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Successful Defined Contribution Investment Design
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Successful Defined Contribution Investment Design
by Ying Gao, Stacy L. Schaus
Successful Defined Contribution Investment Design
Acknowledgments
Introduction
HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT
A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION
WHY SHOULD YOU READ THIS BOOK?
PART ONE DC Plans: A Cornerstone of Retirement
CHAPTER 1 DC Plans Today: An Overview of the Issues
PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN
DC PLANS: BECOMING THE NEW REALITY . . . NO TURNING BACK
SETTING GOALS FOR SUCCESS: INCOME REPLACEMENT TARGETS
REDUCING DC LITIGATION RISK: PROCESS AND OVERSIGHT
WHO’S A FIDUCIARY?
HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES
HIRING AN INVESTMENT CONSULTANT
GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE
PIMCO PRINCIPLES FOR DC PLAN SUCCESS: BUILDING AND PRESERVING PURCHASING POWER
MAXIMIZING DC SAVINGS: JUST DO IT!
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
CHAPTER 2 Aligning DC Investment Design to Meet the PRICE of Retirement
BEGIN WITH THE END IN MIND
WHAT IS A REASONABLE PAY REPLACEMENT TARGET?
CALCULATING THE INCOME REPLACEMENT RATES
HISTORIC COST OF RETIREMENT: PRICE IS A MOVING TARGET
A FOCUS ON INCOME, NOT COST
PRICE-AWARE: APPLYING PRICE TO CONSIDER DC ASSETS AND TARGET-DATE STRATEGIES
EVALUATING GLIDE PATHS
TRACKING DC ACCOUNT BALANCE GROWTH RELATIVE TO PRICE
SUMMARY: THE IMPORTANCE OF KNOWING YOUR PRICE
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTE
CHAPTER 3 Plan Investment Structure
TIERS AND BLENDS: INVESTMENT CHOICES FOR DC PARTICIPANTS
TIER I: “DO-IT-FOR-ME” ASSET ALLOCATION INVESTMENT STRATEGIES
TIER II: “HELP-ME-DO-IT” STAND-ALONE OR “CORE” INVESTMENT OPTIONS
TIER III: “DO-IT-MYSELF” MUTUAL-FUND-ONLY OR FULL BROKERAGE WINDOW
CONSIDERING AN OUTSOURCED CHIEF INVESTMENT OFFICER
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
CHAPTER 4 Target-Date Design and Approaches
TARGET-DATE STRUCTURES VARY BY PLAN SIZE
CUSTOM TARGET-DATE STRATEGIES
SEMICUSTOM TARGET-DATE
PACKAGED TARGET-DATE
TARGET-DATE SELECTION AND EVALUATION CRITERIA
NO SUCH THING AS PASSIVE
LOW COST AND LOW TRACKING ERROR DOES NOT EQUAL LOW RISK
FRAMEWORK FOR SELECTING AND EVALUATING TARGET-DATE STRATEGIES: THREE ACTIVE DECISIONS PLAN SPONSORS MUST MAKE
ACTIVE DECISION #1: HOW MUCH RISK CAN PLAN PARTICIPANTS TAKE?
ACTIVE DECISION #2: HOW IS THE RISK BEST ALLOCATED ACROSS INVESTMENT CHOICES?
ACTIVE DECISION #3: SHOULD RISK BE ACTIVELY HEDGED?
TAIL-RISK HEDGING STRATEGIES
INSURANCE
TARGET-DATE ANALYTICS: GLIDE PATH ANALYZER (GPA) AND OTHER TOOLS
GLOBAL DC PLANS: SIMILAR DESTINATIONS, DISTINCTLY DIFFERENT PATHS
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
PART TWO Building Robust Plans: Core Investment Offerings
CHAPTER 5 Capital Preservation Strategies
CAPITAL PRESERVATION: IMPORTANCE
CAPITAL PRESERVATION: WHAT IS PREVALENT AND WHAT IS PREFERRED?
THE $1 NAV: SHARED BY STABLE VALUE AND MMFs
STABLE VALUE OFFERS MORE OPPORTUNITY IN A LOW-INTEREST-RATE ENVIRONMENT
LOOKING FORWARD: THE CHANGING ROLE OF STABLE VALUE
MAKING LOW-RISK DECISIONS: VIEWS FROM THE FIELD
WHITE LABELING: A CAPITAL PRESERVATION SOLUTION
AN ANALYTIC EVALUATION OF CAPITAL PRESERVATION SOLUTIONS
SHORT-TERM, LOW-DURATION, AND LOW-RISK BOND STRATEGIES
INCLUSION OF STABLE VALUE IN CUSTOM TARGET-DATE OR OTHER BLENDED STRATEGIES
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTE
CHAPTER 6 Fixed-Income Strategies
WHAT ARE BONDS, AND WHY ARE THEY IMPORTANT FOR RETIREMENT INVESTORS?
WHAT ARE THE DIFFERENT TYPES OF BONDS IN THE MARKET?
WHAT TYPES OF BONDS SHOULD BE OFFERED TO DC PARTICIPANTS?
INVESTMENT-GRADE AND HIGH-YIELD CREDIT
BOND INVESTMENT STRATEGIES: PASSIVE VERSUS ACTIVE APPROACHES
ANALYTIC EVALUATION: COMPARING BOND STRATEGIES
OBSERVATIONS FOR FIXED INCOME ALLOCATION WITHIN TARGET-DATE STRATEGIES
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
CHAPTER 7 Designing Balanced DC Menus: Considering Equity Options
WHAT ARE EQUITIES AND HOW ARE THEY PRESENTED IN DC INVESTMENT MENUS?
GETTING THE MOST OUT OF EQUITIES
CONSIDER DIVIDEND-PAYING STOCKS
EVALUATING EQUITY STRATEGIES
LESS IS MORE: STREAMLINING EQUITY CHOICES
SHIFT TO ASSET-CLASS MENU MAY IMPROVE RETIREMENT OUTCOMES
ACTIVE VERSUS PASSIVE—THE ONGOING DEBATE
STRATEGIC BETA: CONSIDER ADDING FUNDAMENTALLY WEIGHTED EQUITY EXPOSURE
CURRENCY HEDGING: AN ACTIVE DECISION
OBSERVATIONS FOR EQUITY ALLOCATIONS WITHIN TARGET-DATE STRATEGIES
IN CLOSING
QUESTIONS FOR FIDUCIARIES
NOTE
CHAPTER 8 Inflation Protection
WHAT IS INFLATION AND HOW IS IT MEASURED?
WHY INFLATION PROTECTION IN DC?
HISTORY OF INFLATION: INFLATION SPIKES UNDERSCORE NEED FOR INFLATION-HEDGING ASSETS
INFLATION PROTECTION WHEN ACCUMULATING AND DECUMULATING, AND IN DIFFERENT ECONOMIC ENVIRONMENTS
ECONOMIC ENVIRONMENTS CHANGE UNEXPECTEDLY—AND REWARD OR PUNISH VARIOUS ASSET CLASSES
CONSULTANTS FAVOR TIPS, MULTI-REAL-ASSET STRATEGIES, REITS, AND COMMODITIES
HOW SHOULD PLAN SPONSORS ADDRESS INFLATION RISK IN DC PORTFOLIOS?
IMPLEMENTATION CHALLENGES
EVALUATING REAL ASSET STRATEGIES
SUMMARY COMPARISON OF INDIVIDUAL AND MULTI-REAL-ASSET BLENDS
INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
OBSERVATIONS FOR INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
IN CLOSING
QUESTIONS FOR FIDUCIARIES
CHAPTER 9 Additional Strategies and Alternatives: Seeking Diversification and Return
WHAT ARE ALTERNATIVE ASSETS?
A WIDER LENS ON ALTERNATIVES
CONSULTANT SUPPORT FOR ADDITIONAL STRATEGIES AND ALTERNATIVES
BACK TO BASICS: WHY CONSIDER ALTERNATIVES?
LIQUID ALTERNATIVES: TYPES AND SELECTION CONSIDERATIONS
IMPORTANT CHARACTERISTICS IN SELECTING ALTERNATIVES: CONSULTANT VIEWS
ILLIQUID ALTERNATIVES: TYPES AND CONSIDERATIONS
CONTRASTING LIQUID ALTERNATIVE STRATEGIES WITH HEDGE FUND AND PRIVATE EQUITY INVESTMENTS
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
PART THREE Bringing It All Together: Creating Retirement Income
CHAPTER 10 Retirement Income: Considering Options for Plan Sponsors and Retirees
ADVISOR AND CONSULTANT RETIREMENT INCOME SUGGESTIONS
WHY DON’T RETIREES LEAVE THEIR ASSETS IN DC PLANS AT RETIREMENT?
RETAINING A RELATIONSHIP WITH YOUR EMPLOYER IN RETIREMENT: AN INNOVATIVE AND CARING PLAN SPONSOR
MUTUAL BENEFITS: RETAINING RETIREE ASSETS MAY HELP BOTH RETIREES AND PLAN SPONSORS
TURNING DC ASSETS INTO A LIFETIME PAYCHECK: EVALUATING THE DC INVESTMENT LINEUP FOR RETIREE READINESS
EVALUATING PORTFOLIO LONGEVITY
TURNING DEFINED CONTRIBUTION ASSETS INTO A LIFETIME INCOME STREAM: HOW TO EVALUATE INVESTMENT CHOICES FOR RETIREES
GUARDING RETIREE ASSETS AGAINST A SUDDEN MARKET DOWNTURN: SEQUENCING RISK
WAYS TO MANAGE MARKET AND LONGEVITY RISK . . . WITHOUT ADDING IN-PLAN INSURANCE PRODUCTS
LIVING BEYOND 100: PLANNING FOR LONGEVITY
MANAGING LONGEVITY RISK: CONSIDERATIONS FOR BUYING AN ANNUITY
IMMEDIATE AND DEFERRED ANNUITIES: WHY OUT-OF-PLAN MAKES SENSE
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
CHAPTER 11 A Global View: The Best Ideas from around the Globe for Improving Plan Design
DC PLANS: BECOMING THE DOMINANT GLOBAL MODEL
RETIREMENT PLAN COVERAGE AND PARTICIPATION
INVESTMENT DEFAULT AND GROWTH OF TARGET-DATE STRATEGIES
RETIREMENT INCOME: THE GLOBAL SEARCH FOR SOLUTIONS
DEFINED AMBITION IN THE NETHERLANDS
NEW SOLUTIONS IN AUSTRALIA AND BEYOND: TONTINES AND GROUP SELF-ANNUITIZATION
“GETTING DC RIGHT”: LESSONS LEARNED IN CHAPTERS 1 THROUGH 10
ANALYTIC FACTORS TO CONSIDER: SUMMARY BY ASSET PILLAR
IN CLOSING
NOTE
Closing Comments
PRIORITY 1: INCREASING PLAN COVERAGE AND INDIVIDUAL SAVINGS RATES
PRIORITY 2: MOVING TO OBJECTIVE-ALIGNED INVESTMENT APPROACHES
PRIORITY 3: BROADENING OPTIONS FOR RETIREMENT INCOME
NUDGING ONE ANOTHER ALONG A PATH TO SUCCESS
Index
EULA
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Successful Defined Contribution Investment Design
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Acknowledgments
CONTENTS
Acknowledgments
Introduction
HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT
A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION
WHY SHOULD YOU READ THIS BOOK?
PART ONE DC Plans: A Cornerstone of Retirement
CHAPTER 1 DC Plans Today: An Overview of the Issues
PREFACE: A CAREER AND A NEW FORM OF PENSION PLAN ARE BORN
DC PLANS: BECOMING THE NEW REALITY . . . NO TURNING BACK
SETTING GOALS FOR SUCCESS: INCOME REPLACEMENT TARGETS
REDUCING DC LITIGATION RISK: PROCESS AND OVERSIGHT
WHO’S A FIDUCIARY?
HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES
HIRING AN INVESTMENT CONSULTANT
GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE
PIMCO PRINCIPLES FOR DC PLAN SUCCESS: BUILDING AND PRESERVING PURCHASING POWER
MAXIMIZING DC SAVINGS: JUST DO IT!
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
CHAPTER 2 Aligning DC Investment Design to Meet the PRICE of Retirement
BEGIN WITH THE END IN MIND
WHAT IS A REASONABLE PAY REPLACEMENT TARGET?
CALCULATING THE INCOME REPLACEMENT RATES
HISTORIC COST OF RETIREMENT: PRICE IS A MOVING TARGET
A FOCUS ON INCOME, NOT COST
PRICE-AWARE: APPLYING PRICE TO CONSIDER DC ASSETS AND TARGET-DATE STRATEGIES
EVALUATING GLIDE PATHS
TRACKING DC ACCOUNT BALANCE GROWTH RELATIVE TO PRICE
SUMMARY: THE IMPORTANCE OF KNOWING YOUR PRICE
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTE
CHAPTER 3 Plan Investment Structure
TIERS AND BLENDS: INVESTMENT CHOICES FOR DC PARTICIPANTS
TIER I: “DO-IT-FOR-ME” ASSET ALLOCATION INVESTMENT STRATEGIES
TIER II: “HELP-ME-DO-IT” STAND-ALONE OR “CORE” INVESTMENT OPTIONS
TIER III: “DO-IT-MYSELF” MUTUAL-FUND-ONLY OR FULL BROKERAGE WINDOW
CONSIDERING AN OUTSOURCED CHIEF INVESTMENT OFFICER
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
CHAPTER 4 Target-Date Design and Approaches
TARGET-DATE STRUCTURES VARY BY PLAN SIZE
CUSTOM TARGET-DATE STRATEGIES
SEMICUSTOM TARGET-DATE
PACKAGED TARGET-DATE
TARGET-DATE SELECTION AND EVALUATION CRITERIA
NO SUCH THING AS PASSIVE
LOW COST AND LOW TRACKING ERROR DOES NOT EQUAL LOW RISK
FRAMEWORK FOR SELECTING AND EVALUATING TARGET-DATE STRATEGIES: THREE ACTIVE DECISIONS PLAN SPONSORS MUST MAKE
ACTIVE DECISION #1: HOW MUCH RISK CAN PLAN PARTICIPANTS TAKE?
ACTIVE DECISION #2: HOW IS THE RISK BEST ALLOCATED ACROSS INVESTMENT CHOICES?
ACTIVE DECISION #3: SHOULD RISK BE ACTIVELY HEDGED?
TAIL-RISK HEDGING STRATEGIES
INSURANCE
TARGET-DATE ANALYTICS: GLIDE PATH ANALYZER (GPA) AND OTHER TOOLS
GLOBAL DC PLANS: SIMILAR DESTINATIONS, DISTINCTLY DIFFERENT PATHS
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
PART TWO Building Robust Plans: Core Investment Offerings
CHAPTER 5 Capital Preservation Strategies
CAPITAL PRESERVATION: IMPORTANCE
CAPITAL PRESERVATION: WHAT IS PREVALENT AND WHAT IS PREFERRED?
THE $1 NAV: SHARED BY STABLE VALUE AND MMFs
STABLE VALUE OFFERS MORE OPPORTUNITY IN A LOW-INTEREST-RATE ENVIRONMENT
LOOKING FORWARD: THE CHANGING ROLE OF STABLE VALUE
MAKING LOW-RISK DECISIONS: VIEWS FROM THE FIELD
WHITE LABELING: A CAPITAL PRESERVATION SOLUTION
AN ANALYTIC EVALUATION OF CAPITAL PRESERVATION SOLUTIONS
SHORT-TERM, LOW-DURATION, AND LOW-RISK BOND STRATEGIES
INCLUSION OF STABLE VALUE IN CUSTOM TARGET-DATE OR OTHER BLENDED STRATEGIES
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTE
CHAPTER 6 Fixed-Income Strategies
WHAT ARE BONDS, AND WHY ARE THEY IMPORTANT FOR RETIREMENT INVESTORS?
WHAT ARE THE DIFFERENT TYPES OF BONDS IN THE MARKET?
WHAT TYPES OF BONDS SHOULD BE OFFERED TO DC PARTICIPANTS?
INVESTMENT-GRADE AND HIGH-YIELD CREDIT
BOND INVESTMENT STRATEGIES: PASSIVE VERSUS ACTIVE APPROACHES
ANALYTIC EVALUATION: COMPARING BOND STRATEGIES
OBSERVATIONS FOR FIXED INCOME ALLOCATION WITHIN TARGET-DATE STRATEGIES
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
CHAPTER 7 Designing Balanced DC Menus: Considering Equity Options
WHAT ARE EQUITIES AND HOW ARE THEY PRESENTED IN DC INVESTMENT MENUS?
GETTING THE MOST OUT OF EQUITIES
CONSIDER DIVIDEND-PAYING STOCKS
EVALUATING EQUITY STRATEGIES
LESS IS MORE: STREAMLINING EQUITY CHOICES
SHIFT TO ASSET-CLASS MENU MAY IMPROVE RETIREMENT OUTCOMES
ACTIVE VERSUS PASSIVE—THE ONGOING DEBATE
STRATEGIC BETA: CONSIDER ADDING FUNDAMENTALLY WEIGHTED EQUITY EXPOSURE
CURRENCY HEDGING: AN ACTIVE DECISION
OBSERVATIONS FOR EQUITY ALLOCATIONS WITHIN TARGET-DATE STRATEGIES
IN CLOSING
QUESTIONS FOR FIDUCIARIES
NOTE
CHAPTER 8 Inflation Protection
WHAT IS INFLATION AND HOW IS IT MEASURED?
WHY INFLATION PROTECTION IN DC?
HISTORY OF INFLATION: INFLATION SPIKES UNDERSCORE NEED FOR INFLATION-HEDGING ASSETS
INFLATION PROTECTION WHEN ACCUMULATING AND DECUMULATING, AND IN DIFFERENT ECONOMIC ENVIRONMENTS
ECONOMIC ENVIRONMENTS CHANGE UNEXPECTEDLY—AND REWARD OR PUNISH VARIOUS ASSET CLASSES
CONSULTANTS FAVOR TIPS, MULTI-REAL-ASSET STRATEGIES, REITS, AND COMMODITIES
HOW SHOULD PLAN SPONSORS ADDRESS INFLATION RISK IN DC PORTFOLIOS?
IMPLEMENTATION CHALLENGES
EVALUATING REAL ASSET STRATEGIES
SUMMARY COMPARISON OF INDIVIDUAL AND MULTI-REAL-ASSET BLENDS
INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
OBSERVATIONS FOR INFLATION-HEDGING ASSETS IN TARGET-DATE GLIDE PATHS
IN CLOSING
QUESTIONS FOR FIDUCIARIES
CHAPTER 9 Additional Strategies and Alternatives: Seeking Diversification and Return
WHAT ARE ALTERNATIVE ASSETS?
A WIDER LENS ON ALTERNATIVES
CONSULTANT SUPPORT FOR ADDITIONAL STRATEGIES AND ALTERNATIVES
BACK TO BASICS: WHY CONSIDER ALTERNATIVES?
LIQUID ALTERNATIVES: TYPES AND SELECTION CONSIDERATIONS
IMPORTANT CHARACTERISTICS IN SELECTING ALTERNATIVES: CONSULTANT VIEWS
ILLIQUID ALTERNATIVES: TYPES AND CONSIDERATIONS
CONTRASTING LIQUID ALTERNATIVE STRATEGIES WITH HEDGE FUND AND PRIVATE EQUITY INVESTMENTS
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
PART THREE Bringing It All Together: Creating Retirement Income
CHAPTER 10 Retirement Income: Considering Options for Plan Sponsors and Retirees
ADVISOR AND CONSULTANT RETIREMENT INCOME SUGGESTIONS
WHY DON’T RETIREES LEAVE THEIR ASSETS IN DC PLANS AT RETIREMENT?
RETAINING A RELATIONSHIP WITH YOUR EMPLOYER IN RETIREMENT: AN INNOVATIVE AND CARING PLAN SPONSOR
MUTUAL BENEFITS: RETAINING RETIREE ASSETS MAY HELP BOTH RETIREES AND PLAN SPONSORS
TURNING DC ASSETS INTO A LIFETIME PAYCHECK: EVALUATING THE DC INVESTMENT LINEUP FOR RETIREE READINESS
EVALUATING PORTFOLIO LONGEVITY
TURNING DEFINED CONTRIBUTION ASSETS INTO A LIFETIME INCOME STREAM: HOW TO EVALUATE INVESTMENT CHOICES FOR RETIREES
GUARDING RETIREE ASSETS AGAINST A SUDDEN MARKET DOWNTURN: SEQUENCING RISK
WAYS TO MANAGE MARKET AND LONGEVITY RISK . . . WITHOUT ADDING IN-PLAN INSURANCE PRODUCTS
LIVING BEYOND 100: PLANNING FOR LONGEVITY
MANAGING LONGEVITY RISK: CONSIDERATIONS FOR BUYING AN ANNUITY
IMMEDIATE AND DEFERRED ANNUITIES: WHY OUT-OF-PLAN MAKES SENSE
IN CLOSING
QUESTIONS FOR PLAN FIDUCIARIES
NOTES
CHAPTER 11 A Global View: The Best Ideas from around the Globe for Improving Plan Design
DC PLANS: BECOMING THE DOMINANT GLOBAL MODEL
RETIREMENT PLAN COVERAGE AND PARTICIPATION
INVESTMENT DEFAULT AND GROWTH OF TARGET-DATE STRATEGIES
RETIREMENT INCOME: THE GLOBAL SEARCH FOR SOLUTIONS
DEFINED AMBITION IN THE NETHERLANDS
NEW SOLUTIONS IN AUSTRALIA AND BEYOND: TONTINES AND GROUP SELF-ANNUITIZATION
“GETTING DC RIGHT”: LESSONS LEARNED IN CHAPTERS 1 THROUGH 10
ANALYTIC FACTORS TO CONSIDER: SUMMARY BY ASSET PILLAR
IN CLOSING
NOTE
Closing Comments
PRIORITY 1: INCREASING PLAN COVERAGE AND INDIVIDUAL SAVINGS RATES
PRIORITY 2: MOVING TO OBJECTIVE-ALIGNED INVESTMENT APPROACHES
PRIORITY 3: BROADENING OPTIONS FOR RETIREMENT INCOME
NUDGING ONE ANOTHER ALONG A PATH TO SUCCESS
Index
EULA
List of Tables
CHAPTER 2
FIGURE 2.2
Expected Retirement Income from Public Pension
FIGURE 2.7
Cost for Future Retirement Income Stream
FIGURE 2.9
Estimated Income Replacement from Various Levels of Savings
CHAPTER 3
FIGURE 3.9
Comparing the Characteristics of Three Approaches to Investment Plan Design
FIGURE 3.13
Mutual Fund and Collective Investment Trust Fund Fee Differentials on an Assumed $50 Million Mandate
FIGURE 3.14
Comparison of Mutual Funds and Collective Trusts (CITs): Similar but Not Identical
FIGURE 3.16
Challenges in White-Label/Multimanager Investment Options
FIGURE 3.17
Factors Driving Growth in Delegated Services
FIGURE 3.18
Top Discretionary Services Growth and Availability by DC Plan Consultants
CHAPTER 4
FIGURE 4.2
Consultants’ View on Selection of Target Dates
FIGURE 4.9
Reports from Glide Path Analyzer
CHAPTER 5
FIGURE 5.7
Capital Preservation Strategies and Index Proxies
CHAPTER 6
FIGURE 6.13
Diversifying Approaches May Improve Risk and Return Opportunities
FIGURE 6.14
A Summary of Diversifying Fixed-Income Strategies and Benefits
FIGURE 6.15
Market Average Glide Path and Objective-Aligned Glide Path
CHAPTER 7
FIGURE 7.4
Lineup Design May Have Meaningful Influence on Asset Allocation Decisions
FIGURE 7.9
Performance and Risk Comparison for U.S. Large-Cap, Non-U.S. Developed, and Emerging Market Equities
FIGURE 7.11
How Different Equities Compare across Key Measures
FIGURE 7.12
Performance and Risk Comparison of Current Equity Portfolio and Consolidated Equity Portfolio
FIGURE 7.15
Strategy Performance and Risk Comparison
FIGURE 7.17
Top Performing Equity Managers Outperform Their Passive Peer Average
FIGURE 7.18
Add Fundamentally Weighted Equity Indexes
FIGURE 7.20
Consultants’ Views on Currency Hedging
FIGURE 7.22
Glide Path Allocation to Equities
CHAPTER 8
FIGURE 8.8
Key Questions and Metrics We Believe Plan Sponsors Should Evaluate
FIGURE 8.9
How Different Asset Classes Compare across Key Measures
FIGURE 8.11
Diversifying Real Asset Strategies and Index Proxies
FIGURE 8.12
Adding Inflation-Related Assets to a Traditional Nominal Stock and Bond Mix May Improve Portfolio Diversification (From January 1997 to December 2015)
FIGURE 8.13
Glide Path Allocation to Inflation-Hedging Assets
CHAPTER 9
FIGURE 9.1
Investment Strategies Defined as “Alternatives” by Consultants
FIGURE 9.10
Important Characteristics in Selecting Alternatives
CHAPTER 10
FIGURE 10.4
Consultants Report on Primary Concerns with In-Plan Insurance Products
FIGURE 10.5
Consultants Report on What Actions Plan Sponsors Should Take to Encourage Retirees to Retain Their Assets in the Plan
FIGURE 10.6
Asset Allocations: Target-Dates (At-Retirement Vintage) and Diversified Fixed Income
CHAPTER 11
FIGURE 11.5
Summary Evaluation Metrics
List of Illustrations
CHAPTER 1
FIGURE 1.1
Consider Distribution of Potential Income-Replacement Outcomes: Identify Both Target and Failure
CHAPTER 2
FIGURE 2.1
My 2013 Meeting with Dr. Harry Markowitz
FIGURE 2.3
Immediate Annuity Income: Real Payout Rate versus Nominal Payout Rate
FIGURE 2.4
Correlation of Real Annuity Rates with TIPS Ladder Retirement Income
FIGURE 2.5
Real Income in Retirement from a TIPS Ladder
FIGURE 2.6
PRICE Is a Moving Target: How Much Does a Participant Need to Replace 30 Percent of Final Pay?
FIGURE 2.8
Price Multiplier for Different Age Groups
FIGURE 2.10
S&P Index versus Retirement Liability
FIGURE 2.11
Long-Duration TIPS versus Retirement Liability
FIGURE 2.12
Considering Absolute Risk of Selected Assets versus Risk Relative to Retirement
FIGURE 2.13
Glide Path Asset Allocation
FIGURE 2.14
Correlation between Glide Paths and Retirement Liability
FIGURE 2.15
Accumulated Real Balance
FIGURE 2.16
Excess Return versus Tracking Error to Price (February 2004– December 2015)
FIGURE 2.17
Probability of Failure (Income Replacement Ratio <30 Percent)
CHAPTER 3
FIGURE 3.1
A Sample Diversified Glide Path Allocation
FIGURE 3.2
Indicative Glide Path of NEST Retirement Date Funds
FIGURE 3.3
U.S. Market Returns, 1981–2000
FIGURE 3.4
Typical DC Core Menu Choices—Driven by Bull Markets and a Need to “Fill the Style Box”
FIGURE 3.5
PIMCO Defined Contribution Consulting Support and Trends Survey 2016: What Is the Optimal Number of Core Menu Options?
FIGURE 3.6
Asset Class Performance Is Dependent on the Economic Environment
FIGURE 3.7
Balancing Investment Menu Risk by Adding Diversifying Assets
FIGURE 3.8
Core Lineup Trends in DC Plans: From Style-Box Focus to Risk-Pillar Focus
FIGURE 3.10
Active versus Passive Approaches in DC Plans
FIGURE 3.11
PIMCO Defined Contribution Consulting Support and Trends Survey 2016: The Importance of Active Management in DC Plans
FIGURE 3.12
Consultant Views on Management Approaches for Various Investment Strategies
FIGURE 3.15
Traditional and White-Label/Multimanager Investment Options Compared
CHAPTER 4
FIGURE 4.1
What Type of Target-Date Offering Will Be Selected Most by Plan Sponsors?
FIGURE 4.3
Consultants Suggest a DC Plan May Need to Replace 60 Percent of Final Pay
FIGURE 4.4
Suggested Process for Asset Allocation Strategy Selection or Creation
FIGURE 4.5
Participant Risk Capacity: How Much Can Participants Afford to Lose and Still Retire on Time?
FIGURE 4.6
Accumulated Real Account Balance: Staying the Course versus Moving to Stable Value
FIGURE 4.7
Market Average Glide Path versus Objective-Aligned Glide Path A. Market Average Glide Path B. Objective-Aligned Glide Path
FIGURE 4.8
Risk Factor Decomposition of Tracking Error
FIGURE 4.10
Which Is the Most Attractive Income Replacement Distribution?
FIGURE 4.11
Australian Balanced Allocation
FIGURE 4.12
UK Traditional Lifestyle Glide Path Allocation
CHAPTER 5
FIGURE 5.1
The Four Pillars of Well-Balanced Core Lineups
FIGURE A:
Impact of Money Market Reform on DC Plans
FIGURE 5.2
True Capital Preservation Needs to Include the Protection of Purchasing Power
FIGURE 5.3
Market Value of Underlying Investments Fluctuates, but a Stable Value Investment Option’s Assets Grow at a More Constant Rate
FIGURE 5.4
Stable Value Has Delivered More Return and Less Volatility Than Money Market Funds
FIGURE 5.5
Historical Performance of Money Markets, Stable Value, Short-Term, Low-Duration, and Low-Risk Blend Strategies (January 2006–December 2015)
FIGURE 5.6
Strategy’s Performance and Risk Comparison
FIGURE 5.8
Market Average Glide Path B. Market Average Glide Path with Stable Value Market Average Glide Path versus Market Average Glide Path with Stable Value
FIGURE 5.9
Potential Loss
FIGURE 5.10
Estimated Longevity
CHAPTER 6
FIGURE 6.1
History of Interest Rates and DC Plans
FIGURE 6.2
The Composition of the Global Bond Market, 2016
FIGURE 6.3
Balancing Investment Menu Risk by Adding Diversifying Fixed Income Assets
FIGURE 6.4
Consultants’ Recommended Fixed Income Offerings
FIGURE 6.5
Decline in Yield on BAGG Index (1996–2015) Shows That Forward-Looking Expected Returns Are Lower
FIGURE 6.6
Comparing Yields across Asset Classes
FIGURE 6.7
Global Bond Diversification
FIGURE 6.8
Composition of Barclays U.S. Aggregate Index
FIGURE 6.9
Plan Sponsors Prefer Active Management for Fixed Income by a Wider Margin Than for Equities
FIGURE 6.10
Active Core Bond Management May Improve Risk and Return
FIGURE 6.11
The Largest Actively Managed Strategies Have Beaten the Barclay’s Aggregate over the Past 28 Years
FIGURE 6.12
Decline in Yield and Rise in Duration of BAGG Index (2007–2015) Demonstrates Changing Risk Profile of Indices over Time
CHAPTER 7
FIGURE 7.1
Equity Style Box
FIGURE 7.2
2016 DC Consulting Trends Survey—Investment Recommendations: Equity
FIGURE 7.3
Equity Investment Trends
FIGURE 7.5
Correlation among Equity Styles Has Increased
FIGURE 7.6
Evolution of DC Plan Core Investment Structure
FIGURE 7.7
Size of Global Stock Markets
FIGURE 7.8
Emerging Markets Are Growing Fastest
FIGURE 7.10
Divided-Paying Equities May Be an Attractive Long-Term Income Solution
FIGURE 7.13
A Typical DC Core Menu Is Dominated by Domestic Equity Risk
FIGURE 7.14
Consolidate Domestic Equity Options and Add Global
FIGURE 7.16
Consultants Underscore Importance of Active Management for Equity
FIGURE 7.19
Portfolio’s Performance and Risk Comparison
FIGURE 7.21
Why Should Plan Sponsors Consider Hedging Their Non-U.S. Currency Exposure?
CHAPTER 8
FIGURE 8.1
Inflation Can Cripple Purchasing Power in Retirement
FIGURE 8.2
The Rising Cost of a Dollar over Time
FIGURE 8.3
U.S. Inflation 1900–2015
FIGURE 8.4
Asset Class Performance in Various Market Environments
FIGURE 8.5
During an Inflationary Environment, Commodities Outperform Other Asset Classes
FIGURE 8.6
Consultant Support for Inflation-Fighting Assets
FIGURE 8.7
A Range of Inflation-Hedging Strategies for Consideration
FIGURE 8.10
Real Asset Diversification for Inflation Protection
Figure A
Comparing Different Inflation-Hedging Assets
CHAPTER 9
FIGURE 9.2
Equity Risk Dominates Traditional Portfolios
FIGURE 9.3
Consultant Support for Additional Strategies and Alternatives
FIGURE 9.4
Defined Benefit and Defined Contribution Plan Returns
FIGURE 9.5
Alternatives May Improve the Efficient Frontier
FIGURE 9.6
Liquid Alternatives Come to Main Street
FIGURE 9.7
The Liquid Alternatives Landscape
FIGURE 9.8
Risks Are Often Idiosyncratic
FIGURE 9.9
In Alternative Strategies, Manager Skill Plays an Important Role
FIGURE 9.11
Liquid Alternatives Fees and Expenses Range Widely
FIGURE 9.12
Overview and Merits of Hedge Funds, Private Equity, and Real Estate Alternatives
FIGURE 9.13
Comparing the Benefits of Various Liquid Alternative Strategies
CHAPTER 10
FIGURE 10.1
Plan Sponsor Attitudes toward Retaining Client Assets at Retirement
FIGURE 10.2
Consultants Report on Support for Retirement Income Strategies
FIGURE 10.3
Retiree Assets May Be Building in Target-Date Strategies
FIGURE 10.7
Four Retirement Income Strategies and Their Correlation to PRICE
FIGURE 10.8
Four Retirement Income Strategies: Excess Return versus Tracking Error Relative to PRICE
FIGURE 10.9
Four Retirement Income Strategies: Downside Risk (VaR 95 Percent)
FIGURE 10.10
Asset Longevity in Retirement: 50 Percent Final Salary Annual Withdrawal Rate
FIGURE 10.11
Asset Longevity in Retirement: 30 Percent Final Salary Annual Withdrawal Rate
FIGURE 10.12
Four Retirement Income Strategies: Inflation Beta*
FIGURE 10.13
Extreme Events Occur More Often Than “Normal” Risk Models Predict
FIGURE 10.14
Out-of-Plan Annuity Buying Program May Offer More Advantages
CHAPTER 11
FIGURE 11.1
Retirement Plan Structures Vary Globally
FIGURE 11.2
Auto-Enrollment Improves DC Plan Participation Rates
FIGURE A
Non-ERISA and ERISA-Covered State Retirement Plan Approaches
FIGURE B
State-Administered Retirement Plans, Summary of Passed Initiatives
FIGURE 11.3
Target-Date Fund Strategies Capture Growing Share of Participant Account Balance
FIGURE 11.4
Tenure’s Impact on Target-Date Fund Usage and Average Balance
Closing Comments
FIGURE 1
FIGURE 2
Guide
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