Retirement Plan Solution

Don Ezra is a widely published author. He has won a Graham and Dodd Award from the Financial Analysts Journal, the Roger Murray Prize from the Q Group in the United States, and the Lillywhite Award of the Employee Benefit Research Institute "for extraordinary life contributions to Americans' economic security." Bob Collie has been working with defined benefit and defined contribution plans in the United Kingdom and United States for more than twenty years, playing at different times the role of actuary, investment consultant, and strategist.Matthew X. Smith has been involved with the design, implemen-tation, administration, consultation to, and asset management of defined contribution plans for over twenty-five years. He has also written and spoken widely on defined contribution topics.

"... the book's positive and inspiring message is one the UK would do well to head." (Pensions Age, September 2009)

• Preface xiiiAcknowledgments xixIntroduction The Great American Retirement System? 1Defined Benefit and Defined Contribution 2The Dynamics of the Retirement Plan 3Room for Improvement in the Accumulation Phase 4The Right Sort of Education 5Other Ways of Running Defined Contribution Plans 6The Individual’s Role in Decumulation 7The Plan Sponsor’s Role 8A Final Thought: From Biggest to Best 9Chapter 1 DC Version 2.0 11Coming of Age 12The New Retirement Superpower 13Coming Soon to a Dictionary Near You: DBization 14At the Heart of Version 2.0: A Different Objective 15Income Replacement 15Is This the First Nail in the Coffin of Defined Contribution? 16“Hold on a Second . . .” 17Part One The Dynamics of the Retirement PlanChapter 2 More than You Ever Wanted to Know about Life Expectancy 21What Is “Life Expectancy”? 21How Life Expectancy Has Changed 22But an Individual’s Life Span Is Uncertain 23Longevity Distributions: Let’s Take a Look 26What Does This Mean? 29And Will Longevity Improve Even More? 30Chapter 3 Retirement Is Expensive 31The Goal Is a Targeted Level of Income Replacement 32The Fundamental Pension Equation and the Defined Benefit System 33A Simple Model of Retirement Plan Accumulation and Decumulation 34Base Case Results 34When to Start Saving 37The Base Case May Not Be a Reliable Guide 38How to Act in the Face of Uncertainty 39Appendix: Further Analysis of the Uncertainty Associated with Investment Returns 41Chapter 4 Investment Returns Are All-Important 43The 10/30/60 Rule 44Games at a Virtual Casino 46Investment Analogs 48Historical Return Patterns 49What Are the Lessons? 52What Follows? 54How Much Investment Risk Can You Tolerate? 54Chapter 5 Sustainable Spending 57Lifetime Annuities 57Simulations 58Appendix: The Multiple 61Part Two Opportunities in the Accumulation PhaseChapter 6 Save More 65Employers with No Plan 65Employees Who Do Not Enroll 67Employees Who Start Saving Too Late 69Employees with Low Savings Rates 70Employees with Gaps in Continuous Participation 72Chapter 7 Limit Leakage 75Cashing Out 75Loans 76Hardship Withdrawals 77Chapter 8 Invest Better 81Evidence of Waste 81The Importance of a Good Default Option 83The “Target Date” Solution 84And for the Investment Experts? 89Chapter 9 Reduce Fees 91The Impact of Fees 91Fees for What? 92Looking for Fee Leakage 92Fee-Sharing Arrangements 93Institutional versus Retail Fees 94Active Management 95Record-Keeping Fees 97Part Three We Need the Right Sort of EducationChapter 10 Why the Waste? Because We’re Only Human 101Overconfidence in Retirement Planning 101Behavioral Finance 102Low Participation and Savings Rates 103Poor Investment Results 106What to Do? 108Chapter 11 Financial Education 109Facts that Surprised Us 109Enthusiastic Initiatives 110What Exactly Can Be Taught? 112Why Hasn’t This Already Been Taught? 115A Literate Default System 115A Final Anecdote 116Part Four Other Ways of Running Defined Contribution PlansChapter 12 Case Study—Australia 119Some Features of the Australian Defined Contribution System 120Consequences for Coverage 121Consequences for Adequacy 122Consequences for Employer Attitudes 123Lessons for the United States 124Consequences for Investment Choices 125Chapter 13 Three Defined Contribution Plan Models 127The Bank Savings Model 127The Fund Supermarket Model 129The Retirement Income Model 129An Example of a Participant Statement in the Retirement Income Model 130Chapter 14 Collective Defined Contribution 133The Principles 133Broader Applications by the Dutch and Canadians 135There’s More than One Way to Skin a Cat 137Part Five The Perspective of the Individual in DecumulationChapter 15 The First Dial: Your Personal Spending Policy 141Step One: How to Keep Score—The Current Position 142Step Two: What about the Future? 144Step Three: The Projected Outflow—The First Attempt to Quantify Your Spending Plan 145Step Four: How Long Will Your Assets Sustain Your Spending Plan? 147Checkpoint: Is There a Gap to Be Bridged? 148Next Up 150Chapter 16 The Second Dial: Your Longevity Protection Policy 151How an Immediate Annuity Works 151The Benefit of Buying a Lifetime Annuity 153Should Everyone Buy an Immediate Annuity? 154Reasons Why Some People Don’t Like to Buy Immediate Annuities 156Fortunately 157Appendix: More on Annuity-Equivalent Wealth 157Chapter 17 The Third Dial: Investment Policy 159A Reminder of Our Goals and Our Choices 159A Framework 160Taking Owner-Occupied Real Estate into Account 161Many Rules of Thumb Are Just Plain Wrong 163Four Wealth Zones 164How Your Wealth Zone Determines Your Choices 166Bequests 169Chapter 18 Product Innovation with Decumulation in Mind 173Variations on the Lifetime Annuity 173Longevity Protection Plus Long-Term Care Insurance 174Guaranteed Minimum Withdrawal Benefits 175The Longevity Pool 177Advanced Life Deferred Annuities 177Pure Decumulation Products 178Which Type of Product Is Best? 179Part Six The Plan Sponsor’s RoleChapter 19 Defined Contribution Plan Governance 183The Purpose of Defined Contribution Plan Governance 183Risk Management 184A Defined Contribution Plan’s Purpose and Objectives 185Fiduciary Duty 186What Should a Prudent Expert Know—And When? 189New Choices Based on New Knowledge 189In Summary 190Chapter 20 Defined Contribution Plan Effectiveness 191Participation Rate 193Participation Delay 193Employee Savings Rate 194Employer Contribution Rate 195Match Maximization 195Participant Net Investment Return 196Hardship Withdrawal Usage 198Loans as Distributions 199Early Withdrawals 200Conclusion 200Chapter 21 The Defined Contribution Plan Sponsor’s Role in Decumulation 201Providing Education 202Providing Access to Financial Products: In-Plan or Out-of-Plan 203Design Features 204Product Features 205Simplicity 206Parting Thought 206Notes 207About the Authors 223Index 225