Über die Autorin bzw. den Autor

STACY L. SCHAUS, CFP, is a senior vice president and the defined contribution practice leader at PIMCO, which manages over $130 billion in DC assets. Prior to joining PIMCO in 2006, she was a founder and president of Hewitt Financial Services LLC, where she created the Hewitt 401(k) Index. Ms. Schaus has nearly thirty years of investment experience. She has written extensively on defined contribution issues, including PIMCO DC Dialogue, and has been named by 401kWire as one of the fifty most influential leaders in defined contribution for 2010. Stacy is the Founding Chairperson of the Defined Contribution Institutional Investment Association, as well as a board and research committee member for the Employee Benefit Research Institute. She also is a former board member of the Financial Planning Association.

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Your nuts-and-bolts road map to understanding how to create custom target-date strategies

One of the hottest investment products of the past few years, target-date retirement funds have taken hold in the world of 401(k) and other defined contribution plans, forcing you, as a plan administrator or sponsor, to rethink your program.

Written by one of the nation's most qualified and experienced experts in the field, Designing Successful Target-Date Strategies for Defined Contribution Plans gives you the detailed answers you need to your questions about defined contribution plan design and building custom target-date strategies, with in-depth coverage of:

• Defined contribution plans in the American retirement system

• Evolving DC plan design

• Target-date strategies: packaged versus custom

• Legal and fiduciary considerations

• Recordkeeping and trust setup

• Communication issues

• Evaluating costs

• Glide path design

• Asset classes and alternatives

• Protecting DC assets

• Benchmarking

• Advice and retirement planning

• Retirement income and guarantees

Since target-date strategies place participants on "autopilot," you need to take a good, long look at what you offer so you can confirm that participants will arrive at the right destination. Designing Successful Target-Date Strategies¿for Defined Contribution Plans demystifies the often daunting and confusing task of understanding these retirement investments, with sound advice from experts across the industry on the best way to design your own asset allocation, keep plan fees at the lowest possible level, and help protect both plan participants and sponsors from risk.

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Over the last decade, there has been a revolution in the way that retirement plans have been conceptualized and set up in America. Defined contribution (DC) retirement savings plans have rapidly become many organizations' sole sponsored retirement vehicle, providing participants a primary source of retirement savings beyond Social Security. With the amount of money going into these plans―over $3 trillion in assets―increasingly being invested in target-date retirement strategies, investment managers, consultants, advisors, record keepers, and many others are wisely clamoring to capture these assets and generate other significant business from these game-changing entrants.

Taking a closer look at target-date strategies from all angles, Designing Successful Target-Date Strategies for Defined Contribution Plans provides you with the support you need to design best-in-class target-date strategies for DC plans. Practical and detailed, this thorough book considers the current relevant trends in plan design with coverage of:

• The expertise of many of the nation's leading consultants, legal experts, plan sponsors, academics, and others

• Various perspectives and innovative approaches to designing optimal DC plans

• The history of the development and restructuring of retirement plans in America, especially in light of the Pension Protection Act and recent regulations

Written by Stacy Schaus, a renowned defined contribution business leader who deals with these issues on a daily basis, this book explains it all, from the evolution of DC plans and design trends, including the development of target-date strategies, to the benefits of building rather than buying an off-the-shelf product, as well as all you need to know to set up your own custom strategies. This nuts-and-bolts book is designed to help you build a successful retirement program that will help manage risk and ultimately foster a dignified and secure financial future for employees of corporations, not-for-profits, governments, and for yourself as well.

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Designing Successful Target-Date Strategies for Defined Contribution Plans

John Wiley & Sons

Chapter One

Someone once called defined contribution (DC) plans one of the "great social experiments of our time." For many people, a DC plan is the only company-sponsored retirement plan they have, and for this reason, plan effectiveness needs to be more than merely an "experiment." People need these plans to function because most will depend on them to provide adequate retirement income. The plans should also be designed to realistically take into account factors such as inflation.

When we refer to DC as a social "experiment," we should recognize that "scientists" in the retirement-plan field have made significant contributions to the status of DC plans today. Two behavioral economists who have done so are Professor Richard Thaler from the University of Chicago and Professor Shlomo Benartzi of the University of California at Los Angeles. Perhaps their greatest DC contribution has been to support automatic programs within the Pension Protection Act (PPA). Working from the premise that inertia is one of the most powerful forces of nature, employee auto-enrollment, auto-contribution escalation, and auto-asset allocation all work together to help put Americans in a better position to retire more successfully.

We need to find better ways to make these retirement plans succeed. What is more, each participant must succeed in a retirement plan individually. In other words, it is not good enough for a group of employees to reach their retirement-income goals on average.

Some people will resort to anything to find a creative solution to retirement planning. We saw an extreme example in the 2007 New York Times article "A Financial Plan that Comes with Mug Shots." The story involved "financial visionary" Timothy Bowers, who solved his retirement income shortfall by robbing a bank and immediately handing himself over to the police. Bowers figured that if he were sentenced to a minimum-security prison with "quality programming for an aging offender population" and remained in jail until Social Security and Medicare kicked in, he would be able to meet his retirement-income goal.

Few of us are desperate enough to go to that length. However, this story underscores the need for our retirement plans to succeed, again, not just for most people but for everyone individually. That is why we produced this book, covering key issues in today's retirement field. To gather a wide variety of experienced commentary on these issues, in 2006 we started the monthly PIMCO DC Dialogue series in which we interview various retirement experts, including consultants, academics, plan sponsors, financial advisors, attorneys, and others. This book discusses a number of points from conversations with them and covers key questions and proposed solutions discussed at the Pensions & Investments Custom Target-Date Summits held in both 2008 and 2009.

EVOLUTION OF DB AND DC PLANS

To see where you are going more clearly, it is helpful to understand where you are coming from. For that reason, we asked David Wray, president of the Profit Sharing/401(k) Council of America (PSCA), to share some historical background about the evolution of DC plans in America. Wray explained that while most people think that DC plans began with the invention of the 401(k) plan, the plans actually got their start in the late 1800s with the implementation of company profit sharing plans for employers "to build partnership in the workplace and manage labor relations."

Procter & Gamble led the way with this type of plan in 1887, but then found that employees were spending the money instead of using it as a financial reserve or as money that could go toward their retirement. So in 1904, "to encourage saving, P&G introduced a stock-purchase and matching program in which they would match contributions made by the employee, with an additional amount based on the profitability of the company." This, Wray noted, was the genesis of company matching.

Then the Revenue Act of 1921 initiated tax advantages for employment-based retirement plans, allowing plan contributions to be tax free until the employee withdrew funds from the retirement account. "This law established the value of the DC plan from a tax perspective," Wray explained, "which remains the real advantage of these plans today."

These early DC plans flourished in the early part of the twentieth century, but when so many companies were forced out of business during the Great Depression, only about 300 plans remained at the beginning of the 1940s. However, World War II marked a rebirth of retirement plans and employee benefits. As Wray noted:

At the time, wages were frozen but there were no government limits on benefit plans. Competing for high-quality-and now scarce-workers, companies improved their benefit plans and started offering both health insurance and retirement programs. There was an increase in both traditional defined benefit plans, with which most people are familiar, as well as DC programs. By the 1950s, the DC system had grown and evolved into three kinds of tax-advantaged plans: pure profit-sharing plans where the employer contributed the entire amount; cash and deferred profit-sharing plans in which companies allocated a profit-sharing bonus to the employee, who could take all or part of it in cash or defer all or part of it into a profit-sharing trust; and thrift savings profit-sharing plans, into which the employee contributed a certain amount of his or her income on an after-tax basis and could receive a tax-deferred employer matching contribution.

The year 1974 saw the creation of the Employee Retirement Income Security Act (ERISA), which focused on defined benefit (DB) funding issues, but also impacted DC programs. "Unfortunately," Wray pointed out, "ERISA failed to authorize the continuation of cash and deferred profit-sharing plans and, as a result, no new plans were formed and some companies withheld contributions waiting for a clarification."

Recognizing that there were at least 1,000 of these plans and that they "were excellent programs for workers to build retirement savings, as well as for companies to build a positive partnership in the workplace," legislation was passed in 1978 to change the tax code and correct this oversight. However, the language inadvertently went further, opening the door "to a new type of deferred compensation savings plan, the 401(k).... For the first time, workers were allowed to save not only bonus dollars, but also regular wages on a tax-deferred basis." Following further clarification by the IRS in 1981, the modern 401(k) plan was born.

In 1982, Wray explained, when companies began to allow "employees who were already making after-tax contributions to the plan to make their contributions on a tax-deferred basis ... the 401(k) then took off like wildfire. Within years, literally millions of people were participating in these programs."

This full-speed-ahead rush to save a significant amount of tax-deferred wages in these plans was not to last. Concerned about lost tax revenues,...