Designing Successful Target-Date Strategies for Defined Contribution Plans Putting Participants on the Optimal Glide Path

by Schaus, Stacy L.; Gross, Bill

• ISBN13: 9780470596319
• ISBN10: 0470596317
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-03-29
• Publisher: Wiley

Summary

The ultimate guidebook for navigating the new world of pensions and retirement plansIn 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 leadersWith 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.

Author Biography

STACY L. SCHAUS, CFP, is a senior vice president and the defined contribution practice leader at PIMCO, which manages over $130 billion in DC assets. Prior to joining PIMCO in 2006, she was a founder and president of Hewitt Financial Services LLC, where she created the Hewitt 401(k) Index. Ms. Schaus has nearly thirty years of investment experience. She has written extensively on defined contribution issues, including PIMCO DC Dialogue, and has been named by 401kWire as one of the fifty most influential leaders in defined contribution for 2010. Stacy is the Founding Chairperson of the Defined Contribution Institutional Investment Association, as well as a board and research committee member for the Employee Benefit Research Institute. She also is a former board member of the Financial Planning Association.

Table of Contents

Foreword	p. xiii
Introduction	p. xv
Acknowledgments	p. xxi
DC Plan Evolution and Design Trends	p. 1
DC Plans in the American Retirement System	p. 3
Evolution of DB and DC Plans	p. 4
Making the Move from a DB Plan to a DC Plan	p. 6
How Do We Measure DC, Plan Success?	p. 8
What Is a Qualified Default Investment Alternative?	p. 10
Is Automatic Enrollment Enough?	p. 15
Auto-Escalation: How Much Is Enough?	p. 17
How Much Should We Save to Beat Inflation?	p. 17
Preparing for Retirement in an Economic Downturn	p. 19
What the Future May Hold for DC Plans	p. 21
In Closing	p. 22
Evolving DC Plan Design	p. 23
Investment Structure of Defined Contribution Plans	p. 27
Future of DC Plan Investment Design	p. 28
Qualified Default Investment Alternatives-Asset-Allocation Strategies	p. 28
Core Investment Offerings in DC Plans	p. 30
Brokerage or Mutual Fund Window	p. 36
Passive Investment Strategies?	p. 39
Evolving Structures and Alternative Investment Strategies	p. 40
Bringing It All Together: DC Investment Structure and Guarantees	p. 44
In Closing	p. 46
Target-Date Strategies: Packaged versus Custom	p. 47
Why Plan Sponsors Create Custom Target Retirement-Date Strategies	p. 49
Intel: Building Is Better than Buying	p. 56
Verizon: Well Worth the Effort	p. 61
In Closing	p. 64
Development of Custom Target-Date Retirement Strategies	p. 65
Legal and Fiduciary Considerations	p. 67
Common Legal Questions Regarding DC Plans	p. 68
Investment Policy Statements and Governance	p. 72
Target-Date Strategies on the Hot Seat	p. 74
What May Lie Ahead in Legislation of Target Strategies	p. 79
In Closing	p. 83
Record Keeping and Trust	p. 84
Two Basic Approaches to Setting Up Record Keeping	p. 85
Custom Target Strategies Lead to New Record-Keeping Approaches	p. 85
Pros and Cons of Alternative Operational Approaches	p. 87
Questions to Pose to Your Record Keeper	p. 87
Key Considerations to Determine Which Approach to Choose	p. 91
Establishing and Maintaining Operations	p. 92
Conversion of Target Risk to Target Date	p. 92
Fee Allocations and Disclosures	p. 92
Rebalancing the Target-Date Strategies	p. 96
Deluxe Corporation: Seamless Operational Setup and Rollout Communication	p. 96
How Record Keepers and Trustees Support Operations	p. 97
In Closing	p. 98
Communication Challenges and How to Meet Them	p. 100
Common Myths Surrounding Custom Target-Strategy Communication	p. 101
Communicating the Benefits of Target-Date Strategies	p. 102
Communication: Strategies to Keep It Simple	p. 103
Communication Tools	p. 105
Helping Plan Participants to Visualize Their Postretirement Future	p. 110
Communications and the Switch to DC Custom Strategies	p. 115
Communication Challenges during an Economic Downturn	p. 118
In Closing	p. 120
Evaluating Costs m Custom Strategies	p. 121
Why Costs Matter	p. 122
Have You Calculated and Reduced Total Plan Cost?	p. 122
Keeping Fees Reasonable	p. 124
Unbundling Can Keep Down Costs	p. 126
Custom Strategies and the Value of Unitizing	p. 127
Experts Discuss Fee Transparency	p. 128
ERISA Section 404(c) and Fee Disclosure	p. 130
Costs of Implementing and Running Custom Target Strategies	p. 132
In Closing	p. 134
Designing and Benchmarking custom Target-Date Strategies	p. 135
Glide-Path Design	p. 137
An Academic Look at Creating Optimal Asset-Allocation Strategies	p. 139
A Practitioner's look at Creating Optimal Asset-Allocation Strategies	p. 141
DC Plan Success Requires a New Approach	p. 143
Evaluating the Probability of Meeting DC Retirement-Income Goals	p. 144
Evaluating Risk-Factor Exposures in Target-Date Glide Paths	p. 156
Plan Sponsor Approaches to Custom Target-Date Strategies	p. 158
In Closing	p. 165
Asset Classes and Alternatives	p. 167
Clearing the Decks: Offering a Brokerage Window to Participants	p. 169
Typical DC Core Investment Offerings	p. 170
Simplify, Simplify, Simplify	p. 173
Simplify yet Diversify	p. 174
Suggested Core Investment Lineup	p. 176
Adding Alternatives to Target-Date Strategies	p. 191
In Closing	p. 194
Helping Protect DC Assets from Risk	p. 135
How Do We Experience Risk?	p. 196
2008 Market Impact on DC Participant Accounts	p. 198
No Place to Hide	p. 201
What Are the Main Types of Risk?	p. 203
Helping Protect DC Participant Assets from Risks	p. 220
Importance of Tail-Risk Hedging	p. 220
In Closing	p. 221
Approaches to Benchmarking	p. 223
Introduction to Target Date Benchmarking and the Measure of Success	p. 224
Common Approaches to Benchmarking Target-Date Strategies	p. 226
Benchmarking Managed Accounts	p. 234
In Closing	p. 235
Looking to the Future	p. 237
Financial Education, Advice, and Retirement Planning	p. 239
Why Plan Sponsors Provide Education and Advice	p. 241
Is Advice Needed When a Plan Has Auto-Enrollment and Target-Date Strategies?	p. 241
Education and Advice Offered by Plan Sponsors	p. 242
Evolution from Education to Managed Accounts	p. 243
Comparison of Managed Accounts and Custom Target-Date Strategies	p. 246
Advice beyond Asset Allocation	p. 247
Advice beyond Advice Models	p. 248
What Is Financial Planning?	p. 249
Financial Planning Process	p. 250
Financial Planning Fees	p. 251
In Closing	p. 254
Retirement Income and Guarantees	p. 256
Encourage Participants to Stay in the Plan or Go?	p. 260
In-Plan Guaranteed Income Solutions	p. 276
Plan Sponsors Exploring Guarantees	p. 278
Allowing Consolidation of Outside Assets into the Plan	p. 280
In Closing	p. 281
Conclusion	p. 283
Notes	p. 287
Index	p. 297
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