Successful Defined Contribution Investment Design: How to Align Target-Date, Core, and Income Strategies to the PRICE of Retirement(Wiley Finance)

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:
Acknowledgments xv Introduction 1 How This Book Is Organized—and How to Use It 3 A Continuing Commitment to Meet the Need for Information 6 Why Should You Read This Book? 7 PART ONE DC Plans: A Cornerstone of Retirement 9 CHAPTER 1 DC Plans Today 11 Preface: A Career and a New Form of Pension Plan Are Born 11 DC Plans: Becoming the New Reality . . . No Turning Back 13 Setting Goals for Success: Income Replacement Targets 14 Reducing DC Litigation Risk: Process and Oversight 16 Who’s a Fiduciary? 17 How to Approach Outsourcing DC Plan Resources 19 Hiring an Investment Consultant 20 Getting Started: Setting an Investment Philosophy and Governance Structure 20 PIMCO Principles for DC Plan Success: Building and Preserving Purchasing Power 25 Maximizing DC Savings: Just Do It! 27 In Closing 32 Questions for Plan Fiduciaries 33 CHAPTER 2 Aligning DC Investment Design to Meet the PRICE of Retirement 35 Begin with the End in Mind 37 What Is a Reasonable Pay Replacement Target? 39 Calculating the Income Replacement Rates 42 Historic Cost of Retirement: PRICE Is a Moving Target 44 A Focus on Income, Not Cost 47 PRICE-Aware: Applying PRICE to Consider DC Assets and Target-Date Strategies 48 Evaluating Glide Paths 50 Tracking DC Account Balance Growth Relative to PRICE 54 Summary: The Importance of Knowing Your PRICE 55 In Closing 55 Questions for Plan Fiduciaries 56 Note 56 CHAPTER 3 Plan Investment Structure 57 Tiers and Blends: Investment Choices for DC Participants 60 Tier I: “Do-It-for-Me” Asset Allocation Investment Strategies 61 Tier II: “Help-Me-Do-It” Stand-Alone or “Core” Investment Options 67 Tier III: “Do-It-Myself” Mutual-Fund-Only or Full Brokerage Window 90 Considering an Outsourced Chief Investment Offi cer 91 In Closing 93 Questions for Plan Fiduciaries 94 Notes 94 CHAPTER 4 Target Date Design and Approaches 95 Target-Date Structures Vary by Plan Size 100 Custom Target-Date Strategies 101 Semicustom Target-Date 102 Packaged Target-Date 103 Target-Date Selection and Evaluation Criteria 104 No Such Thing as Passive 105 Low Cost and Low Tracking Error Does Not Equal Low Risk 106 Framework for Selecting and Evaluating Target-Date Strategies: Three Active Decisions Plan Sponsors Must Make 107 Active Decision #1: How Much Risk Can Plan Participants Take? 108 Active Decision #2: How Is the Risk Best Allocated across Investment Choices? 114 Active Decision #3: Should Risk Be Actively Hedged? 119 Tail-Risk Hedging Strategies 119 Insurance 120 Target-Date Analytics: Glide Path Analyzer (GPA) and Other Tools 120 Global DC Plans: Similar Destinations, Distinctly Different Paths 121 In Closing 123 Questions for Plan Fiduciaries 124 Notes 125 PART TWO Building Robust Plans: Core Investment Offerings 127 CHAPTER 5 Capital Preservation Strategies 129 Capital Preservation: Importance 130 Capital Preservation: What Is Prevalent and What Is Preferred? 131 The $1 NAV: Shared by Stable Value and MMFs 132 Stable Value Offers More Opportunity in a Low-Interest-Rate Environment 135 Looking Forward: The Changing Role of Stable Value 138 Making Low-Risk Decisions: Views from the Field 140 White Labeling: A Capital Preservation Solution 143 An Analytic Evaluation of Capital Preservation Solutions 144 Short-Term, Low-Duration, and Low-Risk Bond Strategies 146 Inclusion of Stable Value in Custom Target-Date or Other Blended Strategies 149 In Closing 152 Questions for Plan Fiduciaries 152 Note 153 CHAPTER 6 Fixed-Income Strategies 155 What Are Bonds, and Why Are They Important for Retirement Investors? 157 What Are the Different Types of Bonds in the Market? 158 What Types of Bonds Should Be Offered to DC Participants? 161 Investment-Grade and High-Yield Credit 165 Bond Investment Strategies: Passive versus Active Approaches 166 Analytic Evaluation: Comparing Bond Strategies 176 Fixed Income within Target-Date Glide Paths 178 Observations for Fixed Income Allocation within Target-Date Strategies 179 In Closing 181 Questions for Plan Fiduciaries 181 CHAPTER 7 Designing Balanced DC Menus: Considering Equity Options 183 What Are Equities and How Are They Presented in DC Investment Menus? 184 Getting the Most out of Equities 190 Consider Dividend-Paying Stocks 194 Evaluating Equity Strategies 194 Less Is More: Streamlining Equity Choices 197 Shift to Asset-Class Menu May Improve Retirement Outcomes 197 Active versus Passive—The Ongoing Debate 197 Strategic Beta: Consider Adding Fundamentally Weighted Equity Exposure 204 Currency Hedging: An Active Decision 205 Observations for Equity Allocations within Target-Date Strategies 210 In Closing 212 Questions for Fiduciaries 212 Note 213 CHAPTER 8 Inflation Protection 215 What Is Inflation and How Is It Measured? 216 Why Inflation Protection in DC? 217 History of Inflation: Inflation Spikes Underscore Need for Inflation-Hedging Assets 218 Inflation Protection When Accumulating and Decumulating, and in Different Economic Environments 219 Economic Environments Change Unexpectedly—and Reward or Punish Various Asset Classes 221 Consultants Favor TIPS, Multi-Real-Asset Strategies, REITs, and Commodities 223 How Should Plan Sponsors Address Inflation Risk in DC Portfolios? 226 Implementation Challenges 228 Evaluating Real Asset Strategies 229 Summary Comparison of Individual and Multi-Real-Asset Blends 232 Inflation-Hedging Assets in Target-Date Glide Paths 235 Observations for Inflation-Hedging Assets in Target-Date Glide Paths 236 In Closing 238 Questions for Fiduciaries 238 CHAPTER 9 Additional Strategies and Alternatives: Seeking Diversification and Return 239 What Are Alternative Assets? 240 A Wider Lens on Alternatives 242 Consultant Support for Additional Strategies and Alternatives 244 Back to Basics: Why Consider Alternatives? 247 Liquid Alternatives: Types and Selection Considerations 252 Important Characteristics in Selecting Alternatives: Consultant Views 256 Illiquid Alternatives: Types and Considerations 259 Contrasting Liquid Alternative Strategies with Hedge Fund and Private Equity Investments 261 In Closing 263 Questions for Plan Fiduciaries 264 PART THREE Bringing It All Together: Creating Retirement Income 265 CHAPTER 10 Retirement Income: Considering Options for Plan Sponsors and Retirees 267 Advisor and Consultant Retirement Income Suggestions 268 Why Don’t Retirees Leave Their Assets in DC Plans at Retirement? 272 Retaining a Relationship with Your Employer in Retirement: An Innovative and Caring Plan Sponsor 277 Mutual Benefits: Retaining Retiree Assets May Help Both Retirees and Plan Sponsors 279 Turning DC Assets into a Lifetime Paycheck: Evaluating the DC Investment Lineup for Retiree Readiness 280 Evaluating Portfolio Longevity 285 Turning Defined Contribution Assets into a Lifetime Income Stream: How to Evaluate Investment Choices for Retirees 286 Guarding Retiree Assets against a Sudden Market Downturn: Sequencing Risk 288 Ways to Manage Market and Longevity Risk . . . without Adding In-Plan Insurance Products 289 Living beyond 100: Planning for Longevity 290 Managing Longevity Risk: Considerations for Buying an Annuity 292 Immediate and Deferred Annuities: Why Out-of-Plan Makes Sense 292 In Closing 298 Questions for Plan Fiduciaries 298 Notes 299 CHAPTER 11 A Global View 301 DC Plans: Becoming the Dominant Global Model 302 Retirement Plan Coverage and Participation 305 Investment Default and Growth of Target-Date Strategies 315 Retirement Income: The Global Search for Solutions 319 Defined Ambition in the Netherlands 321 New Solutions in Australia and Beyond: Tontines and Group Self-Annuitization 323 “Getting DC Right”: Lessons Learned in Chapters 1 through 10 326 Analytic Factors to Consider: Summary by Asset Pillar 333 In Closing 333 Note 335 Closing Comments 337 Priority 1: Increasing Plan Coverage and Individual Savings Rates 338 Priority 2: Moving to Objective-Aligned Investment Approaches 338 Priority 3: Broadening Options for Retirement Income 341 Nudging One Another along a Path to Success 341 Index 343

About the Author :
STACY L. SCHAUS is an executive vice president and leads PIMCO’s Defined Contribution Practice working primarily with plan sponsors and consultants. Prior to joining PIMCO in 2006, she was a founder and president of Hewitt Financial Services, which offers DC investment consulting and research as well as brokerage and personal finance services. While at Hewitt, she co-created and launched the Aon Hewitt 401(k) Index™ to help evaluate how DC participants respond to market changes. She is the founding chair for the Defined Contribution Institutional Investment Association, serves on the executive committee of the Employee Benefit Research Institute, and served as a Financial Planning Association board member. She has 35 years of investment experience and holds an MBA from the Stern School of Business at New York University and an undergraduate degree from the University of California, Santa Barbara. YING GAO, who carried out the analytic reporting and modeling contained in this volume, is a vice president in the client analytics group in the Newport Beach office of PIMCO. Her primary areas of focus are financial modeling, asset allocation, and risk management. Prior to joining PIMCO in 2009, Dr. Gao worked with the fixed income portfolio management department at Principal Global Investors and the capital markets group at Federal Home Loan Bank of Des Moines. She has 10 years of investment experience and holds a PhD in economics from Iowa State University. She earned her master’s and undergraduate degrees in finance from Zhejiang University in China.