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The author of this book is employed by Pacific Investment Management Company, LLC (PIMCO) at time of publication. The views contained herein are the author’s but not necessarily those of PIMCO. Such opinions are subject to change without notice. This publication has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This publication contains a general discussion of defined contribution plans and is intended for plan sponsors of such plans. The analysis contained herein does not take into consideration any particular investor’s or plan’s financial circumstance, objectives, or risk tolerance. Investments discussed may not be suitable for all investors or plans.

This book may contain hypothetical simulated data and is provided for illustrative purposes only. Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

Nothing contained herein is intended to constitute accounting, legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This book includes discussions of financial concepts that are theoretical in nature such as the “risk-free rate” or “risk-free asset”; readers should be aware that all investments carry risk and may lose value. The information contained herein should not be acted upon without obtaining specific accounting, legal, tax, and investment advice from a licensed professional.

This volume was brought into being as a result of countless conversations about the increasing importance of defined contribution pension plan design for workers around the globe. My first volume, Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path, was published in 2010 and focused on designing and implementing custom target-date strategies within DC plans. This volume, in turn, broadens and deepens the dialogue about plan design—looking not only at custom target-date strategies, but also the whole of DC investment design from governance to investment defaults, through the core lineup and ending with retirement income. My goal in preparing this book is to further contribute to plan sponsors’, consultants’, and other professionals’ understanding of how to design a DC plan to help participants succeed in building adequate and sustainable retirement income.

Like its predecessor, this book is the result of extensive collaboration and participation among a very long list of colleagues, plan sponsors, consultants, lawyers, and investment and other DC professionals. Among my colleagues, Ying Gao, PhD, CFA, CAIA is noted on the cover as she has worked tirelessly over the past six years in developing and enhancing the PIMCO DC analytic toolset, including the methodology for PRICE. We worked together in coauthoring a long list of DC design papers; analytic work from these papers is updated and woven into the analytic sections of the book. Outside of PIMCO, I worked closely with talented financial editor Alexandra Macqueen CFP^®, who skillfully guided the project and helped shape, refine, and polish every chapter. Her financial depth of understanding, coupled with superb writing skills, eased the process and improved the book’s readability.

Once again I extend my deepest gratitude to the plan sponsors whose passionate work to “get DC right” has paved the way for increasing the retirement success of workers today and tomorrow, and who have shared the details of their plan design through our PIMCO DC Dialogues and in the various summits, forums, conferences, and other ways in which they keep the DC conversation alive. My gratitude extends to Karin Brodbeck at Nestlé, USA; Judy Mares, formerly of Alliant Techsystems Inc. (now part of Orbital); Stuart Odell at Intel Corporation; Brad Leak, CFA of The Boeing Company; Sharon Cowher and Christine Morris at Halliburton; Cindy Cattin at Exelon Corporation; Karen Barnes of McDonald’s Corporation; Gary Park at Schlumberger; Dan Holupchinski formerly of Deluxe Corporation; Dave Zellner at Wespath Benefits and Investments (formerly United Methodist Church); Georgette Gestely at New York City Deferred Compensation Program; David Fisser formerly of Southwest Airline Pilots’ Association; and Pete Apor at Fujitsu.

Each chapter of this book delves into a specific topic and I have called upon the insights and expertise of many experts to review and comment on the content. For this volume, my appreciation for their assistance and global plan pension design insights, both in the opening and close of the book, extends to Brigitte Miksa, Head of International Pensions, and Greg Langley, Editor-in-Chief, Allianz PROJECT M, both of Allianz Asset Management AG; Sabrina Bailey, Global Head of Defined Contribution at Northern Trust Asset Management; and former PIMCO colleague Will Allport. For plan and investment design, I’m thankful for the expertise and careful review by Lori Lucas, DC Practice Leader at Callan Associates; Matthew Rice, Chief Investment Officer at DiMeo Schneider and Associates, LLC; Kevin Vandolder, DC Client Practice Leader, Partner, Investment Consulting, and Bill Ryan, Associate Partner at Aon Hewitt Investment Consulting; Ross Bremen, Rob Fishman, and Tim McCusker, partners at NEPC; Thomas Idzorek, Chief Investment Officer at Ibbotson Associates; Mark A. Davis, Senior Vice President, Financial Advisor at CAPTRUST Financial Advisors; Philip Chao, Pension Consultant and Chief Investment Officer at Chao & Company; Donald Stone, Director of DC Strategy and Product Development and Senior Consultant at Pavilion Advisory Group Inc.; Josh Cohen, Head of Defined Contribution at Russell Investments; Chris Lyon and Lisa Florentine, partners at Rocaton Investment Advisors, LLC; Tim Burggraaf, DC Leader at Mercer in the Netherlands; Jody Strakosch, Founder of Strakosch Retirement Strategies, LLC; Kelli Hueler, Founder of Hueler Companies; Susan Bradley, Founder of Sudden Money Institute; and Lee Baker, Financial Planner at Apex Financial Services.

In addition, I’m deeply appreciative of the extensive research, writing, and insights from many of the world’s most noted academic thought leaders, including Harry Markowitz, Nobel Prize winner, recognized Father of Modern Portfolio Theory, and professor of finance at the Rady School of Management at the University of California, San Diego (UCSD); Zvi Bodie, retired Norman and Adele Barron Professor of Management at Boston University; Richard Thaler, Charles R. Walgreen Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago Booth School of Business; Shlomo Benartzi, professor at University of California at Los Angeles; Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School; Olivia S. Mitchell, Professor of Insurance and Risk Management, International Foundation of Employee Benefit Plans, also Executive Director, Pension Research Council, and Director, Boettner Center on Pensions and Retirement Research, The Wharton School; Jeffrey R. Brown, the Josef and Margot Lakonishok Professor of Business and Dean of the College of Business at the University of Illinois in Urbana-Champaign, Illinois; Joshua Grill at University of California at Irvine; Michael Drew, Professor of Finance at Griffith Business School, Griffith University, and Partner at Drew, Walk & Co.; and Julie Agnew, Associate Professor of Finance and Economics at The College of William and Mary.

I also am thankful for the research, insights, and contributions to DC by many extraordinary professionals and organizations, including Jack VanDerhei, Research Director at the Employee Benefit Research Institute (EBRI); Lew Minsky, Executive Director at Defined Contribution Institutional Investment Association (DCIIA); Chris J. Battaglia, Vice President and Group Publisher at Crain Communications, Inc.; Joshua Franzel, PhD, Vice President, Research Center for State and Local Government Excellence; Juan Yermo, Deputy Chief of Staff to the OECD Secretary-General; Helen Monks Takhar at the NEST Corporation; Gina Mitchell, President of the Stable Value Investment Association (SVIA); and Hattie Greenan, Director of Research and Communications at the Plan Sponsor Council of America (PSCA).

I am grateful for the additions to content, thoughtful editing, and suggestions by ERISA legal professionals, including Marla Kreindler, Partner at Morgan, Lewis and Bockius; James Fleckner, Securities and Investment Management Litigator at Goodwin Procter LLP; David Levine, Principal at Groom Law Group, Chartered; R. Bradford Huss, Partner at Trucker Huss APC; and Sally Nielsen of Kilpatrick, Townsend and Stockton LLP.

PIMCO colleagues also contributed significantly to the content development, review, and editing of all of the chapters. I would like to extend heartfelt gratitude to Joe Healy, DC institutional leader for his review and contribution to the entire book; and Steve Sapra, PhD, and Justin Blesy for meticulous review of the glide path and benchmarking content found in multiple chapters. By topic, we thank: Steve Ferber and former colleague Michael Esselman for review of investment structure; Brett Gorman, Brian Leach, Paul Reisz, Ronnie Bernard, and David Berg for capital preservation and fixed income; Nick Rovelli for shaping and editing the fixed income chapter, plus David Fisher and Loren Sageser for their careful edits; Andy Pyne, Raji Manasseh, and Markus Aakko for contribution to content and editing the equity section; Bransby Whitton, Klaus Thuerbach, and Kate Botting for contributing to and editing the inflation chapter; John Cavalieri, Ashish Tiwari, and Ryan Korinke, as well as Rob Arnott and Lillian Yu of Research Affiliates for review of additional strategies and alternatives; Mike Cogswell and Theo Ellis for review of the retirement income section; and Ken Chambers and Chantal Manseau for their review of the closing. I also appreciate the review by colleagues in Australia, including Adrian Stewart, Sara Higgins, and Manusha Samaraweera; in Canada by Stuart Graham; and in The Netherlands by Patrick Dunnewolt.

PIMCO leadership, as well, stood behind the creation and fulfillment of this project, including Tom Otterbein, managing director and head of institutional Americas, and Rick Fulford, executive vice president and head of U.S. retirement. I also extend gratitude to PIMCO managing directors Susie Wilson; James Moore, PhD; Kim Stafford; and Candice Stack for their review of materials and support of discussions with consultants and plan sponsors.

In addition, our highly professional team at PIMCO tirelessly and individually had a hand in producing this final work, including reviewing, adding to content, editing, designing, and confirming numbers, names, graphics, and figures. These include Daniel Bradshaw and Carla Harris, who reviewed the entire book from a compliance perspective; Blayze Hanson, who worked on all of the charts and graphs throughout the book; Barry Lawrence, who contributed to analyses and helped shepherd the project; and Candi Barbour, who served as marketing assistant to the project. In addition, I would like to thank our editors who contributed to materials, including Steve Brull and Matt Padilla.

My partners at John Wiley & Sons, Sheck Cho, Judy Howarth, and Vincent Nordhaus assisted greatly in editing and publishing this book, and I owe them, too, my appreciation.

And last but never least, I owe a continuing debt of thankfulness to my family, whose generous patience, support, and encouragement helped me produce this work—through many time zones, late nights, weekends, and other moments and hours dedicated to this project. Thank you, once again, for allowing me the time to continue to contribute to global defined contribution plan advancement.

Today, workers around the globe are increasingly dependent on defined contribution plans to reach their retirement income goals. In the United States, fewer than one in five workers have access to a traditional defined benefit pension program. To retire financially secure, workers need well-designed defined contribution (DC) plans—as most will rely on such plans for at least a third of retirement income. Those who have access to a well-designed plan and are contributing at a sufficient level are likely to succeed. Unfortunately, not all workers are offered a DC plan . . . and plans that are offered may have a less-than-optimal design.

As of 2015, we estimate that only about half of U.S. workers have access to a DC plan; in particular, people working part-time or for small employers often lack plan access. Some countries such as the United Kingdom and Australia have addressed DC plan availability by mandating that employers must offer and enroll employees into such programs. At this writing, we anticipate retirement plan availability will increase in the United States as multiple states and possibly the federal government will roll out compulsory programs or regulatory change to ease the burden of offering plans.

As plans become increasingly available, our hope is they offer an investment structure that places participants on a path to success.

This book is designed to assist plan sponsors and providers to structure investment menus that help participants meet their retirement goals. Our earlier book, Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path (2010), provided a framework for understanding the growing role DC plans have come to play for Americans planning for and transitioning into and through retirement. In that volume, we reviewed the origins of DC plans with a focus on building custom target-date strategies, an innovation that is now widely adopted, particularly within the largest U.S. plans. Our earlier book was a resource that helped plan sponsors and their consultants as they considered how to create their own custom target retirement-date strategies. It was written at a time when DC plans were experiencing significant growth in both prevalence and assets.

In the intervening years, the trends we identified have accelerated. Global DC assets in seven major markets (representing more than 90 percent of total assets) swelled to $15.6 trillion in 2015, a 7.1 percent 10-year annual growth rate that was more than double the 3.4 percent pace for defined benefit plan (DB) assets, according to Willis Towers Watson. At the end of 2015, DC assets in these markets represented 48.4 percent of combined DC/DB assets, up from 39.9 percent in 2005. With continued adoption of DC plans and higher contribution rates—fueled increasingly by automatic enrollment—DC assets will eclipse those of DB plans in the near future.

As contribution rates climb, DC assets will increasingly flow into investment defaults. In the United States, more than 80 percent of plans use a qualified default investment alternative (QDIA, an investment vehicle used for retirement plan contributions in the absence of direction from the plan participant); target-date funds dominate, being offered by about 75 percent of plans. According to PIMCO’s ninth annual Defined Contribution Consulting Support and Trends Survey (published in 2016 with data collected in 2015), 96 percent of consultants supported target-date funds as the QDIA.

As a result of the increasing popularity and importance of DC plans, plan sponsors, consultants, advisors, investment managers, attorneys, academics, and other professionals are keenly interested in DC plan design. But as they seek information and guidance, they often find only piecemeal information on how to thoughtfully structure a DC plan. They are left not knowing where and how to begin. To help answer the questions of those interested in and responsible for DC plans, this book offers a framework, information, analytics, and ultimately a guide to building successful DC plans.

Throughout these pages, we focus the discussion first and foremost on meeting the DC plan’s objective—which for nearly all plans today is to provide participants with sustainable retirement income. This retirement income objective may differ from the past when many plans may have been considered supplemental savings programs. Those days are over and new approaches are required. By identifying and focusing first on the plan objective, plans can be managed to meet that objective, both during asset accumulation and retirement-income drawdown.

We believe this outcome-oriented approach presents the best path to success. Our interest in focusing on outcomes extends from our collective experience over the past decade. We have learned that the old approaches to DC plan design are often misaligned to a plan’s objective and can present participants with untenable risk. By aligning investment design to the plan objective and managing both to maximize return and minimize risk, workers are likely to succeed; and what’s more, plan sponsors are able to meet their fiduciary duty to participants.

At PIMCO, we understand that meeting the objective of outcome-oriented investing may be easier said than done. To help plan fiduciaries grapple with this challenge, we have developed proprietary analytics and other resources to help inform and guide DC investment development. Our commitment to contribute to the effective design and success of DC plans for sponsors and participants alike is what motivates us to return to the printing press with a new book for 2017.

HOW THIS BOOK IS ORGANIZED—AND HOW TO USE IT

The book is divided into three parts. Part One (Chapters 1–4) provides the background that readers will need to build their understanding of DC plan design rudiments. Part Two (Chapters 5–9) sets out a guide to understand the overall DC investment structure and menu of choices plan sponsors and participants face. In Part Three (Chapters 10 and 11), we return to a focus on the individual, both in the U.S. and other markets around the world. In it we explore the specific plan features and investment choices retirees seek as they consider whether to stay in their plans, and how a DC plan balance could be turned into a lifetime of retirement income.

Here’s what’s happening, chapter by chapter:

• Chapter 1: We start with an overview of the new reality. For most workers success is up to the individual, as DC plans have replaced traditional pension plans as the primary source of employer-provided retirement income. While the objective is often the same, design around the globe varies significantly so we look at the types of plans by major market. Then we discuss what this shift means as fiduciaries design DC plans: What are a fiduciary’s responsibilities? How can consultants and advisors help? How can plans be designed to succeed? Where does a plan sponsor begin? This chapter includes an assessment of the extent to which workers globally may rely on DC plans for retirement income, showing how the audience for DC plans continues to expand. We discuss the challenges that plan sponsors face in governing plans and share views on the importance of both contribution and investment design. We also consider automatic enrollment and contribution escalation, and then turn our attention to investment design.
• Chapter 2: In this chapter, we introduce a framework for evaluating and structuring DC plans. We discuss how to align investment design to the plan objective and introduce the innovative PIMCO Retirement Income Cost Estimate (the “PRICE” approach) as a methodology to quantify both the historical and prospective cost of buying a lifetime income stream. The PRICE approach helps fiduciaries to identify the number, or amount of savings, a worker needs to retire. In this chapter, readers will be able to ask—and answer—the questions: What is the PRICE of retirement? Is your company’s DC plan on track? We also reach into the world of behavioral finance to help understand why numeric or quantitative frameworks can provide an important counterpoint to the biases that may otherwise shape our behavior.
• Chapter 3: Here we turn to plan investment structure, including an investigation of the number of tiers and investment structures available in plan design. We consider qualified default investment alternatives (QDIAs), including the types of investments and prevalence of each. Then we look at the core investment lineup, helping readers understand how to think about the number and type of investment offerings. We also consider active versus passive investment choices, and brokerage windows (whether full or mutual-fund-only). Finally, we consider the investment structure, whether mutual fund, collective investment trust (CIT), or separately managed account. We also explore white label or multimanager approaches, including considering when a delegated or outsourced chief investment officer approach might make sense.
• Chapter 4: In Chapter 4, we delve into target-date funds. We consider the types available, including packaged, custom, and semicustom. What type of fund may be desirable by plan size? Why may a custom or semicustom approach make sense? We review evaluation criteria and how to apply these during both selection and monitoring of the funds. Among the criteria, we include the objective of the fund, diversification, investor loss tolerance versus capacity, and more.
• Chapters 5–9: Part Two includes Chapters 5 to 9 in which we review core investment offerings in DC plans, including options for capital preservation, fixed income, equity, and real assets. In Chapter 9, we consider whether and how alternative assets fit within plan offerings. Together these chapters allow readers to gain insight into the full range of investment options for DC plans, and the trade-offs, benefits, and costs of different approaches—including how to evaluate plan options in the face of a changing regulatory and economic backdrop. How might an environment of equity levels at record highs and interest rates at record lows, for example, require plan sponsors to review their core lineups? What is the role of active strategies with global exposure, or the importance of inflation hedging? In these chapters, we evaluate how considering options from both return and risk perspectives can help provide the assortment of solutions retirees will likely need.
• Chapter 10: In Part Three, we shift from accumulation to distribution with a more in-depth look at the options available for retired plan participants. We grapple with how retirees make the decision to stay in or exit their plans; and we investigate what plan features and investment choices retirees need, both from the point of view of expert observers and the retiree. Questions include: What role should plans play in encouraging retirees to leave assets in the plan at retirement, and what features cause retirees to stay? How do individuals think about and accommodate the impact that increasing longevity may have on their retirement income plans?
• Chapter 11: We wrap up with the best ideas for improving defined contribution plan success, including a summary of suggestions made throughout the book. We will consider how retirement plan coverage might be improved, including ideas from outside the United States. Among potential improvements, we’ll look at increasing contribution rates, reducing plan leakage, and aligning investment design to a retirement objective.

Finally, in our closing comments, we’ll identify some top priorities for future action. These include 1: increasing plan coverage and savings rates, 2: moving to objective-aligned investment approaches, and 3: broadening options for retirement income.