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