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The Retirement Plan Solution: The Reinvention of Defined Contribution

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Praise ForThe 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

Table of Contents

  1. Copyright
  2. Preface
    1. THOUGHTS ON THE MARKET TURMOIL OF 2008–2009
  3. Acknowledgments
  4. International Praise for The Retirement Plan Solution: The Reinvention of Defined Contribution
  5. 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
  6. 1. Dc Version 2.0
    1. 1.1. COMING OF AGE
    2. 1.2. THE NEW RETIREMENT SUPERPOWER
    3. 1.3. COMING SOON TO A DICTIONARY NEAR YOU: DBization
    4. 1.4. AT THE HEART OF VERSION 2.0: A DIFFERENT OBJECTIVE
    5. 1.5. INCOME REPLACEMENT
    6. 1.6. IS THIS THE FIRST NAIL IN THE COFFIN OF DEFINED CONTRIBUTION?
    7. 1.7. "HOLD ON A SECOND ..."
  7. I. The Dynamics of the Retirement Plan
    1. 2. More than You Ever Wanted to Know about Life Expectancy
      1. 2.1. WHAT IS "LIFE EXPECTANCY"?
      2. 2.2. HOW LIFE EXPECTANCY HAS CHANGED
      3. 2.3. BUT AN INDIVIDUAL'S LIFE SPAN IS UNCERTAIN
      4. 2.4. LONGEVITY DISTRIBUTIONS: LET'S TAKE A LOOK
      5. 2.5. WHAT DOES THIS MEAN?
      6. 2.6. AND WILL LONGEVITY IMPROVE EVEN MORE?
    2. 3. Retirement Is Expensive
      1. 3.1. THE GOAL IS A TARGETED LEVEL OF INCOME REPLACEMENT
      2. 3.2. THE FUNDAMENTAL PENSION EQUATION AND THE DEFINED BENEFIT SYSTEM
      3. 3.3. A SIMPLE MODEL OF RETIREMENT PLAN ACCUMULATION AND DECUMULATION
      4. 3.4. BASE CASE RESULTS
      5. 3.5. WHEN TO START SAVING
      6. 3.6. THE BASE CASE MAY NOT BE A RELIABLE GUIDE
      7. 3.7. HOW TO ACT IN THE FACE OF UNCERTAINTY
        1. 3.7.1. Choice 1: Be Prepared To Vary The Savings Rate
        2. 3.7.2. Choice 2: Be Prepared To Vary The Retirement Date
        3. 3.7.3. Choice 3: Be Prepared To Adjust Your Expectations
        4. 3.7.4. Choice 4: Manage The Investment Program
      8. 3.8. APPENDIX: FURTHER ANALYSIS OF THE UNCERTAINTY ASSOCIATED WITH INVESTMENT RETURNS
    3. 4. Investment Returns Are All-Important
      1. 4.1. THE 10/30/60 RULE
        1. 4.1.1. The 10/30/60 Rule Is Fairly Robust Under Different Input Assumptions
        2. 4.1.2. What The 10/30/60 Rule Does Not Mean—And What It Does Mean
      2. 4.2. GAMES AT A VIRTUAL CASINO
        1. 4.2.1. And We've Already Learned Two Important Lessons
        2. 4.2.2. Two More Lessons
      3. 4.3. INVESTMENT ANALOGS
      4. 4.4. HISTORICAL RETURN PATTERNS
      5. 4.5. WHAT ARE THE LESSONS?
      6. 4.6. WHAT FOLLOWS?
      7. 4.7. HOW MUCH INVESTMENT RISK CAN YOU TOLERATE?
    4. 5. Sustainable Spending
      1. 5.1. LIFETIME ANNUITIES
      2. 5.2. SIMULATIONS
      3. 5.3. APPENDIX: THE MULTIPLE
  8. II. Opportunities in the Accumulation Phase
    1. 6. Save More
      1. 6.1. EMPLOYERS WITH NO PLAN
        1. 6.1.1. Why Does This Happen?
        2. 6.1.2. Possible Solutions
      2. 6.2. EMPLOYEES WHO DO NOT ENROLL
        1. 6.2.1. Why Does This Happen?
        2. 6.2.2. Possible Solutions
      3. 6.3. EMPLOYEES WHO START SAVING TOO LATE
        1. 6.3.1. Why Does This Happen?
        2. 6.3.2. Possible Solutions
      4. 6.4. EMPLOYEES WITH LOW SAVINGS RATES
        1. 6.4.1. Why Does This Happen?
        2. 6.4.2. Possible Solutions
      5. 6.5. EMPLOYEES WITH GAPS IN CONTINUOUS PARTICIPATION
        1. 6.5.1. Why Does This Happen?
        2. 6.5.2. Possible Solutions
    2. 7. Limit Leakage
      1. 7.1. CASHING OUT
        1. 7.1.1. Why Does This Happen?
      2. 7.2. LOANS
        1. 7.2.1. Why Does This Happen?
      3. 7.3. HARDSHIP WITHDRAWALS
        1. 7.3.1. Why Does This Happen?
        2. 7.3.2. Possible Solutions
    3. 8. Invest Better
      1. 8.1. EVIDENCE OF WASTE
      2. 8.2. THE IMPORTANCE OF A GOOD DEFAULT OPTION
      3. 8.3. THE "TARGET DATE" SOLUTION
        1. 8.3.1. Glide Path: The Academic Explanation
        2. 8.3.2. Sequential Risk: The Practical Explanation
        3. 8.3.3. What Goes Into A Glide Path?
        4. 8.3.4. What to Do If You're Not The Average Employee
        5. 8.3.5. Implementing the Glide Path
      4. 8.4. AND FOR THE INVESTMENT EXPERTS?
    4. 9. Reduce Fees
      1. 9.1. THE IMPACT OF FEES
      2. 9.2. FEES FOR WHAT?
      3. 9.3. LOOKING FOR FEE LEAKAGE
      4. 9.4. FEE-SHARING ARRANGEMENTS
      5. 9.5. INSTITUTIONAL VERSUS RETAIL FEES
      6. 9.6. ACTIVE MANAGEMENT
      7. 9.7. RECORD-KEEPING FEES
  9. III. We Need the Right Sort of Education
    1. 10. Why the Waste? Because We're Only Human
      1. 10.1. OVERCONFIDENCE IN RETIREMENT PLANNING
      2. 10.2. BEHAVIORAL FINANCE
      3. 10.3. LOW PARTICIPATION AND SAVINGS RATES
        1. 10.3.1. Hyperbolic Discounting
        2. 10.3.2. Choice Overload
      4. 10.4. POOR INVESTMENT RESULTS
        1. 10.4.1. Lack Of Sophistication
        2. 10.4.2. Overconfidence
        3. 10.4.3. Chasing Returns
      5. 10.5. WHAT TO DO?
    2. 11. Financial Education
      1. 11.1. FACTS THAT SURPRISED US
      2. 11.2. ENTHUSIASTIC INITIATIVES
      3. 11.3. WHAT EXACTLY CAN BE TAUGHT?
      4. 11.4. WHY HASN'T THIS ALREADY BEEN TAUGHT?
      5. 11.5. A LITERATE DEFAULT SYSTEM
      6. 11.6. A FINAL ANECDOTE
  10. iV. Other Ways of Running Defined Contribution Plans
    1. 12. Case Study—Australia
      1. 12.1. SOME FEATURES OF THE AUSTRALIAN DEFINED CONTRIBUTION SYSTEM
      2. 12.2. CONSEQUENCES FOR COVERAGE
      3. 12.3. CONSEQUENCES FOR ADEQUACY
      4. 12.4. CONSEQUENCES FOR EMPLOYER ATTITUDES
      5. 12.5. LESSONS FOR THE UNITED STATES
      6. 12.6. CONSEQUENCES FOR INVESTMENT CHOICES
    2. 13. Three Defined Contribution Plan Models
      1. 13.1. THE BANK SAVINGS MODEL
      2. 13.2. THE FUND SUPERMARKET MODEL
      3. 13.3. THE RETIREMENT INCOME MODEL
      4. 13.4. AN EXAMPLE OF A PARTICIPANT STATEMENT IN THE RETIREMENT INCOME MODEL
    3. 14. Collective Defined Contribution
      1. 14.1. THE PRINCIPLES
        1. 14.1.1. Some Consequences Of This Hybrid Design
      2. 14.2. BROADER APPLICATIONS BY THE DUTCH AND CANADIANS
      3. 14.3. THERE'S MORE THAN ONE WAY TO SKIN A CAT
  11. V. The Perspective of the Individual in Decumulation
    1. 15. The First Dial: Your Personal Spending Policy
      1. 15.1. STEP ONE: HOW TO KEEP SCORE—THE CURRENT POSITION
      2. 15.2. STEP TWO: WHAT ABOUT THE FUTURE?
      3. 15.3. STEP THREE: THE PROJECTED OUTFLOW—THE FIRST ATTEMPT TO QUANTIFY YOUR SPENDING PLAN
      4. 15.4. STEP FOUR: HOW LONG WILL YOUR ASSETS SUSTAIN YOUR SPENDING PLAN?
      5. 15.5. CHECKPOINT: IS THERE A GAP TO BE BRIDGED?
      6. 15.6. NEXT UP
    2. 16. The Second Dial: Your Longevity Protection Policy
      1. 16.1. HOW AN IMMEDIATE ANNUITY WORKS
      2. 16.2. THE BENEFIT OF BUYING A LIFETIME ANNUITY
      3. 16.3. SHOULD EVERYONE BUY AN IMMEDIATE ANNUITY?
      4. 16.4. REASONS WHY SOME PEOPLE DON'T LIKE TO BUY IMMEDIATE ANNUITIES
      5. 16.5. FORTUNATELY...
      6. 16.6. APPENDIX: MORE ON ANNUITY-EQUIVALENT WEALTH
    3. 17. The Third Dial: Investment Policy
      1. 17.1. A REMINDER OF OUR GOALS AND OUR CHOICES
      2. 17.2. A FRAMEWORK
      3. 17.3. TAKING OWNER-OCCUPIED REAL ESTATE INTO ACCOUNT
      4. 17.4. MANY RULES OF THUMB ARE JUST PLAIN WRONG
      5. 17.5. FOUR WEALTH ZONES
      6. 17.6. HOW YOUR WEALTH ZONE DETERMINES YOUR CHOICES
        1. 17.6.1. In the Essentials Zone
        2. 17.6.2. In the Lifestyle Zone
        3. 17.6.3. In the Bequest Zone
        4. 17.6.4. In the Endowment Zone
      7. 17.7. BEQUESTS
    4. 18. Product Innovation With Decumulation In Mind
      1. 18.1. VARIATIONS ON THE LIFETIME ANNUITY
      2. 18.2. LONGEVITY PROTECTION PLUS LONG-TERM CARE INSURANCE
      3. 18.3. GUARANTEED MINIMUM WITHDRAWAL BENEFITS
      4. 18.4. THE LONGEVITY POOL
      5. 18.5. ADVANCED LIFE DEFERRED ANNUITIES
      6. 18.6. PURE DECUMULATION PRODUCTS
      7. 18.7. WHICH TYPE OF PRODUCT IS BEST?
  12. VI. The Plan Sponsor's Role
    1. 19. Defined Contribution Plan Governance
      1. 19.1. THE PURPOSE OF DEFINED CONTRIBUTION PLAN GOVERNANCE
      2. 19.2. RISK MANAGEMENT
      3. 19.3. A DEFINED CONTRIBUTION PLAN'S PURPOSE AND OBJECTIVES
        1. 19.3.1. From Few To Many
        2. 19.3.2. From Supplemental Savings To Income Replacement
        3. 19.3.3. From Lump-Sum Distributions To Sustainable Income
      4. 19.4. FIDUCIARY DUTY
        1. 19.4.1. Exclusive Benefit Of Participants
        2. 19.4.2. Prudent Expert
      5. 19.5. WHAT SHOULD A PRUDENT EXPERT KNOW—AND WHEN?
      6. 19.6. NEW CHOICES BASED ON NEW KNOWLEDGE
      7. 19.7. IN SUMMARY
    2. 20. Defined Contribution Plan Effectiveness
      1. 20.1. PARTICIPATION RATE
      2. 20.2. PARTICIPATION DELAY
      3. 20.3. EMPLOYEE SAVINGS RATE
      4. 20.4. EMPLOYER CONTRIBUTION RATE
      5. 20.5. MATCH MAXIMIZATION
      6. 20.6. PARTICIPANT NET INVESTMENT RETURN
      7. 20.7. HARDSHIP WITHDRAWAL USAGE
      8. 20.8. LOANS AS DISTRIBUTIONS
      9. 20.9. EARLY WITHDRAWALS
      10. 20.10. CONCLUSION
    3. 21. The Defined Contribution Plan Sponsor's Role in Decumulation
      1. 21.1. PROVIDING EDUCATION
      2. 21.2. PROVIDING ACCESS TO FINANCIAL PRODUCTS: IN-PLAN OR OUT-OF-PLAN
      3. 21.3. DESIGN FEATURES
      4. 21.4. PRODUCT FEATURES
      5. 21.5. SIMPLICITY
      6. 21.6. PARTING THOUGHT
    4. Notes
      1. Preface
      2. INTRODUCTION The Great American Retirement System?
      3. CHAPTER 1 DC Version 2.0
      4. CHAPTER 2 More than You Ever Wanted to Know about Life Expectancy
      5. CHAPTER 3 Retirement Is Expensive
      6. CHAPTER 4 Investment Returns Are All-Important
      7. CHAPTER 5 Sustainable Spending
      8. CHAPTER 6 Save More
      9. CHAPTER 7 Limit Leakage
      10. CHAPTER 8 Invest Better
      11. CHAPTER 9 Reduce Fees
      12. CHAPTER 10 Why the Waste? Because We're Only Human
      13. CHAPTER 11 Financial Education
      14. CHAPTER 12 Case Study—Australia
      15. CHAPTER 14 Collective Defined Contribution
      16. CHAPTER 15 The First Dial: Your Personal Spending Policy
      17. CHAPTER 16 The Second Dial: Your Longevity Protection Policy
      18. CHAPTER 17 The Third Dial: Investment Policy
      19. CHAPTER 18 Product Innovation with Decumulation in Mind
      20. CHAPTER 19 Defined Contribution Plan Governance
      21. CHAPTER 20 Defined Contribution Plan Effectiveness
      22. CHAPTER 21 The Defined Contribution Plan Sponsor's Role in Decumulation
    5. About the Authors