What’s measured improves.

—Peter F. Drucker

As I write these closing words, it’s been over 35 years since I started working in the finance industry and began saving toward retirement. I feel privileged to work in a profession that offers both intellectual challenge and social purpose. Over the past several decades, I have enjoyed working to improve retirement programs alongside plan sponsors, consultants, university professors, government leaders, lawyers, service providers, colleagues and other professionals. In contrast to many other investment areas, DC requires engagement across multiple disciplines and collaboration with other professional experts. It’s not just about investing: rather, to design successful DC plans, we must also understand benefits and insurance, behavioral science, communication approaches, regulatory and tax considerations, and administrative complexities. As no one of us can know it all, we look to each other in the DC professional community to work together in an effort to improve these critical retirement programs—to help workers succeed in meeting their retirement goals.

Over these three-plus decades since my financial services career began, DC plans have changed in many ways. They’ve evolved from being viewed as a supplemental, perhaps even insignificant, component of a retirement income strategy, to being the most-relied-upon private retirement savings program for workers worldwide . . . and thus significantly more serious. Along the way, “cute” education programs designed to “help a participant understand stocks and bonds” so they could pick an asset allocation right for them have been replaced by professionally managed investment defaults and world-class risk management. Gone are the days of individuals going it alone. The importance of DC plans as a source of retirement income, coupled with the dual challenges of capturing investment returns and managing risk, makes DC far more significant. Today, the stakes are much higher as workers have only one chance to save for retirement, only one chance to get it right. This reality is unlikely to change.

We anticipate DC plans will continue to be rolled out around the globe and to be relied upon as a primary source of retirement income. Looking forward, many fear that a DC-dependent system will doom workers to fail in reaching their retirement goals. I don’t believe this is true. When a DC plan is well structured and managed, workers are likely to succeed. We need to continue working together to make these plans better—and many actions can be taken to continue to improve plans. Here are my three top priorities for where these actions should be focused.

PRIORITY 1: INCREASING PLAN COVERAGE AND INDIVIDUAL SAVINGS RATES

In the preceding chapters, we talked about increasing plan coverage and pumping up savings rates. These goals may be best accomplished through automatic enrollment and contribution escalation programs, while nationally supported and/or state-offered multiple employer programs may also help close the coverage gap. We’ll also need to consider leakage from DC plans, including rollovers to (possibly higher-cost) retail retirement programs, and the failure to pay back loans or cash-outs prior to retirement. We applaud efforts by Mark Iwry at the U.S. Treasury in driving regulation to reduce cash-outs and retain assets in the DC system by making it easier to roll money from one DC plan to another. In our view, more work can and should be done in this area—including supporting more plan sponsors that actively work to retain retiree assets within the DC plan.

PRIORITY 2: MOVING TO OBJECTIVE-ALIGNED INVESTMENT APPROACHES

On the investment side, a lot has gone right: in particular, the establishment of qualified default investment alternatives and the movement toward asset allocation strategies that take into account, at minimum, a participant’s expected investment time horizon. At time of writing and as discussed throughout the book, target-date strategies are the dominant option in U.S. plans and are growing in prevalence around the globe. We expect that trend to continue. More tailored asset allocation approaches, such as managed accounts and possibly robo advisors, also may attract more assets over time. Regardless of the asset allocation approach, what is critical is for the DC community to help align these strategies and benchmarking to the DC plan’s objective. For the vast majority of plans, this means aligning to an income replacement goal. How do we help participants and plan fiduciaries focus and measure to this goal?

In this book, we have outlined an approach for aligning and evaluating an asset allocation strategy—whether target-date, target-risk, balanced, or managed accounts—to a sustainable retirement income objective. We introduced a methodology for quantifying the cost to buy a sustainable retirement income stream, using the acronym PRICE (PIMCO Retirement Income Cost Estimate). This methodology can be used to look at how the cost of retirement has changed historically as well as to show what it may cost for a participant to retire even decades from today.

The concern we hear from plan sponsors in using this real-liability-aware or objective-aligned framework is the challenge of helping participants understand it. In response, we may argue that participants don’t necessarily need to understand this approach, as long as the plan fiduciaries do, and the fiduciaries build or select investment default structures that align the participants’ accounts to reach a reasonable income replacement target. Given an objective-aligned investment default coupled with automatic enrollment and a healthy contribution rate, participants may be set on a path to retirement success. An objective-aligned, professionally managed investment default will both increase the probability of success and, importantly, reduce the risk of failure.

What’s also critical is for plan fiduciaries to shift their evaluation of the investment default to an objective-aligned framework, both historically and prospectively. Whether the investment default outperforms or underperforms relative to a peer group of similar investment alternatives (e.g., target-date vintages) may be irrelevant if the other investments are set to achieve a different objective, such as maximizing wealth with little regard for downside risk. Here again, we need an objective-aligned evaluation approach. We offer the PRICE methodology as an important consideration as you evaluate your target-date or other asset allocation strategies relative to a plan’s retirement income objective.

PRICE can be plugged into models to evaluate historic tracking to the real liability, including considering tracking error and return relative to an objective—and then bringing both together in an information ratio (i.e., return relative to risk of failing to meet the income objective). This real-liability-aware approach is most relevant as we consider long timeframes, asking whether participants are on track to meet their retirement income goals—and as we evaluate the closest-to-retirement vintages, which should more closely track PRICE. The PRICE approach can also be used within stochastic modeling to consider the probability of meeting or falling short of a goal. In summary, both implementing and evaluating objective-aligned asset allocation programs will take us a long way toward improving DC plan success.

Unfortunately, for short-term benchmarking, such as quarterly and annual performance, PRICE may be inappropriate given the amount of anticipated and justifiable tracking error. Accordingly, more work is needed to consider and put forth a real-liability-focused approach to short-term benchmarking. As we write, it may be most helpful to identify a peer group of asset allocation strategies that are managed to the same investment objective, that is, meeting a sustainable retirement income goal. Movement to an objective-aligned benchmarking process is critical. As management guru Peter Drucker said, “What’s measured improves.” For DC plans to improve in delivering retirement income, we need to measure them relative to this objective.

Now, how can we do a better job in communicating with participants? Can they understand PRICE? (Do they need to? Maybe not.) As a DC community, we have talked about the importance of shifting the participant’s mindset from wealth accumulation to retirement income building. We want participants to think not of the total value of their DC account (as a lump sum at a point in time), but rather of the monthly income that account may deliver (as an income stream over time). While clearly important, one’s account size is not necessarily the best indicator of the monthly income that it may fund throughout retirement. Many DC recordkeepers show participants a projection of what an account may deliver, yet as an industry we lack clarity and consistency in the methodology used to calculate that amount.

As the Department of Labor considers offering guidelines for this calculation, we again suggest the PRICE methodology as a defensible and capital-market-based approach. As PRICE is derived using current and forward TIPS pricing, it is founded in the market realities participants face. It does not require future return or other assumptions. We believe staying away from backward-looking and static assumptions is in the best interest of participants. Using PRICE shows a better picture of what the participant may actually experience. Importantly, by providing a monthly retirement income estimate using PRICE, participants will be able to see that their income may actually go up even though their account balance has gone down. This can be a difficult concept for individuals to grasp. By refocusing their attention to monthly income that is largely driven by the real rate environment they will see a truer, and less volatile, picture of what they may have for retirement, instilling confidence rather than angst.

PRIORITY 3: BROADENING OPTIONS FOR RETIREMENT INCOME

As discussed in the book, retirement income itself is the third area that requires attention and improvement. We believe retirees may be best served by retaining assets within their DC plan and creating an income stream from the plan—particularly for large plans with buying power that can offer lower pricing on investment products and services than a retail account (e.g., an IRA). Plans need to offer the appropriate asset allocation structure (e.g., at-retirement-date strategies), plus capital preservation and income-focused strategies. They need to offer access to account balances through at least partial withdrawals, but also ideally via installment payments, making it easy for a retiree to create a monthly paycheck or automatic deposit to their checking account.

Retirement investment options should account for the retiree’s time horizon (to and through retirement) and help manage the risk of loss. In addition, the need for longevity insurance should be considered. For example, an employer may wish to consider offering access to an out-of-plan, institutionally priced annuity platform. This would allow a retiree to gather competitive bids, then buy the insurance that fits their individual needs and lifestyle. Buying a deferred annuity that pays out 20 years post retirement allows the investment horizon for DC assets to constrict and eases the challenge of meeting the monthly income needs. More study is needed of longevity insurance solutions and implementation processes.

NUDGING ONE ANOTHER ALONG A PATH TO SUCCESS

What else is needed to succeed? DC plans will advance by increasing plan coverage and participation, implementing objective-aligned asset allocation strategies, and improving retiree access and solutions. The larger the organization, the more buying power and value can be delivered to help participants succeed. Regardless of the organization’s size, the fiduciary oversight by plan fiduciaries brings value to the participants. We can help individual workers by designing plans to increase the likelihood of reaching their objective. Taking these actions, along with practicing good governance and process, should put sponsors in good standing and lessen the risk of present and future litigation.

Employers may also be able to offer more one-on-one retirement and broader financial planning support. One-on-one planning would help address not only retirement issues, but would also consider retirement within a comprehensive financial picture that takes into account budgeting, college financing, home purchase, and more. While some plan sponsors offer access to these programs today, more widespread adoption would improve the financial security and sense of well-being among our workforce. For plan sponsors who do offer such programs, we often hear small usage rates for the programs. Perhaps we need to find an appropriate nudge to get them there? As many readers likely have seen, elephants nudging one another forward along the path is often used as a symbol for automatic enrollment and other programs. It’s always a pleasure to share visual images that represent how to move forward. With that in mind, here I share a couple of photos from a recent trip to Africa where the many elephants roam the open plains. They indeed nudge each other forward. They also live in family groups with long and healthy lives. In closing: thank you for the time you have spent reading and studying the material in this book. I know if you comment on the elephants that you have made it to the end, along the path we have laid out. We look forward to working with you and helping your DC plan participants succeed.