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Successful Defined Contribution Investment Design

Book Description

Start-to-finish guidance toward building and implementing a robust DC plan

Successful Defined Contribution Investment Design offers a comprehensive guidebook for fiduciaries tasked with structuring and implementing a 401(k) or other defined contribution (DC) pension plan. More than a collection of the usual piecemeal information, this book seeks to offer a complete, contemporary framework for plan design, together with tested methodologies and analytic techniques to help streamline plan monitoring, management and improve participant outcomes. Examples from plan sponsors provide on-the-ground insight while suggestions from DC consultants add expert perspective. Views from ERISA expert counsel provide additional understanding—along with input from academic thought leaders. Finally, investment evaluation and analysis is joined with participant savings and asset allocation data to look prospectively at potential outcomes, and case studies illustrate real-world implementation of objective-aligned asset allocation such as custom target-date strategies. Though the focus is primarily on U.S. plan design, author perspectives from countries including Australia, the United Kingdom and Canada provide relevant and helpful viewpoints for both new and experienced plan fiduciaries.

For the vast majority of workers, DC plans have replaced traditional defined benefit pension plans as the primary source of employer-provided retirement income. This book provides comprehensive guidance to help you construct a plan to help workers to retire with confidence.

  • Adopt a framework for DC evaluation and structure
  • Learn new methodologies for investment choice evaluation
  • Use the innovative PIMCO Retirement Income Cost Estimate—or PRICE—to help quantify the amount of money a worker needs to create and stay on track to building a real income stream in retirement
  • Examine methodologies used at major companies in the U.S. and globally

DC plans are the most rapidly growing retirement market in the world, yet sources of consolidated structural and analytical guidance are lacking. Successful Defined Contribution Investment Design fills the gap with a comprehensive handbook that covers the bases to help you develop an objective-aligned defined contribution plan.

Table of Contents

  1. Acknowledgments
  2. Introduction
    1. HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT
    2. A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION
    3. WHY SHOULD YOU READ THIS BOOK?
  3. PART ONE DC Plans: A Cornerstone of Retirement
    1. CHAPTER 1 DC Plans Today: An Overview of the Issues
      1. PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN
      2. DC PLANS: BECOMING THE NEW REALITY . . . NO TURNING BACK
      3. SETTING GOALS FOR SUCCESS: INCOME REPLACEMENT TARGETS
      4. REDUCING DC LITIGATION RISK: PROCESS AND OVERSIGHT
      5. WHO’S A FIDUCIARY?
      6. HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES
      7. HIRING AN INVESTMENT CONSULTANT
      8. GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE
      9. PIMCO PRINCIPLES FOR DC PLAN SUCCESS: BUILDING AND PRESERVING PURCHASING POWER
      10. MAXIMIZING DC SAVINGS: JUST DO IT!
      11. IN CLOSING
      12. QUESTIONS FOR PLAN FIDUCIARIES
    2. CHAPTER 2 Aligning DC Investment Design to Meet the PRICE of Retirement
      1. BEGIN WITH THE END IN MIND
      2. WHAT IS A REASONABLE PAY REPLACEMENT TARGET?
      3. CALCULATING THE INCOME REPLACEMENT RATES
      4. HISTORIC COST OF RETIREMENT: PRICE IS A MOVING TARGET
      5. A FOCUS ON INCOME, NOT COST
      6. PRICE-AWARE: APPLYING PRICE TO CONSIDER DC ASSETS AND TARGET-DATE STRATEGIES
      7. EVALUATING GLIDE PATHS
      8. TRACKING DC ACCOUNT BALANCE GROWTH RELATIVE TO PRICE
      9. SUMMARY: THE IMPORTANCE OF KNOWING YOUR PRICE
      10. IN CLOSING
      11. QUESTIONS FOR PLAN FIDUCIARIES
      12. NOTE
    3. CHAPTER 3 Plan Investment Structure
      1. TIERS AND BLENDS: INVESTMENT CHOICES FOR DC PARTICIPANTS
      2. TIER I: “DO-IT-FOR-ME” ASSET ALLOCATION INVESTMENT STRATEGIES
      3. TIER II: “HELP-ME-DO-IT” STAND-ALONE OR “CORE” INVESTMENT OPTIONS
      4. TIER III: “DO-IT-MYSELF” MUTUAL-FUND-ONLY OR FULL BROKERAGE WINDOW
      5. CONSIDERING AN OUTSOURCED CHIEF INVESTMENT OFFICER
      6. IN CLOSING
      7. QUESTIONS FOR PLAN FIDUCIARIES
      8. NOTES
    4. CHAPTER 4 Target-Date Design and Approaches
      1. TARGET-DATE STRUCTURES VARY BY PLAN SIZE
      2. CUSTOM TARGET-DATE STRATEGIES
      3. SEMICUSTOM TARGET-DATE
      4. PACKAGED TARGET-DATE
      5. TARGET-DATE SELECTION AND EVALUATION CRITERIA
      6. NO SUCH THING AS PASSIVE
      7. LOW COST AND LOW TRACKING ERROR DOES NOT EQUAL LOW RISK
      8. FRAMEWORK FOR SELECTING AND EVALUATING TARGET-DATE STRATEGIES: THREE ACTIVE DECISIONS PLAN SPONSORS MUST MAKE
      9. ACTIVE DECISION #1: HOW MUCH RISK CAN PLAN PARTICIPANTS TAKE?
      10. ACTIVE DECISION #2: HOW IS THE RISK BEST ALLOCATED ACROSS INVESTMENT CHOICES?
      11. ACTIVE DECISION #3: SHOULD RISK BE ACTIVELY HEDGED?
      12. TAIL-RISK HEDGING STRATEGIES
      13. INSURANCE
      14. TARGET-DATE ANALYTICS: GLIDE PATH ANALYZER (GPA) AND OTHER TOOLS
      15. GLOBAL DC PLANS: SIMILAR DESTINATIONS, DISTINCTLY DIFFERENT PATHS
      16. IN CLOSING
      17. QUESTIONS FOR PLAN FIDUCIARIES
      18. NOTES
  4. PART TWO Building Robust Plans: Core Investment Offerings
    1. CHAPTER 5 Capital Preservation Strategies
      1. CAPITAL PRESERVATION: IMPORTANCE
      2. CAPITAL PRESERVATION: WHAT IS PREVALENT AND WHAT IS PREFERRED?
      3. THE $1 NAV: SHARED BY STABLE VALUE AND MMFs
      4. STABLE VALUE OFFERS MORE OPPORTUNITY IN A LOW-INTEREST-RATE ENVIRONMENT
      5. LOOKING FORWARD: THE CHANGING ROLE OF STABLE VALUE
      6. MAKING LOW-RISK DECISIONS: VIEWS FROM THE FIELD
      7. WHITE LABELING: A CAPITAL PRESERVATION SOLUTION
      8. AN ANALYTIC EVALUATION OF CAPITAL PRESERVATION SOLUTIONS
      9. SHORT-TERM, LOW-DURATION, AND LOW-RISK BOND STRATEGIES
      10. INCLUSION OF STABLE VALUE IN CUSTOM TARGET-DATE OR OTHER BLENDED STRATEGIES
      11. IN CLOSING
      12. QUESTIONS FOR PLAN FIDUCIARIES
      13. NOTE
    2. CHAPTER 6 Fixed-Income Strategies
      1. WHAT ARE BONDS, AND WHY ARE THEY IMPORTANT FOR RETIREMENT INVESTORS?
      2. WHAT ARE THE DIFFERENT TYPES OF BONDS IN THE MARKET?
      3. WHAT TYPES OF BONDS SHOULD BE OFFERED TO DC PARTICIPANTS?
      4. INVESTMENT-GRADE AND HIGH-YIELD CREDIT
      5. BOND INVESTMENT STRATEGIES: PASSIVE VERSUS ACTIVE APPROACHES
      6. ANALYTIC EVALUATION: COMPARING BOND STRATEGIES
      7. OBSERVATIONS FOR FIXED INCOME ALLOCATION WITHIN TARGET-DATE STRATEGIES
      8. IN CLOSING
      9. QUESTIONS FOR PLAN FIDUCIARIES
    3. CHAPTER 7 Designing Balanced DC Menus: Considering Equity Options
      1. WHAT ARE EQUITIES AND HOW ARE THEY PRESENTED IN DC INVESTMENT MENUS?
      2. GETTING THE MOST OUT OF EQUITIES
      3. CONSIDER DIVIDEND-PAYING STOCKS
      4. EVALUATING EQUITY STRATEGIES
      5. LESS IS MORE: STREAMLINING EQUITY CHOICES
      6. SHIFT TO ASSET-CLASS MENU MAY IMPROVE RETIREMENT OUTCOMES
      7. ACTIVE VERSUS PASSIVE—THE ONGOING DEBATE
      8. STRATEGIC BETA: CONSIDER ADDING FUNDAMENTALLY WEIGHTED EQUITY EXPOSURE
      9. CURRENCY HEDGING: AN ACTIVE DECISION
      10. OBSERVATIONS FOR EQUITY ALLOCATIONS WITHIN TARGET-DATE STRATEGIES
      11. IN CLOSING
      12. QUESTIONS FOR FIDUCIARIES
      13. NOTE
    4. CHAPTER 8 Inflation Protection
      1. WHAT IS INFLATION AND HOW IS IT MEASURED?
      2. WHY INFLATION PROTECTION IN DC?
      3. HISTORY OF INFLATION: INFLATION SPIKES UNDERSCORE NEED FOR INFLATION-HEDGING ASSETS
      4. INFLATION PROTECTION WHEN ACCUMULATING AND DECUMULATING, AND IN DIFFERENT ECONOMIC ENVIRONMENTS
      5. ECONOMIC ENVIRONMENTS CHANGE UNEXPECTEDLY—AND REWARD OR PUNISH VARIOUS ASSET CLASSES
      6. CONSULTANTS FAVOR TIPS, MULTI-REAL-ASSET STRATEGIES, REITS, AND COMMODITIES
      7. HOW SHOULD PLAN SPONSORS ADDRESS INFLATION RISK IN DC PORTFOLIOS?
      8. IMPLEMENTATION CHALLENGES
      9. EVALUATING REAL ASSET STRATEGIES
      10. SUMMARY COMPARISON OF INDIVIDUAL AND MULTI-REAL-ASSET BLENDS
      11. INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
      12. OBSERVATIONS FOR INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
      13. IN CLOSING
      14. QUESTIONS FOR FIDUCIARIES
    5. CHAPTER 9 Additional Strategies and Alternatives: Seeking Diversification and Return
      1. WHAT ARE ALTERNATIVE ASSETS?
      2. A WIDER LENS ON ALTERNATIVES
      3. CONSULTANT SUPPORT FOR ADDITIONAL STRATEGIES AND ALTERNATIVES
      4. BACK TO BASICS: WHY CONSIDER ALTERNATIVES?
      5. LIQUID ALTERNATIVES: TYPES AND SELECTION CONSIDERATIONS
      6. IMPORTANT CHARACTERISTICS IN SELECTING ALTERNATIVES: CONSULTANT VIEWS
      7. ILLIQUID ALTERNATIVES: TYPES AND CONSIDERATIONS
      8. CONTRASTING LIQUID ALTERNATIVE STRATEGIES WITH HEDGE FUND AND PRIVATE EQUITY INVESTMENTS
      9. IN CLOSING
      10. QUESTIONS FOR PLAN FIDUCIARIES
  5. PART THREE Bringing It All Together: Creating Retirement Income
    1. CHAPTER 10 Retirement Income: Considering Options for Plan Sponsors and Retirees
      1. ADVISOR AND CONSULTANT RETIREMENT INCOME SUGGESTIONS
      2. WHY DON’T RETIREES LEAVE THEIR ASSETS IN DC PLANS AT RETIREMENT?
      3. RETAINING A RELATIONSHIP WITH YOUR EMPLOYER IN RETIREMENT: AN INNOVATIVE AND CARING PLAN SPONSOR
      4. MUTUAL BENEFITS: RETAINING RETIREE ASSETS MAY HELP BOTH RETIREES AND PLAN SPONSORS
      5. TURNING DC ASSETS INTO A LIFETIME PAYCHECK: EVALUATING THE DC INVESTMENT LINEUP FOR RETIREE READINESS
      6. EVALUATING PORTFOLIO LONGEVITY
      7. TURNING DEFINED CONTRIBUTION ASSETS INTO A LIFETIME INCOME STREAM: HOW TO EVALUATE INVESTMENT CHOICES FOR RETIREES
      8. GUARDING RETIREE ASSETS AGAINST A SUDDEN MARKET DOWNTURN: SEQUENCING RISK
      9. WAYS TO MANAGE MARKET AND LONGEVITY RISK . . . WITHOUT ADDING IN-PLAN INSURANCE PRODUCTS
      10. LIVING BEYOND 100: PLANNING FOR LONGEVITY
      11. MANAGING LONGEVITY RISK: CONSIDERATIONS FOR BUYING AN ANNUITY
      12. IMMEDIATE AND DEFERRED ANNUITIES: WHY OUT-OF-PLAN MAKES SENSE
      13. IN CLOSING
      14. QUESTIONS FOR PLAN FIDUCIARIES
      15. NOTES
    2. CHAPTER 11 A Global View: The Best Ideas from around the Globe for Improving Plan Design
      1. DC PLANS: BECOMING THE DOMINANT GLOBAL MODEL
      2. RETIREMENT PLAN COVERAGE AND PARTICIPATION
      3. INVESTMENT DEFAULT AND GROWTH OF TARGET-DATE STRATEGIES
      4. RETIREMENT INCOME: THE GLOBAL SEARCH FOR SOLUTIONS
      5. DEFINED AMBITION IN THE NETHERLANDS
      6. NEW SOLUTIONS IN AUSTRALIA AND BEYOND: TONTINES AND GROUP SELF-ANNUITIZATION
      7. “GETTING DC RIGHT”: LESSONS LEARNED IN CHAPTERS 1 THROUGH 10
      8. ANALYTIC FACTORS TO CONSIDER: SUMMARY BY ASSET PILLAR
      9. IN CLOSING
      10. NOTE
  6. Closing Comments
    1. PRIORITY 1: INCREASING PLAN COVERAGE AND INDIVIDUAL SAVINGS RATES
    2. PRIORITY 2: MOVING TO OBJECTIVE-ALIGNED INVESTMENT APPROACHES
    3. PRIORITY 3: BROADENING OPTIONS FOR RETIREMENT INCOME
    4. NUDGING ONE ANOTHER ALONG A PATH TO SUCCESS
  7. Index
  8. EULA