The Retirement Plan Solution – The Reinvention of Defined Contribution

<p>Preface xiii</p>
<p>Acknowledgments xix</p>
<p>INTRODUCTION</p>
<p>The Great American Retirement System? 1</p>
<p>Defined Benefit and Defined Contribution 2</p>
<p>The Dynamics of the Retirement Plan 3</p>
<p>Room for Improvement in the Accumulation Phase 4</p>
<p>The Right Sort of Education 5</p>
<p>Other Ways of Running Defined Contribution Plans 6</p>
<p>The Individual s Role in Decumulation 7</p>
<p>The Plan Sponsor s Role 8</p>
<p>A Final Thought: From Biggest to Best 9</p>
<p>CHAPTER 1 DC Version 2.0 11</p>
<p>Coming of Age 12</p>
<p>The New Retirement Superpower 13</p>
<p>Coming Soon to a Dictionary Near You: DBization 14</p>
<p>At the Heart of Version 2.0: A Different Objective 15</p>
<p>Income Replacement 15</p>
<p>Is This the First Nail in the Coffin of Defined Contribution? 16</p>
<p> Hold on a Second . . . 17</p>
<p>PART ONE The Dynamics of the Retirement Plan</p>
<p>CHAPTER 2 More than You Ever Wanted to Know about Life Expectancy 21</p>
<p>What Is Life Expectancy ? 21</p>
<p>How Life Expectancy Has Changed 22</p>
<p>But an Individual s Life Span Is Uncertain 23</p>
<p>Longevity Distributions: Let s Take a Look 26</p>
<p>What Does This Mean? 29</p>
<p>And Will Longevity Improve Even More? 30</p>
<p>CHAPTER 3 Retirement Is Expensive 31</p>
<p>The Goal Is a Targeted Level of Income Replacement 32</p>
<p>The Fundamental Pension Equation and the Defined</p>
<p>Benefit System 33</p>
<p>A Simple Model of Retirement Plan Accumulation and Decumulation 34</p>
<p>Base Case Results 34</p>
<p>When to Start Saving 37</p>
<p>The Base Case May Not Be a Reliable Guide 38</p>
<p>How to Act in the Face of Uncertainty 39</p>
<p>Appendix: Further Analysis of the Uncertainty Associated with Investment Returns 41</p>
<p>CHAPTER 4 Investment Returns Are All–Important 43</p>
<p>The 10/30/60 Rule 44</p>
<p>Games at a Virtual Casino 46</p>
<p>Investment Analogs 48</p>
<p>Historical Return Patterns 49</p>
<p>What Are the Lessons? 52</p>
<p>What Follows? 54</p>
<p>How Much Investment Risk Can You Tolerate? 54</p>
<p>CHAPTER 5 Sustainable Spending 57</p>
<p>Lifetime Annuities 57</p>
<p>Simulations 58</p>
<p>Appendix: The Multiple 61</p>
<p>PART TWO Opportunities in the Accumulation Phase</p>
<p>CHAPTER 6 Save More 65</p>
<p>Employers with No Plan 65</p>
<p>Employees Who Do Not Enroll 67</p>
<p>Employees Who Start Saving Too Late 69</p>
<p>Employees with Low Savings Rates 70</p>
<p>Employees with Gaps in Continuous Participation 72</p>
<p>CHAPTER 7 Limit Leakage 75</p>
<p>Cashing Out 75</p>
<p>Loans 76</p>
<p>Hardship Withdrawals 77</p>
<p>CHAPTER 8 Invest Better 81</p>
<p>Evidence of Waste 81</p>
<p>The Importance of a Good Default Option 83</p>
<p>The Target Date Solution 84</p>
<p>And for the Investment Experts? 89</p>
<p>CHAPTER 9 Reduce Fees 91</p>
<p>The Impact of Fees 91</p>
<p>Fees for What? 92</p>
<p>Looking for Fee Leakage 92</p>
<p>Fee–Sharing Arrangements 93</p>
<p>Institutional versus Retail Fees 94</p>
<p>Active Management 95</p>
<p>Record–Keeping Fees 97</p>
<p>PART THREE We Need the Right Sort of Education</p>
<p>CHAPTER 10 Why the Waste? Because We re Only Human 101</p>
<p>Overconfidence in Retirement Planning 101</p>
<p>Behavioral Finance 102</p>
<p>Low Participation and Savings Rates 103</p>
<p>Poor Investment Results 106</p>
<p>What to Do? 108</p>
<p>CHAPTER 11 Financial Education 109</p>
<p>Facts that Surprised Us 109</p>
<p>Enthusiastic Initiatives 110</p>
<p>What Exactly Can Be Taught? 112</p>
<p>Why Hasn t This Already Been Taught? 115</p>
<p>A Literate Default System 115</p>
<p>A Final Anecdote 116</p>
<p>PART FOUR Other Ways of Running Defined Contribution Plans</p>
<p>CHAPTER 12 Case Study Australia 119</p>
<p>Some Features of the Australian Defined</p>
<p>Contribution System 120</p>
<p>Consequences for Coverage 121</p>
<p>Consequences for Adequacy 122</p>
<p>Consequences for Employer Attitudes 123</p>
<p>Lessons for the United States 124</p>
<p>Consequences for Investment Choices 125</p>
<p>CHAPTER 13 Three Defined Contribution Plan Models 127</p>
<p>The Bank Savings Model 127</p>
<p>The Fund Supermarket Model 129</p>
<p>The Retirement Income Model 129</p>
<p>An Example of a Participant Statement in the</p>
<p>Retirement Income Model 130</p>
<p>CHAPTER 14 Collective Defined Contribution 133</p>
<p>The Principles 133</p>
<p>Broader Applications by the Dutch and Canadians 135</p>
<p>There s More than One Way to Skin a Cat 137</p>
<p>PART FIVE The Perspective of the Individual in Decumulation</p>
<p>CHAPTER 15 The First Dial: Your Personal Spending Policy 141</p>
<p>Step One: How to Keep Score The Current Position 142</p>
<p>Step Two: What about the Future? 144</p>
<p>Step Three: The Projected Outflow The First Attempt to Quantify Your Spending Plan 145</p>
<p>Step Four: How Long Will Your Assets Sustain Your Spending Plan? 147</p>
<p>Checkpoint: Is There a Gap to Be Bridged? 148</p>
<p>Next Up 150</p>
<p>CHAPTER 16 The Second Dial: Your Longevity Protection Policy 151</p>
<p>How an Immediate Annuity Works 151</p>
<p>The Benefit of Buying a Lifetime Annuity 153</p>
<p>Should Everyone Buy an Immediate Annuity? 154</p>
<p>Reasons Why Some People Don t Like to Buy</p>
<p>Immediate Annuities 156</p>
<p>Fortunately . . . 157</p>
<p>Appendix: More on Annuity–Equivalent Wealth 157</p>
<p>CHAPTER 17 The Third Dial: Investment Policy 159</p>
<p>A Reminder of Our Goals and Our Choices 159</p>
<p>A Framework 160</p>
<p>Taking Owner–Occupied Real Estate</p>
<p>into Account 161</p>
<p>Many Rules of Thumb Are Just Plain Wrong 163</p>
<p>Four Wealth Zones 164</p>
<p>How Your Wealth Zone Determines</p>
<p>Your Choices 166</p>
<p>Bequests 169</p>
<p>CHAPTER 18 Product Innovation with Decumulation in Mind 173</p>
<p>Variations on the Lifetime Annuity 173</p>
<p>Longevity Protection Plus Long–Term</p>
<p>Care Insurance 174</p>
<p>Guaranteed Minimum Withdrawal Benefits 175</p>
<p>The Longevity Pool 177</p>
<p>Advanced Life Deferred Annuities 177</p>
<p>Pure Decumulation Products 178</p>
<p>Which Type of Product Is Best? 179</p>
<p>PART SIX The Plan Sponsor s Role</p>
<p>CHAPTER 19 Defined Contribution Plan Governance 183</p>
<p>The Purpose of Defined Contribution Plan Governance 183</p>
<p>Risk Management 184</p>
<p>A Defined Contribution Plan s Purpose and Objectives 185</p>
<p>Fiduciary Duty 186</p>
<p>What Should a Prudent Expert Know And When? 189</p>
<p>New Choices Based on New Knowledge 189</p>
<p>In Summary 190</p>
<p>CHAPTER 20 Defined Contribution Plan Effectiveness 191</p>
<p>Participation Rate 193</p>
<p>Participation Delay 193</p>
<p>Employee Savings Rate 194</p>
<p>Employer Contribution Rate 195</p>
<p>Match Maximization 195</p>
<p>Participant Net Investment Return 196</p>
<p>Hardship Withdrawal Usage 198</p>
<p>Loans as Distributions 199</p>
<p>Early Withdrawals 200</p>
<p>Conclusion 200</p>
<p>CHAPTER 21 The Defined Contribution Plan Sponsor s Role in Decumulation 201</p>
<p>Providing Education 202</p>
<p>Providing Access to Financial Products: In–Plan or</p>
<p>Out–of–Plan 203</p>
<p>Design Features 204</p>
<p>Product Features 205</p>
<p>Simplicity 206</p>
<p>Parting Thought 206</p>
<p>Notes 207</p>
<p>About the Authors 223</p>
<p>Index 225</p>