levels at record highs and interest rates at record lows, for example, require plan sponsors to review their core lineups? What is the role of active strategies with global exposure, or the importance of inflation hedging? In these chapters, we evaluate how considering options from both return and risk perspectives can help provide the assortment of solutions retirees will likely need.
Chapter 10: In Part Three, we shift from accumulation to distribution with a more in-depth look at the options available for retired plan participants. We grapple with how retirees make the decision to stay in or exit their plans; and we investigate what plan features and investment choices retirees need, both from the point of view of expert observers and the retiree. Questions include: What role should plans play in encouraging retirees to leave assets in the plan at retirement, and what features cause retirees to stay? How do individuals think about and accommodate the impact that increasing longevity may have on their retirement income plans?
Chapter 11: We wrap up with the best ideas for improving defined contribution plan success, including a summary of suggestions made throughout the book. We will consider how retirement plan coverage might be improved, including ideas from outside the United States. Among potential improvements, we’ll look at increasing contribution rates, reducing plan leakage, and aligning investment design to a retirement objective.
Finally, in our closing comments, we’ll identify some top priorities for future action. These include 1: increasing plan coverage and savings rates, 2: moving to objective-aligned investment approaches, and 3: broadening options for retirement income.
As readers proceed through the book, they will find dozens of design examples and insights from plan sponsors such as Intel Corporation, The Boeing Company, and Nestlé USA, among others. We also draw on the rich insights and perspectives that DC plan design consultants can offer, including Aon Hewitt, Callan, Mercer, NEPC, Rocaton Investment Advisors, LLC, Russell Investments, and more.
In this volume, we have likewise turned to prominent and insightful academics in the world of retirement income planning – including the father of modern finance, Harry Markowitz. Through our interviews with these masterful observers, we broaden the scope of our discussion to include everything from the impact of the field of behavioral finance on individual behavior and DC plan design, to demographic issues such as the effect of increasing longevity for Americans on DC plan design and outcomes, among other topics.
And while this book focuses primarily on U.S. DC plan design, we intend that non-U.S. readers find the framework, case studies, and consultant insights relevant and helpful. We also hope that U.S. readers will be enriched by the information and insights we pull in from other economies around the world.
How should readers use this book? You might think of it as akin to a cookbook, or car-repair manual, to give two examples. While it has been designed to flow logically from start to finish, readers might find it most useful to dip into or refer to specific ideas or chapters – without necessarily reading in a linear fashion. To that end, we’ve written it so the sections and chapters can function independently, versus requiring you to build knowledge that carries from one section to another. And both the Contents and Index can help readers locate specific conversations that are of particular interest. All that said, readers should engage with this volume in whatever way best suits their needs.
A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION
By publishing this handbook, PIMCO is continuing our tradition of dedication to helping clients and the consulting community build more successful DC plans. We bring this commitment to life by identifying and exploring questions and issues active participants and retirees alike face in preparing to enter retirement, and by proposing ways in which we can work together to optimize outcomes for all participants.
Over the past years, we have produced a range of publications to help plan sponsors evolve their retirement programs. Our DC Design series focuses on ways plan sponsors can modify plan lineups to promote the potential of improved participant outcomes, and examines issues plan sponsors face in globalizing their plan offerings.
In 2006, we launched the PIMCO DC Dialogue to showcase the thinking of a wide range of retirement leaders and innovators including consultants, academics, lawyers, financial advisors, not-for-profit executives, and, most important, plan sponsors from both the private and public sectors. In this volume, as in our previous volume, we draw upon the generous contributions we have gleaned from our Dialogue series to contribute to readers.
In addition to our Dialogue series, PIMCO also publishes targeted research and analytic papers that carefully examine elements of DC plan structure. These include our PIMCO DC Research, DC Analytics, and Viewpoint series. In this volume, we use the findings pinpointed in these series to more fully develop our analysis – however, as in our earlier volume, our motivation is not to promote only the suggestions or philosophies of PIMCO, but to add PIMCO’s voice to the various perspectives cultivated from across the industry. In addition, we note that in order to preserve an objective and balanced viewpoint, each chapter of this handbook has been reviewed and edited by professionals from across the country.
Over the past decade, PIMCO has also undertaken an annual Defined Contribution Consulting Support and Trends Survey to help plan sponsors understand the breadth of views and specific consulting services available within the DC marketplace. Through this survey, we capture data, trends, and opinions from 66 consulting firms across the United States, which in 2016 served over 11,000 clients with aggregate DC assets in excess of $4.2 trillion. The data and observations from these surveys – 10 in total – are cited throughout this book, providing practical “on the ground” intelligence about DC plans in America.
We have cultivated the input of these many voices because we recognize that there are a range of approaches, viewpoints, and solutions – both here at home and from around the world – that can contribute to plan sponsors’ and plan members’ understanding of defined contribution plans. And that enhanced understanding, in turn, can help produce plans that are more likely to succeed. So whether you are reading this as a plan sponsor who is new to DC plan oversight, a consultant with decades of experience, or an individual (perhaps planning for your own or another’s retirement) who is keen to learn about plan design, we hope engaging with the ideas in this book will be a valuable experience.
WHY SHOULD YOU READ THIS BOOK?
Finally, if you’re on the fence about whether to carry on reading beyond this introduction, we’ve compiled a partly tongue-in-cheek list of our top 10 reasons to continue. Without further ado, we think you should read this book to:
1. Understand and embrace a framework for considering the world’s most important retirement plan structure: the DC plan.
2. Develop the knowledge that will help improve retirement income security for employees.
3. Learn about how to reduce risk for all employees, as well as the cost of older workers who lack sufficient means to retire.
4. Get up to speed on a concrete approach to structure and benchmark target-date and other investment strategies for DC plans.
5. Receive plan design tips from many of the world’s largest employers.
6. Gain design insights and benefit from the diverse points of view and experiences of consultants and DC experts from around the world.
7. Quickly get up to date on recent DC design trends.
8. Stimulate your own thinking for how to evolve your plan.
9. Gather design concepts from peers and other experts.
10. And last but not least, in order to be able to discuss DC plan ideas and suggestions at cocktail parties!
PART ONE
DC Plans: A Cornerstone of Retirement
CHAPTER 1
DC Plans Today: An Overview of the Issues
PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN
I started my career in 1981, at the age of 21.. which also happened to be the year