minsky, Executive Director of the Defined Contribution Institutional Investment Association (DCIIA), to launch and serve as the founding Chair of this organization. DCIIA is a community of retirement leaders that is passionate about improving the retirement security of workers by improving the design and outcomes of DC plans. DCIIA brings together professionals from across the DC market, including consultants, asset managers, plan sponsors, recordkeepers, insurers, lawyers, communication firms, and others, all working together on this common goal.

Today, as DC plans are poised to become the dominant form of retirement savings around the world, I am inspired to provide a book to help guide the development of successful DC plans primarily for the benefit of employers and workers now and in the future. My hope is that plan sponsors, consultants, and other plan fiduciaries, by engaging with the materials in this book, will take away an empowering framework and insights to help structure and further evolve DC plan design.

DC PLANS: BECOMING THE NEW REALITY . . . NO TURNING BACK

DC plans are a large and growing market globally, representing nearly half the world’s $36 trillion in estimated total pension assets. Over the past decade, the global share of pension assets held in DC plans in the world’s major pension markets has increased dramatically, from 39.9 percent in 2005 to 48.4 percent in 2015—and DC assets have also grown at a faster pace than DB assets, at a rate of 7.1 percent per year compared to the slower pace of 3.4 percent per year for assets in DB plans (Willis Towers Watson, Global Pension Assets Study 2016, covering 19 major pension markets). While DC pension assets are increasing around the world, the United States, Australia, and the UK represent roughly 90 percent with 76 percent, 7.5 percent, and 6 percent of the global DC pension assets.

In 2014, we spoke to Brigitte Miksa, Head of International Pensions (and Executive Editor of PROJECT M at Allianz Asset Management AG), about the development of retirement systems around the globe. We discussed the shift in weight among the pillars or sources of retirement income, including the first source of public pensions, such as Social Security, and the second source of occupational programs, both DB and DC. We also contrasted reliance on the different sources of retirement income and DC developments within three market segments: Anglo-Saxon countries, developed European countries, and emerging pension markets.

Looking forward, as each market develops and DC assets grow, Miksa expects the plans in these markets will become increasingly “professionalized,” such that decision-making about asset allocation and more will shift over time to professionals, away from individual participants. (These shifts mirror the evolution toward institutionalized structures for DC plans discussed above.) She told us: