A Thoughtful Approach to Alternatives for Defined Contribution Plans
Firm: Goldman Sachs Asset Management
Overview: We believe the world has changed over the past decade, challenging participants' ability to stay on track and achieve their retirement goals.Historically, many participants in defined contribution plans have sought investing success through a balanced asset allocation comprised of roughly 60% developed market equity and 40% US fixed income. This traditional approach was suited to the relatively lower volatility of markets in the last half of the 20th century.
Applying institutional investor best practices to DC plans
Firm: MFS Investment Management
Author: Jonathan Hubbard, CFA, and Ravi Venkataraman, CFA
Overview: Defined contribution (DC) plan sponsors have been thrust center stage during the current retirement savings crisis facing US workers. Social Security, previously the backbone of retirement income for many Americans, is facing an uncertain future. Defined benefit (DB) plans, which were staples of corporate and public employee retirement benefits, have been in steady decline over the past decade. Persistent low interest rates, corporate risk aversion, and regulatory scrutiny are leading many employers to freeze or discontinue their DB plans. This occurring as Americans are living longer and facing increased costs of living in many areas, including health care and housing. This environment hands considerable responsibility to DC plan sponsors. The Pension Protection Act of 2006 and subsequent US Department of Labor regulations gave sponsors the ability to increase participation rates and levels through autoenrollment and autoescalation. Plan sponsors can also default participants into a qualfiied default investment alternative (QDIA) which provides participants with exposure to multiple asset classes. In this paper, we explore best practices of institutional investors and discuss their application to DC plans. We focus on five key areas: plan oversight, investment versus administrative considerations, simplification of investment lineups, nontraditional asset classes and strategies, as well as fee transparency and institutional investment vehicles.
Defined Contribution Plans and the Reinvention of Retirement
Firm: Northern Trust
Overview: The pressures of changing regulatory requirements, combined with the need for more sophisticated retirement planning solutions, mean the challenges and the opportunities for defined contribution plan sponsors have never been greater. Through our quarterly magazine Point of View and other defined contribution market research, Northern Trust is committed to providing not only new andinnovative ideas, but also fresh perspectives on existing strategies to help plan sponsors address the challenges of a changing marketplace.This booklet represents a compendium of Point of View articles featuring Northern Trust’s expertise on defined contribution issues, with insights from our thought leaders on product developments and strategies for increasing planparticipation and success.
Retirement's New Normal
Firm: Northern Trust
Overview: Baby boomers are living longer healthier lives, but paradoxically they are retiring earlier and with fewer assets. Further, those with substantial retirement savings generally are neither maximizing their value, nor taking advantage of tools such as reverse mortgages and annuities, thereby lowering their standard of living and increasing the likelihood of outliving their savings. This article discusses effectiveness of defined contribution plans as retirement savings vehicles.
The Path Forward: Designing the Ideal Defined Contribution Plan
Firm: Northern Trust
Overview: The Path Forward: Designing the Ideal Defined Contribution Plan poised the question: “How would you design the ideal workplace DC plan if you were freed from existing laws, structures, history and standard practices?” This paper shares the 10 characteristics that plan sponsors and consultants believe would define the ideal DC plan structure.
The Path Forward: Engaging the Younger Employee in DC Plan Participation
Firm: Northern Trust
Overview: This survey report examines challenges to achieving this objective and proposes ideas to encourage increased participation and higher-quality participation in defined contribution plans among workers below the age of 35.
Constructing More Effective Defined Contribution Investment Lineups
Firm: T. Rowe Price
Author: Joseph Martel, CFA, T. Rowe Price DC Investment Specialist
Overview: According to recent research, only 15% of plan sponsors say most of their employees will be financially prepared for retirement. This concern is prompting an increased focus on construction of investment lineups as a way to encourage participants to make sound saving and investing decisions. As plan sponsors evaluate their lineups, consideration should be given to fiduciary and regulatory issues, culture and employee demographics, and recent research and industry trends. This paper summarizes each of these topics.
Investor comprehension and usage of target-date funds: 2010 survey
Authors: John Ameriks, Ph.D., Dean J. Hamilton and Liqian Ren, Ph.D.
Overview: Vanguard conducted an online survey of target-date fund (TDF) investors in January 2010. The survey was motivated by our ongoing interest in investor behavior and intentions, the continued prominence of TDFs in the retirement landscape, and the 2008-2009 financial crisis, which spurred widespread discussion about TDF usage and comprehension among investors.
Mixed target-date investors in defined contribution plans
Authors: Cynthia Pagliaro and Stephen P. Utkus
Overview: "Mixed" target-date investors combine a target-date fund with other plan investment options. About half the cases of mixed investing arise from plan sponsor action; the other half from participant choice. Those who are mixed investors by choice use 1 of 5 distinct investment strategies to customize their retirement portfolios.
Move forward: The power of target-date funds
Authors: John Ameriks, Ph.D., Scott J. Donaldson, CFA, CFP, and Gary R. Mottola, Ph.D.
Overview: The use of target-date funds (TDFs) has expanded dramatically over the past 10 years - and for good reason. TDFs offer a range of potential benefits essential to successful retirement plans. TDFs: 1. Help participants construct well-diversified portfolios - critical to achieving retirement readiness. 2. Simplify the investment process. 3. Offer a sensible default fund for plan sponsors to use in conjunction with plan design strategies to improve participant portfolio diversification, enrollment, and savings rates.
Participants during the financial crisis: Total returns 2005-2010
Authors: Stephen P. Utkus and Shantanu Bapat.
Overview: For the 2005-2010 period, the typical defined contribution (DC) plan participant earned an average annual return of 3.76% and a cumulative return of just over 20%. In other words, for the typical participant, retirement wealth invested over the period grew by one-fifth because of investment results, despite the 2008-2009 market decline. Portfolios selected by partciiapnts were more highly dispersed in terms of risk and return than professionally managed target-date funds or managed accounts.
Six key survey findings: Gauging attitudes about target-date funds from plan sponsors and consultants
Authors: John Ameriks, Ph.D. and Brad Redding
Overview: In March and April 2011, Vanguard partnered with Greenwich Associates and Research Now to conduct an online survey of defined contribution (DC) plan sponsors and consultants who serve DC plans. The survey sought to gauge current plan sponsor and consultant attitudes about target-date funds (TDFs) and how those attitudes may have shifted over the past three years, a period marked by highly volatile capital markets and ongoing scrutiny of TDFs as an investment for retirement investors.
Generations: Key drivers of investor behavior
Authors: John Ameriks, Ph.D. and Stephen P. Utkus
Overview: The global financial crisis has raised concerns about the willingness of investors to enter the stock market, in particular younger investors. While there is evidence that overall equity ownership among younger generations of U.S. investors has fallen in recent years, we find that within defined contribution (DC) plans, younger investors actually have higher equity allocations than previous cohorts had at the same age. Recent developments in plan and investment menu design - particularly the growing use of automatic enrollment and the increasing prevalence of targe-date funds (TDFs) in DC plans - have played a critical role. These changes have led younger investors to behave differently than prior generations, who were more likely to invest conservatively and remain at these cautious allocations due to inertia. At least when it comes to DC plans, there is no evidence of a "lost generation" of younger investors. Our findings also suggest that as more and ore plans enter the "automation age," equity risk-taking by participants will be increasingly the result of plan design and menu choices, and less a funtion of participant reaction to current market conditions.
Target-date fund adoption in 2011
Authors: Jean A. Young
Overview:In 2011, one-third of all Vanguard participants were invested in a single, professionally managed account option, including 24% in a single target-date fund. Use of target-date funds in defined contribution (DC) plans continues to grow rapidly. At the end of 2011, 82% of plans offered a target-date fund, 47% of participants had a position in the funds, and the funds accounted for 27% of total contributions.