When I graduated from Duke University more than 25 years ago, my aspirations were the same as any Duke Blue Devil — to play professional basketball. Unfortunately, at only 5 foot, 5 inches tall, I had to accept at some point that I needed to find another profession if I wanted to be successful and make an impact on people’s lives.
Just over 10 years ago, when I took over the Verizon Savings Plans, I found what has become the biggest passion of my lifetime: helping hard-working folks put enough money aside in their 401(k) plans and assisting them to make good decisions about how to invest that money so they can achieve a comfortable retirement.
I have seen up close how the shift to defined contribution plans from defined benefit has exposed many of my colleagues to the risk of coming up short in retirement. So, I focused my energy at Verizon on providing participants with various tools to attain a better outcome. These tools fell into three basic categories:
Automatic Defaults: In late 2006, we implemented automatic defaults into our plan as well as auto escalation to ensure that every eligible employee at least had to think through the implications of not saving for retirement prior to opting out of the plan. We then set it up so it was as simple as possible for an employee to choose a time for their savings rate to increase. Finally, when we set up our target-date funds, we made sure they were positioned as the Qualified Default Investment Alternative for our plan, replacing a money market fund. The automatic defaults increased the participation rates in the Verizon Management and Wireless Savings plans into the high 90s. I felt great about this because I helped to make an immediate impact on those who needed the most help.
Custom Target-Date Funds: In January 2007, I led the introduction of custom target-date funds into our savings plans to ensure every plan participant has the ability to take advantage of the years of asset allocation experience the firm accumulated managing large DB portfolios, as well as providing access to many of the best-in-class institutional money managers Verizon works with. Most studies show participants need help with asset allocation. There is far too much money in money market and stable-value funds, which are not going to bring the returns necessary over time to fund a comfortable retirement. Target-date funds are the “one-stop shop” that most participants would need and are simple for them to understand.
Alternative Investments: For many years, in the DB plan, Verizon had been one of the biggest and most successful investors in private real estate and private equity. It was therefore natural that, almost immediately, we initiated an alternatives program in our target-date funds, commencing with private “bricks-and-mortar” real estate and absolute-return strategies. As a plan sponsor, we had a fiduciary responsibility to offer a plan that gave our participants the best chance for successful outcomes. There were several challenges that we had to overcome: For example, we had to provide daily liquidity and valuation mechanisms so participants can get daily updates on their accounts and be able to move money in and out when they wanted. These hurdles can be overcome when a plan sponsor and its record keepers and trustees are flexible and creative, while always keeping the best interests of participants in mind.
I am thrilled that we accomplished these things at Verizon, and will be forever grateful for the support and encouragement of my superiors and colleagues at Verizon Investment Management Corp. and human resources, who worked to implement these initiatives. All three tools mentioned above, especially the first two, have now become standard in the DC industry.
Most companies now recognize that increasing participation and savings rates are the best way to help participants. Target-date funds, especially custom TDFs that can take advantage of the expertise plans have gained using alternatives in DB plans, are now a major trend in the DC universe. Plan sponsors are more open to considering alternatives because they have been successful with these asset classes in their DB plans.
I now aspire to pursue my passion on a larger scale in order to try to assist many more future retirees. The best way to achieve this, I believe, is to introduce plan participants to the asset class that has most distinguished itself for consistently creating alpha in the DB world: private equity.
Private equity is the most significant asset class missing from target-date funds but it also is the one with the greatest potential to make a positive impact on the retirement readiness of participants. I believe, with the experience of my years at Verizon, I can work to bring it to DC plans Constructing a portfolio of the best private equity funds and then making them available in a target-date fund is one of the final components to replicating the investment lineup of successful DB plans. I want to make this option a reality for 401(k) savings plan participants.
Michael Riak is principal and head of defined contribution at Pantheon Ventures. Mr. Riak had been director of savings and affiliate plans at Verizon Communications Inc.
