The Retirement Plan Solution The Reinvention of Defined Contribution

by Ezra, Don; Collie, Bob; Smith, Matthew X.

• ISBN13: 9780470398852
• ISBN10: 047039885X
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-06-29
• Publisher: Wiley

Summary

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

Author Biography

Don Ezra is a widely published author. He has won a Graham and Dodd Award from the Financial Analysts Journal, the Roger Murray Prize from the Q Group in the United States, and the Lillywhite Award of the Employee Benefit Research Institute "for extraordinary life contri-butions to Americans' economic security."

Bob Collie has been working with defined benefit and defined contribution plans in the United Kingdom and United States for more than twenty years, playing at different times the role of actuary, investment consultant, and strategist.

Matthew X. Smith has been involved with the design, implemen-tation, administration, consultation to, and asset management of defined contribution plans for over twenty-five years. He has also written and spoken widely on defined contribution topics.

Table of Contents

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