The Retirement Plan Solution E-Book

Don Ezra

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

Seitenzahl: 447

Veröffentlichungsjahr: 2009

Beschreibung

Praise For The Retirement Plan Solution

"Short, clear, complete, and always interesting. Best book on DC plans and what we should do-now."
—Charles D. Ellis, author, Winning the Loser's Game

"At a time when the world is in turmoil, along with retirement expectations, the authors have hit a home run. After reading this book, I have a plan. Read it for your path to retirement security."
—Dallas Salisbury, President and CEO, Employee Benefit Research Institute

"The Retirement Plan Solution offers a refreshing and provocative perspective on how to assess retirement needs, save to meet these needs, and manage the retirement payout process. In this time of financial turmoil, employees, plan sponsors, and financial advisors will find this highly practical resource volume both useful and humorous."
—Olivia S. Mitchell, Director, Pension Research Council, Wharton School

"The Retirement Plan Solution is a map to the future of 401(k) retirement plans. But it is not just a theoretical view of what could be. Instead, the authors describe the needs and trends that are already here, and then describe the changes that are developing to meet those needs. It is about the tomorrow that is happening today."
—Fred Reish, Managing Director, Reish Luftman Reicher & Cohen

"The respected authors have created a readable, timely, and very helpful book on all aspects of retirement planning. The suggestions are practical, the information is concise, and the book is highly recommended for anyone that is interested in sound financial planning."
—Moshe A. Milevsky, PhD, Finance Professor, York University, Toronto, Canada

"This is a must-read for people working in the retirement industry, as well as those who simply care about how to improve their chance of reaching a financially secure retirement. In a clear and simple fashion, the authors deliver one of the best books to date on inefficiencies in the current DC plan and potential improvements."
—Peng Chen, President, Ibbotson Associates

Leseprobe

Contents

Cover

Content

Title Page

Copyright

Dedication

Preface

THOUGHTS ON THE MARKET TURMOIL OF 2008–2009

Acknowledgments

INTRODUCTION: THE GREAT AMERICAN RETIREMENT SYSTEM?

DEFINED BENEFIT AND DEFINED CONTRIBUTION

THE DYNAMICS OF THE RETIREMENT PLAN

ROOM FOR IMPROVEMENT IN THE ACCUMULATION PHASE

THE RIGHT SORT OF EDUCATION

OTHER WAYS OF RUNNING DEFINED CONTRIBUTION PLANS

THE INDIVIDUAL’S ROLE IN DECUMULATION

THE PLAN SPONSOR’S ROLE

A FINAL THOUGHT: FROM BIGGEST TO BEST

CHAPTER 1: DC Version 2.0

COMING OF AGE

THE NEW RETIREMENT SUPERPOWER

COMING SOON TO A DICTIONARY NEAR YOU: DBization

AT THE HEART OF VERSION 2.0: A DIFFERENT OBJECTIVE

INCOME REPLACEMENT

IS THIS THE FIRST NAIL IN THE COFFIN OF DEFINED CONTRIBUTION?

“HOLD ON A SECOND …”

PART ONE: The Dynamics of the Retirement Plan

CHAPTER 2: More than You Ever Wanted to Know about Life Expectancy

WHAT IS “LIFE EXPECTANCY”?

HOW LIFE EXPECTANCY HAS CHANGED

BUT AN INDIVIDUAL’S LIFE SPAN IS UNCERTAIN

LONGEVITY DISTRIBUTIONS: LET’S TAKE A LOOK

WHAT DOES THIS MEAN?

AND WILL LONGEVITY IMPROVE EVEN MORE?

CHAPTER 3: Retirement Is Expensive

THE GOAL IS A TARGETED LEVEL OF INCOME REPLACEMENT

THE FUNDAMENTAL PENSION EQUATION AND THE DEFINED BENEFIT SYSTEM

A SIMPLE MODEL OF RETIREMENT PLAN ACCUMULATION AND DECUMULATION

BASE CASE RESULTS

WHEN TO START SAVING

THE BASE CASE MAY NOT BE A RELIABLE GUIDE

HOW TO ACT IN THE FACE OF UNCERTAINTY

APPENDIX: FURTHER ANALYSIS OF THE UNCERTAINTY ASSOCIATED WITH INVESTMENT RETURNS

CHAPTER 4: Investment Returns Are All-Important

THE 10/30/60 RULE

GAMES AT A VIRTUAL CASINO

INVESTMENT ANALOGS

HISTORICAL RETURN PATTERNS

WHAT ARE THE LESSONS?

WHAT FOLLOWS?

HOW MUCH INVESTMENT RISK CAN YOU TOLERATE?

CHAPTER 5: Sustainable Spending

LIFETIME ANNUITIES

SIMULATIONS

APPENDIX: THE MULTIPLE

PART TWO: Opportunities in the Accumulation Phase

CHAPTER 6: Save More

EMPLOYERS WITH NO PLAN

EMPLOYEES WHO DO NOT ENROLL

EMPLOYEES WHO START SAVING TOO LATE

EMPLOYEES WITH LOW SAVINGS RATES

EMPLOYEES WITH GAPS IN CONTINUOUS PARTICIPATION

CHAPTER 7: Limit Leakage

CASHING OUT

LOANS

HARDSHIP WITHDRAWALS

CHAPTER 8: Invest Better

EVIDENCE OF WASTE

THE IMPORTANCE OF A GOOD DEFAULT OPTION

THE “TARGET DATE” SOLUTION

AND FOR THE INVESTMENT EXPERTS?

CHAPTER 9: Reduce Fees

THE IMPACT OF FEES

FEES FOR WHAT?

LOOKING FOR FEE LEAKAGE

FEE-SHARING ARRANGEMENTS

INSTITUTIONAL VERSUS RETAIL FEES

ACTIVE MANAGEMENT

RECORD-KEEPING FEES

PART THREE: We Need the Right Sort of Education

CHAPTER 10: Why the Waste? Because We’re Only Human

OVERCONFIDENCE IN RETIREMENT PLANNING

BEHAVIORAL FINANCE

LOW PARTICIPATION AND SAVINGS RATES

POOR INVESTMENT RESULTS

WHAT TO DO?

CHAPTER 11: Financial Education

FACTS THAT SURPRISED US

ENTHUSIASTIC INITIATIVES

WHAT EXACTLY CAN BE TAUGHT?

WHY HASN’T THIS ALREADY BEEN TAUGHT?

A LITERATE DEFAULT SYSTEM

A Final Anecdote

PART FOUR: Other Ways of Running Defined Contribution Plans

CHAPTER 12: Case Study—Australia

SOME FEATURES OF THE AUSTRALIAN DEFINED CONTRIBUTION SYSTEM

CONSEQUENCES FOR COVERAGE

CONSEQUENCES FOR ADEQUACY

CONSEQUENCES FOR EMPLOYER ATTITUDES

LESSONS FOR THE UNITED STATES

CONSEQUENCES FOR INVESTMENT CHOICES

CHAPTER 13: Three Defined Contribution Plan Models

THE BANK SAVINGS MODEL

THE FUND SUPERMARKET MODEL

THE RETIREMENT INCOME MODEL

AN EXAMPLE OF A PARTICIPANT STATEMENT IN THE RETIREMENT INCOME MODEL

CHAPTER 14: Collective Defined Contribution

THE PRINCIPLES

BROADER APPLICATIONS BY THE DUTCH AND CANADIANS

THERE’S MORE THAN ONE WAY TO SKIN A CAT

PART FIVE: The Perspective of the Individual in Decumulation

CHAPTER 15: The First Dial: Your Personal Spending Policy

STEP ONE: HOW TO KEEP SCORE—THE CURRENT POSITION

STEP TWO: WHAT ABOUT THE FUTURE?

STEP THREE: THE PROJECTED OUTFLOW—THE FIRST ATTEMPT TO QUANTIFY YOUR SPENDING PLAN

STEP FOUR: HOW LONG WILL YOUR ASSETS SUSTAIN YOUR SPENDING PLAN?

CHECKPOINT: IS THERE A GAP TO BE BRIDGED?

NEXT UP

CHAPTER 16: The Second Dial: Your Longevity Protection Policy

HOW AN IMMEDIATE ANNUITY WORKS

THE BENEFIT OF BUYING A LIFETIME ANNUITY

SHOULD EVERYONE BUY AN IMMEDIATE ANNUITY?

REASONS WHY SOME PEOPLE DON’T LIKE TO BUY IMMEDIATE ANNUITIES

FORTUNATELY …

APPENDIX: MORE ON ANNUITY-EQUIVALENT WEALTH

CHAPTER 17: The Third Dial: Investment Policy

A REMINDER OF OUR GOALS AND OUR CHOICES

A FRAMEWORK

TAKING OWNER-OCCUPIED REAL ESTATE INTO ACCOUNT

MANY RULES OF THUMB ARE JUST PLAIN WRONG

FOUR WEALTH ZONES

HOW YOUR WEALTH ZONE DETERMINES YOUR CHOICES

BEQUESTS

CHAPTER 18: Product Innovation with Decumulation in Mind

VARIATIONS ON THE LIFETIME ANNUITY

LONGEVITY PROTECTION PLUS LONG-TERM CARE INSURANCE

GUARANTEED MINIMUM WITHDRAWAL BENEFITS

THE LONGEVITY POOL

ADVANCED LIFE DEFERRED ANNUITIES

PURE DECUMULATION PRODUCTS

WHICH TYPE OF PRODUCT IS BEST?

PART SIX: The Plan Sponsor’s Role

CHAPTER 19: Defined Contribution Plan Governance

THE PURPOSE OF DEFINED CONTRIBUTION PLAN GOVERNANCE

RISK MANAGEMENT

A DEFINED CONTRIBUTION PLAN’S PURPOSE AND OBJECTIVES

FIDUCIARY DUTY

WHAT SHOULD A PRUDENT EXPERT KNOW—AND WHEN?

NEW CHOICES BASED ON NEW KNOWLEDGE

IN SUMMARY

CHAPTER 20: Defined Contribution Plan Effectiveness

PARTICIPATION RATE

PARTICIPATION DELAY

EMPLOYEE SAVINGS RATE

EMPLOYER CONTRIBUTION RATE

MATCH MAXIMIZATION

PARTICIPANT NET INVESTMENT RETURN

HARDSHIP WITHDRAWAL USAGE

LOANS AS DISTRIBUTIONS

EARLY WITHDRAWALS

CONCLUSION

CHAPTER 21: The Defined Contribution Plan Sponsor’s Role in Decumulation

PROVIDING EDUCATION

PROVIDING ACCESS TO FINANCIAL PRODUCTS: IN-PLAN OR OUT-OF-PLAN

DESIGN FEATURES

PRODUCT FEATURES

SIMPLICITY

PARTING THOUGHT

Notes

About the Authors

Index

END USER LICENSE AGREEMENT

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Guide

Cover

Contents

Start Reading

List of Illustrations

CHAPTER 2: More than You Ever Wanted to Know about Life Expectancy

Figure 2.1 Life Expectancy at Birth, 1900–2000

Figure 2.2 Life Expectancy at Age 65, 1900–2000

Figure 2.3 Percent of Americans Born Reaching Age 65, 1900–2000

Figure 2.4 Longevity Distributions for Males

Figure 2.5 Longevity Distributions for Females

Figure 2.6 Longevity Distributions for Second Death, Males and Females

CHAPTER 4: Investment Returns Are All-Important

Figure 4.1 Calendar Year Returns, U.S. Large Cap Stocks, 1926–2007

Figure 4.2 Calendar Year Returns, U.S. Long-Term Corporate Bonds, 1926–2007

Figure 4.3 Summary Statistics, U.S. Long-Term Corporate Bonds, 1926–2007

CHAPTER 5: Sustainable Spending

Figure 5.1 Success of Systematic Withdrawal Plans

Figure 5.2 Success of Systematic Withdrawal Plans

CHAPTER 8: Invest Better

Figure 8.1 Human Capital, Financial Capital, and Total Wealth

CHAPTER 16: The Second Dial: Your Longevity Protection Policy

Figure 16.1 Immediate Annuity = Longevity Swap

List of Tables

CHAPTER 2: More than You Ever Wanted to Know about Life Expectancy

Table 2.1 Average Life Expectancies and Standard Deviations in Years

CHAPTER 3: Retirement Is Expensive

Table 3.1 Base Case Retirement Savings Model with 7.5 Percent Investment Rate of Return Both Pre- and Postretirement

CHAPTER 4: Investment Returns Are All-Important

Table 4.1 Calendar Year Returns, U.S. Large Cap Stocks, 1926–2007

Table 4.2 Calendar Year Returns, U.S. Long-Term Corporate Bonds, 1926–2007

Table 4.3 Summary Statistics, U.S. Long-Term Corporate Bonds, 1926–2007

TABLE 4.4 Summary Statistics, U.S. Treasury Bills, 1926–2007

CHAPTER 5: Sustainable Spending

TABLE 5.1 Success of Systematic Withdrawal Plans

CHAPTER 13: Three Defined Contribution Plan Models

TABLE 13.1 Three Models of DC Plans

CHAPTER 15: The First Dial: Your Personal Spending Policy

TABLE 15.1 What You Are Worth Today

TABLE 15.2 What You Have Available to Spend or Save

TABLE 15.3 Percentage by Category of Total Household Spending

CHAPTER 17: The Third Dial: Investment Policy

TABLE 17.1 Basic Asset Types to Consider (Examples Shown for Each Category)

International Praise forThe Retirement Plan Solution: The Reinvention of Defined Contribution

“With DBization as a core objective to strengthen the current DC design, but aware of the difficulties pure sponsor-guaranteed DB plans encounter as pension funds mature, the authors eloquently describe building blocks for a sustainable and satisfying retirement solution. These experienced writers have produced a work that is comprehensive yet accessible.”

—THEO KOCKEN

CEO, Cardano, The Netherlands, and author of Curious Contracts: Pension Fund Redesign of the Future

“This is not just another retirement planning book. The authors turn sound theory, common sense, hands-on experience, and a friendly, conversational writing style into a transformative vision of how to design and implement strategies for financing retirement in the 21st century. Policy makers, employers, and employees alike will find much wisdom in this work.”

—KEITH AMBACHTSHEER

Director of the Rotman International Centre for Pension Management, University of Toronto, Canada

“Ensuring a dignified retirement is an imperative for any society that dares call itself civilized. In The Retirement Plan Solution we finally have a roadmap that lays out how we get from here to there. This is a must-read for the retirement industry.”

—CHARLES RUFFEL

Founder and Director of Asset International and Founder of PLANSPONSOR

“Improvements in DC plans are essential for us to meet tomorrow’s demographic challenges. This book is really well thought through and makes a big contribution to this cause.”

—ROGER URWIN

Global Head of Investment Content, Watson Wyatt, United Kingdom

“This book provides an invaluable roadmap from which to explore key characteristics of best-of-breed pension design. It contains important concepts and messages that will inevitably improve the evolution of pension products.”

—DAVID ELIA

Chief Executive Officer, HOSTPLUS Superannuation Fund, Australia

The Retirement Plan Solution

The Reinvention of Defined Contribution

DON EZRA

BOB COLLIE

MATTHEW X. SMITH

Copyright © 2009 by Don Ezra, Bob Collie, and Matthew X. Smith. 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:

Ezra, D. Don.    The retirement plan solution : the reinvention of defined contribution / Don Ezra, Bob Collie, Matthew X. Smith.           p. cm. – (Wiley finance series)    Includes bibliographical references and index.    ISBN 978-0-470-39885-2 (cloth)        1. Defined contribution pension plans. 2. Retirement–Planning.I. Collie, Bob, 1966– II. Smith, Matthew X., 1961– III. Title.    HD7105.4.E97 2009    331.25’20973–dc22                         2008053368

This book is dedicated to:

My extended family

—Don

Corinne, Alex, and Kate

—Bob

Karen, Rachel, Emily, and Matthew

—Matt

Preface

The biggest pension system in the world is in the United States, where for decades the defined benefit (DB) plan ruled the roost. But since the 1980s the defined contribution (DC) plan has taken root, and as many corporations have shied away from the cost of a DB guarantee, DC now dominates the scene in the private sector. In fact, the trend from DB to DC is virtually universal, not just an American phenomenon. We have not devoted this book to a discussion of the sustainability of social security systems around the world, or bemoaning the triumph of DC over DB, or calling for new legislation that will miraculously solve all problems. Our approach is more pragmatic. We point out where the DC system, as it currently operates, is inefficient, and show how improvements in two areas can make it an extremely productive force for generating postretirement income.