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The Retirement Plan Solution: The Reinvention of Defined Contribution


Praise For The Retirement Plan Solution

"Short, clear, complete, and always interesting. Best book on DC plans and what we should do-now."
Charles D. Ellis, author, Winning the Loser's Game

"At a time when the world is in turmoil, along with retirement expectations, the authors have hit a home run. After reading this book, I have a plan. Read it for your path to retirement security."
Dallas Salisbury, President and CEO, Employee Benefit Research Institute

"The Retirement Plan Solution offers a refreshing and provocative perspective on how to assess retirement needs, save to meet these needs, and manage the retirement payout process. In this time of financial turmoil, employees, plan sponsors, and financial advisors will find this highly practical resource volume both useful and humorous."
Olivia S. Mitchell, Director, Pension Research Council, Wharton School

"The Retirement Plan Solution is a map to the future of 401(k) retirement plans. But it is not just a theoretical view of what could be. Instead, the authors describe the needs and trends that are already here, and then describe the changes that are developing to meet those needs. It is about the tomorrow that is happening today."
Fred Reish, Managing Director, Reish Luftman Reicher & Cohen

"The respected authors have created a readable, timely, and very helpful book on all aspects of retirement planning. The suggestions are practical, the information is concise, and the book is highly recommended for anyone that is interested in sound financial planning."
Moshe A. Milevsky, PhD, Finance Professor, York University, Toronto, Canada

"This is a must-read for people working in the retirement industry, as well as those who simply care about how to improve their chance of reaching a financially secure retirement. In a clear and simple fashion, the authors deliver one of the best books to date on inefficiencies in the current DC plan and potential improvements."
Peng Chen, President, Ibbotson Associates

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 Great American Retirement System?

Defined Benefit and Defined Contribution.

The Dynamics of the Retirement Plan.

Room for Improvement in the Accumulation Phase.

The Right Sort of Education.

Other Ways of Running Defined Contribution Plans.

The Individual’s Role in Decumulation.

The Plan Sponsor’s Role.

A Final Thought: From Biggest to Best.

CHAPTER 1 DC Version 2.0.

Coming of Age.

The New Retirement Superpower.

Coming Soon to a Dictionary Near You: DBization.

At the Heart of Version 2.0: A Different Objective.

Income Replacement.

Is This the First Nail in the Coffin of Defined Contribution?

“Hold on a Second . . . ”

PART ONE The Dynamics of the Retirement Plan.

CHAPTER 2 More than You Ever Wanted to Know about Life Expectancy.

What Is “Life Expectancy”?

How Life Expectancy Has Changed.

But an Individual’s Life Span Is Uncertain.

Longevity Distributions: Let’s Take a Look.

What Does This Mean?

And Will Longevity Improve Even More?

CHAPTER 3 Retirement Is Expensive.

The Goal Is a Targeted Level of Income Replacement.

The Fundamental Pension Equation and the Defined Benefit System.

A Simple Model of Retirement Plan Accumulation and Decumulation.

Base Case Results.

When to Start Saving.

The Base Case May Not Be a Reliable Guide.

How to Act in the Face of Uncertainty.

Appendix: Further Analysis of the Uncertainty Associated with Investment Returns.

CHAPTER 4 Investment Returns Are All-Important.

The 10/30/60 Rule.

Games at a Virtual Casino.

Investment Analogs.

Historical Return Patterns.

What Are the Lessons?

What Follows?

How Much Investment Risk Can You Tolerate?

CHAPTER 5 Sustainable Spending.

Lifetime Annuities.


Appendix: The Multiple.

PART TWO Opportunities in the Accumulation Phase.

CHAPTER 6 Save More.

Employers with No Plan.

Employees Who Do Not Enroll.

Employees Who Start Saving Too Late.

Employees with Low Savings Rates.

Employees with Gaps in Continuous Participation.

CHAPTER 7 Limit Leakage.

Cashing Out.


Hardship Withdrawals.

CHAPTER 8 Invest Better.

Evidence of Waste.

The Importance of a Good Default Option.

The “Target Date” Solution.

And for the Investment Experts?

CHAPTER 9 Reduce Fees.

The Impact of Fees.

Fees for What?

Looking for Fee Leakage.

Fee-Sharing Arrangements.

Institutional versus Retail Fees.

Active Management.

Record-Keeping Fees.

PART THREE We Need the Right Sort of Education.

CHAPTER 10 Why the Waste? Because We’re Only Human.

Overconfidence in Retirement Planning.

Behavioral Finance.

Low Participation and Savings Rates.

Poor Investment Results.

What to Do?

CHAPTER 11 Financial Education.

Facts that Surprised Us.

Enthusiastic Initiatives.

What Exactly Can Be Taught?

Why Hasn’t This Already Been Taught?

A Literate Default System.

A Final Anecdote.

PART FOUR Other Ways of Running Defined Contribution Plans.

CHAPTER 12 Case Study—Australia.

Some Features of the Australian Defined Contribution System.

Consequences for Coverage.

Consequences for Adequacy.

Consequences for Employer Attitudes.

Lessons for the United States.

Consequences for Investment Choices.

CHAPTER 13 Three Defined Contribution Plan Models.

The Bank Savings Model.

The Fund Supermarket Model.

The Retirement Income Model.

An Example of a Participant Statement in the Retirement Income Model.

CHAPTER 14 Collective Defined Contribution.

The Principles.

Broader Applications by the Dutch and Canadians.

There’s More than One Way to Skin a Cat.

PART FIVE The Perspective of the Individual in Decumulation.

CHAPTER 15 The First Dial: Your Personal Spending Policy.

Step One: How to Keep Score—The Current Position.

Step Two: What about the Future?

Step Three: The Projected Outflow—The First Attempt to Quantify Your Spending Plan.

Step Four: How Long Will Your Assets Sustain Your Spending Plan?

Checkpoint: Is There a Gap to Be Bridged?

Next Up.

CHAPTER 16 The Second Dial: Your Longevity Protection Policy.

How an Immediate Annuity Works.

The Benefit of Buying a Lifetime Annuity.

Should Everyone Buy an Immediate Annuity?

Reasons Why Some People Don’t Like to Buy Immediate Annuities.

Fortunately . . . .

Appendix: More on Annuity-Equivalent Wealth.

CHAPTER 17 The Third Dial: Investment Policy.

A Reminder of Our Goals and Our Choices.

A Framework.

Taking Owner-Occupied Real Estate into Account.

Many Rules of Thumb Are Just Plain Wrong.

Four Wealth Zones.

How Your Wealth Zone Determines Your Choices.


CHAPTER 18 Product Innovation with Decumulation in Mind.

Variations on the Lifetime Annuity.

Longevity Protection Plus Long-Term Care Insurance.

Guaranteed Minimum Withdrawal Benefits.

The Longevity Pool.

Advanced Life Deferred Annuities.

Pure Decumulation Products.

Which Type of Product Is Best?

PART SIX The Plan Sponsor’s Role.

CHAPTER 19 Defined Contribution Plan Governance.

The Purpose of Defined Contribution Plan Governance.

Risk Management.

A Defined Contribution Plan’s Purpose and Objectives.

Fiduciary Duty.

What Should a Prudent Expert Know—And When?

New Choices Based on New Knowledge.

In Summary.

CHAPTER 20 Defined Contribution Plan Effectiveness.

Participation Rate.

Participation Delay.

Employee Savings Rate.

Employer Contribution Rate.

Match Maximization.

Participant Net Investment Return.

Hardship Withdrawal Usage.

Loans as Distributions.

Early Withdrawals.


CHAPTER 21 The Defined Contribution Plan Sponsor’s Role in Decumulation.

Providing Education.

Providing Access to Financial Products: In-Plan or Out-of-Plan.

Design Features.

Product Features.


Parting Thought.


About the Authors.