Defined Contribution Retirement Plans Research Articles

Using Vividness Interventions to Improve Financial Decision Making

Prior policy work has effectively eased some financial problems that Americans face: Automatic enrollment in retirement saving accounts has drastically increased the number of workers who participate in defined contribution retirement plans. Yet, such choice architecture interventions cannot always be implemented, and even when they can, they are beholden to whatever decisions the choice architect made and, in any case, may not go far enough in helping maximize financial well-being over time. Additional interventions thus need to complement already successful choice architecture ones. Namely, because many financial decisions involve trade-offs between present and future selves, with the present self often being prioritized, this review highlights interventions that make the future self more vivid to decision makers. We discuss the theoretical background underlying such interventions, the factors that may make vividness interventions more or less effective in policy contexts, and possible future directions for researchers and policy makers.

Retirement Planning Decisions: Choices Between Defined Benefit and Defined Contribution Plans

As states move toward offering defined contribution retirement plans as an alternative or addition to traditional defined benefit pensions, they need to consider the preferences and long-term consequences for different groups of employees. This study looks at which plan employees choose when given the option of either a defined contribution or defined benefit plan. The strongest driver of that choice is education level where the most educated prefer defined contribution plans and the least educated stay in defined benefit plans. A unique contribution of this study is that we include region of origin as a study and determine that cultural differences influence plan selection. The study also explores the role of sex, age, and tenure. Challenging other studies on financial planning, these findings indicate that sex and age are not significant factors. This research was conducted using data from more than 4,000 employees from Florida International University and an interview with HR professionals. By understanding retirement preferences in a more nuanced way, we can better craft our approaches to retirement security and financial literacy training in public sector organizations.

The Changing Pattern of Stock Ownership in the US: 1989–2013

In 1989, 32 percent of US households reported some stock ownership, either directly, through a mutual fund, or through an investment held in a defined contribution retirement plan. Twelve years later, in 2001, more than half of all households – 53 percent – reported some stock ownership. Expansion of equity mutual fund ownership, inside and outside defined contribution retirement plans, was the central driver of this expansion. Direct stock ownership also rose over this period, from 17 to 21 percent. The growth of stock ownership slowed, and in some cases reversed, in the subsequent twelve years. The overall rate of stock ownership fell to 49 percent in 2013, and direct stock ownership declined to 14 percent. The substantial increase in stock ownership during the 1990s, and the slight decline since then, may help to distinguish among competing explanations for the low rate of overall stock market participation. There is some evidence that US households became more risk tolerant during the 1990s, and that the transactions costs of equity market participation declined. While transactions costs have not increased in the subsequent period, self-reported risk tolerance has declined. The rapid expansion of defined contribution retirement plans in the 1990s, and the slowdown in that expansion after 2001, is also an important factor in explaining the ownership pattern over time.

End of watch

Unlike Congress, the American Chemical Society Board of Directors has term limits. It has been my honor and great privilege to serve our society on the board for nine years, the past three as board chair. “End of watch” is a phrase often used by the military and law enforcement to indicate the completion of a shift or retirement from active duty. My watch began in 2007 just when the financial markets were on the verge of collapse and the Great Recession was about to commence. Working closely with ACS management, the board of directors had to take immediate action guided by the ACS finance department. Those were difficult days that required hard choices such as freezing the defined contribution retirement plan, capping the society’s financial contributions to the retiree medical plan, calling for a hiring freeze along with a workforce reduction, and eliminating open requisitions for new hires. Without

Simplifying choices in defined contribution retirement plan design: a case study

AbstractThe growth and popularity of defined contribution pensions, along with the government's increasing attention to retirement plan costs and investment choices provided, make it important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2 M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared with their non-streamlined counterparts.

Simplifying Choices in Defined Contribution Retirement Plan Design: A Case Study

The growth and popularity of defined contribution pensions, along with the government’s increasing attention to retirement plan costs and investment choices provided, make it important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.

Practical Applications of Defined Contribution Retirement Plans Should Look and Feel More Like Defined Benefit Plans

<h3>Practical Applications Summary</h3> Defined contribution (DC) retirement plans have largely replaced defined benefit (DB) pension plans, but DC plans, which were designed to be supplements to pensions, aren’t currently positioned to solve the looming retirement crisis in the United States. In <b>Defined Contribution Retirement Plans Should Look and Feel More Like Defined Benefit Plans</b>, <b>Antti Ilmanen, David Kabiller</b>, and <b>Rodney Sullivan</b> of <b>AQR</b> and <b>Laurence Siegel</b> of the <b>CFA Institute Research Foundation</b> show that DC retirement plans, as they currently stand, are inadequate to meet the challenges of our looming retirement crisis. They describe how the addition of features borrowed from DB plans can help DC plans improve retirement outcomes through better risk management and improved diversification of portfolios.

Save More Today: Improving Retirement Savings Rates with Carrots, Advice, and Nudges

Default savings levels in defined-contribution retirement plans are inadequate. Plan sponsors often focus on maximizing participation instead of overall retirement readiness, however. This has led to low default savings rates, and many plans that automatically enroll participants have experienced a decline in rates. Automatic escalation is one approach to raising savings rates; however, obstacles, such as employee turnover and the fact many plan sponsors offer automatic escalation as an opt-in arrangement, reduce its overall effectiveness. The author advocates focusing on solutions that have an immediate impact on retirement readiness. We need to save more today. Using participant and online survey data, three broad approaches to improve participant savings rates are explored: the carrot (stretching the employer matching contribution), the stick (in-plan financial advice), and the nudge (raising savings rate expectations with higher defaults and larger increases from automatic enrollment and automatic escalation). The results strongly suggest that increasing default savings rates is likely the simplest and most effective way to increase retirement saving. Acceptance of the default savings rate was roughly the same whether it was 3% or 12%, and participants who chose their own rate tended to save more at higher default levels (i.e., the default appears to be an “anchor” for these participants). Additionally, approximately 90% of participants who received in-plan advice increased savings rates, by about 2 percentage points, on average. This research suggests that relatively minor changes in plan design can have a significant impact on employee savings.

Education and Contributory Pensions at Work: Disadvantages of the Less Educated

There is long-standing concern about the mechanisms that lead to differential accumulation of retirement resources. As defined contribution (DC) plans have become the most common employer pension for US workers over recent decades, economic resources later in life increasingly depend on participating in voluntary, contributory pension instruments during working life. Using the Survey of Income and Program Participation linked to W-2 tax records containing respondents' annual contributions to DC retirement plans, we examine how participation in and contributions to DC plans among eligible US workers differ by education. Our analysis clarifies two central pathways associated with educational disparities in DC retirement plans. First, we disentangle the effects of education that operate via a labor market pathway, showing that a worker's earnings level is, by far, the most influential labor market factor associated with participation and contribution amounts. Second, we show an important independent effect of education on not only the decision to participate, but also how much money to set aside when participating, net of earnings and structural position in labor markets. Supplementary analyses using data from the Survey of Consumer Finances corroborate the importance of non-labor-market mechanisms for understanding the education gap in workplace retirement savings plans. Together, our results bring to center stage the importance of education in the process of stratification in retirement wealth formation and long-term financial security. Less educated workers face multiple disadvantages in the accumulation of retirement resources in the context of growing income inequality and changing employment institutions.

Defined Contribution Retirement Plans Should Look and Feel More Like Defined Benefit Plans

Defined Contribution Retirement Plans Should Look and Feel More Like Defined Benefit Plans

A Portfolio Approach to Retirement Income Security

Workers with defined contribution retirement plans face a daunting array of choices as they enter retirement. They need to decide how to allocate their savings among asset classes and how much to withdraw from savings to support retirement. They also need to make choices about when to claim Social Security and whether or not to purchase annuities (and what type to purchase) to provide guaranteed lifetime income in addition to Social Security. In this article, we report on a recent collaboration between the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) aimed at analyzing the various alternatives and finding optimal combinations of asset and product allocations, and strategies for withdrawing funds from savings. An important objective in this work has been finding solutions that are sufficiently straightforward to be implemented by retiring workers in employer-sponsored retirement plans or by utilizing low-cost advice options. Solutions that require substantial adviser involvement may be too expensive for typical middle-income workers. While the report focuses on solutions for defined contribution retirement plans, its framework can also be applied to out-of-plan solutions.

How Should Defined Contribution Retirement Plans Be Organized?

Americans have a tough time saving for their retirement. To make matters worse, the move from defined benefit (DB) to defined contribution plans (DC) over the years has required greater investor sophistication, discipline, and sound investment advice. Unfortunately, the current rules regarding investment advice for defined contribution plans do not address the two critical deficiencies of the current system, namely opacity and conflicts of interest. We propose that one-master standard be instituted along with strict transparency requirements to control the conflicts of interest and improve retirement savings advice. We also recommend that only passive, well-diversified index funds for stocks and bonds should qualify as retirement vehicles.

Benefit or Burden? On the Intergenerational Inequity of Teacher Pension Plans

Most public school teachers in the United States are enrolled in defined benefit (DB) pension plans. Using administrative microdata from four states, combined with national pension funding data, we show these plans have accumulated substantial unfunded liabilities—effectively debt—owing to previous plan operations. On average across 49 state plans, an amount that exceeds 10% of current teachers’ earnings is being set aside to pay for previously accrued pension liabilities. To the extent that the costs of the unfunded liabilities drag on teacher compensation, they may exacerbate problems of teacher recruitment and retention. We briefly discuss three policy changes that could end or reduce the accumulation of unfunded liabilities in educator pension plans: (1) transition teachers to defined-contribution retirement plans, (2) transition teachers to cash-balance retirement plans, and (3) tighten the link between funding and benefit formulas within the current defined-benefit structure.

A Secular Approach to Investing for Retirement

We know stock investing offers defined contribution retirement plan participants a viable vehicle to both grow and sustain retirement assets. This paper explores a secular approach to investing using both fundamental and technical analysis to support plan participants in the preretirement (accumulation) and retirement (distribution) stages including a pragmatic and prudent approach to a systematic withdrawal rate.

Regulatory Recommendations for the Department of Labor to Facilitate DC Lifetime Income

The U.S. Department of Labor can take certain regulatory actions to facilitate the adoption of lifetime income programs by sponsors of defined contribution retirement plans. This article outlines the simple steps the DOL can take, without the need of legislative change, that would support plan sponsors in these efforts.

How Portfolios Evolve after Retirement: Evidence from Australia

Households in many countries reach retirement with lump sums of financial wealth accumulated in defined contribution retirement plans. Retired households need to manage risks and generate income from their savings. We study the dynamics of retirement wealth and portfolio allocation using the three wealth waves of the Household, Income and Labour Dynamics in Australia panel survey. The average retired household maintained or accumulated wealth in 2002–2006 and decumulated in 2006–2010 consistent with trends in financial asset prices. At older ages, households prefer portfolios with less risk and more liquidity, while maintaining ownership of the family home. The probability of households exhausting financial assets increased over the sample, but households who depleted financial wealth did not liquidate their housing wealth at higher rates than other households. In contrast to the USA, the overall effect of health shocks on the wealth of retired Australian households is minimal, but financial shocks have large effects.

An Investigation of Administrative Fees in Defined Contribution Plans

The administration of defined contribution retirement plans is generally outsourced by plan sponsors to third-party financial institutions, resulting in two primary types of plan fees. Although investment fund fees in defined contribution plans have been heavily scrutinized, the administrative fees paid to third-party plan administrators are less well understood. The authors highlight the importance of securing fee reimbursements from third-party plan administrators to avoid excessive administrative fees, as well as situations in which the plan sponsor must be particularly careful to ensure that such reimbursements are secured. The authors’ findings have important implications as the scrutiny of plan fees intensifies with continued regulatory change.

Conditional Allocations to Real Estate: An Antidote to Sequencing Risk in Defined Contribution Retirement Plans

In this article, the authors investigate the potential for real estate as an asset class to be exploited to protect against sequencing risk (or path dependency) in defined contribution retirement funds. Their results suggest that allocating both listed and unlisted real estate assets to retirement portfolios, even if very minor, can enhance the risk–return profile and probability of successfully achieving retirement outcomes. Using a bootstrap simulation approach, the authors test for a range of asset allocations that include real estate. In addition, they examine the sensitivity of real estate performance to changes in monetary policy to optimize portfolio outcomes for fund managers who actively seek exposure to real estate assets. Their findings indicate that the performance of real estate is highly dependent on monetary policy settings that, when used in a dynamic asset allocation process, have the potential to enhance portfolio returns while limiting the impact of downside risk.

Conditional Allocations to Real Estate:An Antidote to Sequencing Risk in Defined Contribution Retirement Plans

Conditional Allocations to Real Estate:<i>An Antidote to Sequencing Risk in Defined Contribution Retirement Plans</i>

Investor Sophistication and Target-Date Fund Investing

The Pension Protection Act of 2006 identified target-date funds as an appropriate default investment for defined contribution retirement plans. Using the 2009 National Financial Capability Study, this article examines the relationship between investor sophistication and the decision to primarily invest retirement assets in target-date funds. The article finds that Americans with low investor sophistication are 22% more likely than highly sophisticated investors to make target-date funds their primary retirement saving vehicle. It is possible that the Pension Protection Act improved the economic welfare of many Americans, given that this article provides evidence that investors who stand to benefit the most from target-date fund investing are the ones who are more likely to use the product.