Today, workers around the globe are increasingly dependent on defined contribution plans to reach their retirement income goals. In the United States, fewer than one in five workers have access to a traditional defined benefit pension program. To retire financially secure, workers need well-designed defined contribution (DC) plans—as most will rely on such plans for at least a third of retirement income. Those who have access to a well-designed plan and are contributing at a sufficient level are likely to succeed. Unfortunately, not all workers are offered a DC plan . . . and plans that are offered may have a less-than-optimal design.

As of 2015, we estimate that only about half of U.S. workers have access to a DC plan; in particular, people working part-time or for small employers often lack plan access. Some countries such as the United Kingdom and Australia have addressed DC plan availability by mandating that employers must offer and enroll employees into such programs. At this writing, we anticipate retirement plan availability will increase in the United States as multiple states and possibly the federal government will roll out compulsory programs or regulatory change to ease the burden of offering plans.

As plans become increasingly available, our hope is they offer an investment structure that places participants on a path to success.

This book is designed to assist plan sponsors and providers to structure investment menus that help participants meet their retirement goals. Our earlier book, Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path (2010), provided a framework for understanding the growing role DC plans have come to play for Americans planning for and transitioning into and through retirement. In that volume, we reviewed the origins of DC plans with a focus on building custom target-date strategies, an innovation that is now widely adopted, particularly within the largest U.S. plans. Our earlier book was a resource that helped plan sponsors and their consultants as they considered how to create their own custom target retirement-date strategies. It was written at a time when DC plans were experiencing significant growth in both prevalence and assets.

In the intervening years, the trends we identified have accelerated. Global DC assets in seven major markets (representing more than 90 percent of total assets) swelled to $15.6 trillion in 2015, a 7.1 percent 10-year annual growth rate that was more than double the 3.4 percent pace for defined benefit plan (DB) assets, according to Willis Towers Watson. At the end of 2015, DC assets in these markets represented 48.4 percent of combined DC/DB assets, up from 39.9 percent in 2005. With continued adoption of DC plans and higher contribution rates—fueled increasingly by automatic enrollment—DC assets will eclipse those of DB plans in the near future.

As contribution rates climb, DC assets will increasingly flow into investment defaults. In the United States, more than 80 percent of plans use a qualified default investment alternative (QDIA, an investment vehicle used for retirement plan contributions in the absence of direction from the plan participant); target-date funds dominate, being offered by about 75 percent of plans. According to PIMCO’s ninth annual Defined Contribution Consulting Support and Trends Survey (published in 2016 with data collected in 2015), 96 percent of consultants supported target-date funds as the QDIA.

As a result of the increasing popularity and importance of DC plans, plan sponsors, consultants, advisors, investment managers, attorneys, academics, and other professionals are keenly interested in DC plan design. But as they seek information and guidance, they often find only piecemeal information on how to thoughtfully structure a DC plan. They are left not knowing where and how to begin. To help answer the questions of those interested in and responsible for DC plans, this book offers a framework, information, analytics, and ultimately a guide to building successful DC plans.

Throughout these pages, we focus the discussion first and foremost on meeting the DC plan’s objective—which for nearly all plans today is to provide participants with sustainable retirement income. This retirement income objective may differ from the past when many plans may have been considered supplemental savings programs. Those days are over and new approaches are required. By identifying and focusing first on the plan objective, plans can be managed to meet that objective, both during asset accumulation and retirement-income drawdown.

We believe this outcome-oriented approach presents the best path to success. Our interest in focusing on outcomes extends from our collective experience over the past decade. We have learned that the old approaches to DC plan design are often misaligned to a plan’s objective and can present participants with untenable risk. By aligning investment design to the plan objective and managing both to maximize return and minimize risk, workers are likely to succeed; and what’s more, plan sponsors are able to meet their fiduciary duty to participants.

At PIMCO, we understand that meeting the objective of outcome-oriented investing may be easier said than done. To help plan fiduciaries grapple with this challenge, we have developed proprietary analytics and other resources to help inform and guide DC investment development. Our commitment to contribute to the effective design and success of DC plans for sponsors and participants alike is what motivates us to return to the printing press with a new book for 2017.

HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT

The book is divided into three parts. Part One (Chapters 1–4) provides the background that readers will need to build their understanding of DC plan design rudiments. Part Two (Chapters 5–9) sets out a guide to understand the overall DC investment structure and menu of choices plan sponsors and participants face. In Part Three (Chapters 10 and 11), we return to a focus on the individual, both in the U.S. and other markets around the world. In it we explore the specific plan features and investment choices retirees seek as they consider whether to stay in their plans, and how a DC plan balance could be turned into a lifetime of retirement income.

Here’s what’s happening, chapter by chapter:

• Chapter 1: We start with an overview of the new reality. For most workers success is up to the individual, as DC plans have replaced traditional pension plans as the primary source of employer-provided retirement income. While the objective is often the same, design around the globe varies significantly so we look at the types of plans by major market. Then we discuss what this shift means as fiduciaries design DC plans: What are a fiduciary’s responsibilities? How can consultants and advisors help? How can plans be designed to succeed? Where does a plan sponsor begin? This chapter includes an assessment of the extent to which workers globally may rely on DC plans for retirement income, showing how the audience for DC plans continues to expand. We discuss the challenges that plan sponsors face in governing plans and share views on the importance of both contribution and investment design. We also consider automatic enrollment and contribution escalation, and then turn our attention to investment design.
• Chapter 2: In this chapter, we introduce a framework for evaluating and structuring DC plans. We discuss how to align investment design to the plan objective and introduce the innovative PIMCO Retirement Income Cost Estimate (the “PRICE” approach) as a methodology to quantify both the historical and prospective cost of buying a lifetime income stream. The PRICE approach helps fiduciaries to identify the number, or amount of savings, a worker needs to retire. In this chapter, readers will be able to ask—and answer—the questions: What is the PRICE of retirement? Is your company’s DC plan on track? We also reach into the world of behavioral finance to help understand why numeric or quantitative frameworks can provide an important counterpoint to the biases that may otherwise shape our behavior.
• Chapter 3: Here we turn to plan investment structure, including an investigation of the number of tiers and investment structures available in plan design. We consider qualified default investment alternatives (QDIAs), including the types of investments and prevalence of each. Then we look at the core investment lineup, helping readers understand how to think about the number and type of investment offerings. We also consider active versus passive investment choices, and brokerage windows (whether full or mutual-fund-only). Finally, we consider the investment structure, whether mutual fund, collective investment trust (CIT), or separately managed account. We also explore white label or multimanager approaches, including considering when a delegated or outsourced chief investment officer approach might make sense.
• Chapter 4: In Chapter 4, we delve into target-date funds. We consider the types available, including packaged, custom, and semicustom. What type of fund may be desirable by plan size? Why may a custom or semicustom approach make sense? We review evaluation criteria and how to apply these during both selection and monitoring of the funds. Among the criteria, we include the objective of the fund, diversification, investor loss tolerance versus capacity, and more.
• Chapters 5–9: Part Two includes Chapters 5 to 9 in which we review core investment offerings in DC plans, including options for capital preservation, fixed income, equity, and real assets. In Chapter 9, we consider whether and how alternative assets fit within plan offerings. Together these chapters allow readers to gain insight into the full range of investment options for DC plans, and the trade-offs, benefits, and costs of different approaches—including how to evaluate plan options in the face of a changing regulatory and economic backdrop. How might an environment of equity levels at record highs and interest rates at record lows, for example, require plan sponsors to review their core lineups? What is the role of active strategies with global exposure, or the importance of inflation hedging? In these chapters, we evaluate how considering options from both return and risk perspectives can help provide the assortment of solutions retirees will likely need.
• Chapter 10: In Part Three, we shift from accumulation to distribution with a more in-depth look at the options available for retired plan participants. We grapple with how retirees make the decision to stay in or exit their plans; and we investigate what plan features and investment choices retirees need, both from the point of view of expert observers and the retiree. Questions include: What role should plans play in encouraging retirees to leave assets in the plan at retirement, and what features cause retirees to stay? How do individuals think about and accommodate the impact that increasing longevity may have on their retirement income plans?
• Chapter 11: We wrap up with the best ideas for improving defined contribution plan success, including a summary of suggestions made throughout the book. We will consider how retirement plan coverage might be improved, including ideas from outside the United States. Among potential improvements, we’ll look at increasing contribution rates, reducing plan leakage, and aligning investment design to a retirement objective.

Finally, in our closing comments, we’ll identify some top priorities for future action. These include 1: increasing plan coverage and savings rates, 2: moving to objective-aligned investment approaches, and 3: broadening options for retirement income.

As readers proceed through the book, they will find dozens of design examples and insights from plan sponsors such as Intel Corporation, The Boeing Company, and Nestlé USA, among others. We also draw on the rich insights and perspectives that DC plan design consultants can offer, including Aon Hewitt, Callan, Mercer, NEPC, Rocaton Investment Advisors, LLC, Russell Investments, and more.

In this volume, we have likewise turned to prominent and insightful academics in the world of retirement income planning—including the father of modern finance, Harry Markowitz. Through our interviews with these masterful observers, we broaden the scope of our discussion to include everything from the impact of the field of behavioral finance on individual behavior and DC plan design, to demographic issues such as the effect of increasing longevity for Americans on DC plan design and outcomes, among other topics.

And while this book focuses primarily on U.S. DC plan design, we intend that non-U.S. readers find the framework, case studies, and consultant insights relevant and helpful. We also hope that U.S. readers will be enriched by the information and insights we pull in from other economies around the world.

How should readers use this book? You might think of it as akin to a cookbook, or car-repair manual, to give two examples. While it has been designed to flow logically from start to finish, readers might find it most useful to dip into or refer to specific ideas or chapters—without necessarily reading in a linear fashion. To that end, we’ve written it so the sections and chapters can function independently, versus requiring you to build knowledge that carries from one section to another. And both the Contents and Index can help readers locate specific conversations that are of particular interest. All that said, readers should engage with this volume in whatever way best suits their needs.

A CONTINUING COMMITMENT TO MEET THE NEED FOR INFORMATION

By publishing this handbook, PIMCO is continuing our tradition of dedication to helping clients and the consulting community build more successful DC plans. We bring this commitment to life by identifying and exploring questions and issues active participants and retirees alike face in preparing to enter retirement, and by proposing ways in which we can work together to optimize outcomes for all participants.

Over the past years, we have produced a range of publications to help plan sponsors evolve their retirement programs. Our DC Design series focuses on ways plan sponsors can modify plan lineups to promote the potential of improved participant outcomes, and examines issues plan sponsors face in globalizing their plan offerings.

In 2006, we launched the PIMCO DC Dialogue to showcase the thinking of a wide range of retirement leaders and innovators including consultants, academics, lawyers, financial advisors, not-for-profit executives, and, most important, plan sponsors from both the private and public sectors. In this volume, as in our previous volume, we draw upon the generous contributions we have gleaned from our Dialogue series to contribute to readers.

In addition to our Dialogue series, PIMCO also publishes targeted research and analytic papers that carefully examine elements of DC plan structure. These include our PIMCO DC Research, DC Analytics, and Viewpoint series. In this volume, we use the findings pinpointed in these series to more fully develop our analysis—however, as in our earlier volume, our motivation is not to promote only the suggestions or philosophies of PIMCO, but to add PIMCO’s voice to the various perspectives cultivated from across the industry. In addition, we note that in order to preserve an objective and balanced viewpoint, each chapter of this handbook has been reviewed and edited by professionals from across the country.

Over the past decade, PIMCO has also undertaken an annual Defined Contribution Consulting Support and Trends Survey to help plan sponsors understand the breadth of views and specific consulting services available within the DC marketplace. Through this survey, we capture data, trends, and opinions from 66 consulting firms across the United States, which in 2016 served over 11,000 clients with aggregate DC assets in excess of $4.2 trillion. The data and observations from these surveys—10 in total—are cited throughout this book, providing practical “on the ground” intelligence about DC plans in America.

We have cultivated the input of these many voices because we recognize that there are a range of approaches, viewpoints, and solutions—both here at home and from around the world—that can contribute to plan sponsors’ and plan members’ understanding of defined contribution plans. And that enhanced understanding, in turn, can help produce plans that are more likely to succeed. So whether you are reading this as a plan sponsor who is new to DC plan oversight, a consultant with decades of experience, or an individual (perhaps planning for your own or another’s retirement) who is keen to learn about plan design, we hope engaging with the ideas in this book will be a valuable experience.

WHY SHOULD YOU READ THIS BOOK?

Finally, if you’re on the fence about whether to carry on reading beyond this introduction, we’ve compiled a partly tongue-in-cheek list of our top 10 reasons to continue. Without further ado, we think you should read this book to:

1. Understand and embrace a framework for considering the world’s most important retirement plan structure: the DC plan.
2. Develop the knowledge that will help improve retirement income security for employees.
3. Learn about how to reduce risk for all employees, as well as the cost of older workers who lack sufficient means to retire.
4. Get up to speed on a concrete approach to structure and benchmark target-date and other investment strategies for DC plans.
5. Receive plan design tips from many of the world’s largest employers.
6. Gain design insights and benefit from the diverse points of view and experiences of consultants and DC experts from around the world.
7. Quickly get up to date on recent DC design trends.
8. Stimulate your own thinking for how to evolve your plan.
9. Gather design concepts from peers and other experts.
10. And last but not least, in order to be able to discuss DC plan ideas and suggestions at cocktail parties!