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