Post on 08-May-2015
description
Trends In Retirement Plan Design
by Tim Barnesand Duncan Williams
What the Book Teaches Us
• Acknowledge trend from DB to DC and expect it to continue (cursory)
• 22% of all pension $ are invested in mutual funds, expect to grow
• In DC plans, Investors in their 20s are slightly more aggressive than those in their 60s
Shifts in the Workforce
• On average, workers can expect to change job 14 times– Need Benefits that are portable
• Increased Life Expectancy– Cost of guaranteed lifetime benefit much higher
Shift from Defined Benefit to Defined Contribution
Probability of a 65-year-old living to various ages
0%
25%
50%
75%
100%
65 70 75 80 85 90 95 100 105
MaleFemale
At least one spouse
Age
78 81 86
85 88 91
91 93 96
Pro
bab
ilit
y
Source: Annuity 2000 Mortality Tables
86
91
Plan Features & Differences Defined Benefit Defined Contribution
Benefit Type Lifetime Income Lump Sum
Benefit Portability
Quick Vesting
Investment Risk*Employer Employee
Investment MgmtEmployer Employee
Longevity RiskPooled Employee
The Shift from DB to DC
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 200430%
35%
40%
45%
50%
55%
60%
65%
70%
Defined ContributionDefined Benefit
Source: Broadbent and Palumbo, 2006
2%
Responsibility for Retirement Savings
Source: Social Security Administration, “Income of the population 55 or older using highest quintile $55,889 per year and higher – 2008,” April 2010. This chart is for illustrative purposes only. May not add to 100% due to rounding.
Other
64% fromyour own sources
Earned Income
Investments
18%
44%
36% fromoutside sources
Social Security
Pension
18%
19%
Individuals will be responsible for a higher percentage of their income in retirement
What Workers Need to Know (versus Before)
• How much I need, and the resulting required savings rate
• How to evaluate investment options and form an investment strategy
• And they need to be able to consistently follow requires will power and strong nerves
How Are they Doing?
• Paralysis by Analysis– Average 401(k) > 18 Investment Options– Inertia (Default Framing)/Procrastination
• Picking Previous Winners• Naïve Diversification
– Diversifying with lifestyle funds• Participation and Savings Rates too Low
The Cost of Not Following a Consistent Strategy
Sources: Dalbar and Morningstar
Pick the Top Performing Funds?
Source: Standard & Poors *Bottom quartile includes funds that were liquidated, merged, or changed style.
Performance is historical and does not guarantee future results.
Information from sources deemed reliable but its accuracy cannot be guaranteed.
03
-04
-03
2001-2005 2006-2010
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
14%
21%
22%
43%*
Top 30 Mutual Funds
Subsequent Performance of Top Quartile LC Funds
Recent Trends
• Automatic Enrollment• Lifecycle funds and Default Options• Savings Rate Escalation