tag:www.dfaus.com,2010-10-19:/managed_dc/managed_dc_blog//12 2011-11-04T15:25:22Z Movable Type Pro 5.02 tag:www.dfaus.com,2011:/managed_dc/managed_dc_blog//12.689 2011-09-29T16:05:10Z 2011-11-04T15:25:22Z

Former US senator and best-selling author Bill Bradley talks about the challenges facing Americans planning for retirement and underscores how Dimensional's Managed DC can play a helpful role.

Chris Magyar
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Dimensional Resident Scientist Robert C. Merton, the DC conference's keynote speaker, outlines how and why Dimensional's Managed DC solution represents a revolutionary advance in the DC market.

Chris Magyar
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Chris Magyar
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Dimensional Retirement's Robert C. Merton's recent keynote speech at the National Association of Pension Funds (NAPF) March 10, 2011 Investment Conference in London.

Chris Magyar The pension challenge—balancing ends and means—at the National Association of Pension Funds (NAPF) March 10, 2011 Investment Conference in Edinburgh. In this video, Professor Merton proposes a "next-generation" retirement plan design and discusses the implications of this proposed design for government policies, pension regulations, oversight systems, and corporate governance. <$mt:Include module="Video player" blog_id="$website_id" $> Download the slides]]> tag:www.dfaus.com,2011:/managed_dc/managed_dc_blog//12.468 2011-01-07T16:19:36Z 2011-11-04T14:57:17Z

Professor Robert Merton, presenting at a Pensions & Investments Defined Contribution Conference, details the challenges facing the retirement industry today and outlines a number of opportunities for DC providers to offer creative solutions.

Chris Magyar Download the slides

This information is provided for educational purposes for institutional investors and is not intended for public use. Nothing herein constitutes investment advice or an offer to buy or sell securities.]]> tag:www.dfaus.com,2010:/managed_dc/managed_dc_blog//12.466 2010-12-09T21:13:07Z 2011-11-04T14:57:24Z

Professor Robert Merton presents design requirements for a next-generation retirement solution. David Deming describes Dimensional Managed DC.

Chris Magyar ]]> tag:preview.dfaus.com,2010:/managed_dc/managed_dc_blog//12.438 2010-11-09T17:49:46Z 2011-03-10T21:25:54Z

Younger participants are not only exposed to financial market risk as far as their own accruals are concerned, but also bear (at least some of) the risk of the older participants. Their risk will get bigger as the plans get more underfunded. As a consequence, they may end up with lower benefits than they are currently expecting. Collective DC plans are also failing to adequately inform participants about their risk exposure...

Chris Magyar
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Collective DC plans fail to adequately inform participants about their risk exposure. Moreover, they may allocate more risk to participants than they can actually bear. The lack of transparency and the imbalances between participants' exposure to risk and their risk-bearing capacity is unsustainable, and the house of cards will inevitably collapse once (especially) younger participants realize what is going on.

To prevent this, pension contracts need to be changed. Existing pension rights need to be cut, and future rights need to be made contingent on future returns. New contracts should not only tell participants about their shortfall risk compared to their income needs but also customize that risk and integrate ways of managing it. This obviously requires some degree of risk differentiation.

Although many market experts are aware of the need to come up with new pension contracts and understand the urgency of the issue, few people have come up with clear proposals. One of the few exceptions to date is Eduard Ponds' proposal to differentiate equity risk across age cohorts and reduce it as cohorts approach their retirement date.

Eduard deserves praise for coming up with his ideas, and for presenting them long before many people saw the need for such proposals. We don't believe, however, that his solution is the right one. His proposal is essentially that target date funds be used on a collective basis, and target date funds used collectively come with the same disadvantages that they have in any other context.

A better idea would be to link the new contracts to a managed account solution that targets a pre-established stream of retirement income. Dimensional Fund Advisors' soon-to-be-launched offering, for example, called Dimensional Managed DC, is designed to provide a DB-like benefit—an inflation-protected income stream for life—while managing the risk that this benefit won't be achieved. Unlike DB plans, this solution allows mass customization at low cost, even for participants who don't opt out of the defaults offered to them.

A change in pension contracts is long overdue. Any further postponement exposes participants in Collective DC plans to undue risk. With innovations like Dimensional Managed DC coming onto the marketplace, plan sponsors no longer have any reason to delay.]]> tag:preview.dfaus.com,2010:/managed_dc/managed_dc_blog//12.437 2010-11-07T17:41:52Z 2010-12-15T15:59:07Z

There are many advice offerings for DC plans. Austin has created a matrix that reflects the current landscape, with the "do-it-yourself" vs. "do-it-for-me" models on the x axis and "generic" vs. "individualized" on the y axis. A majority of plans offer investment advice through a modeling or asset allocation tool. Target date or lifecycle funds provide participants convenient execution but, aside from age, are not customized to their specific situation...

Chris Magyar with the "do-it-yourself" vs. "do-it-for-me" models on the x axis and "generic" vs. "individualized"
models on the y axis.

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As you can see, almost all plans offer education and guidance. A majority of plans, probably upwards of 70% according to a recent PSCA study, offer investment advice through a modeling or asset allocation tool. According to Schwab, a majority of plans, probably more than 70%, also offer target date or lifecycle funds. These funds provide participants convenient execution (i.e., they can buy one fund that does it all for them) but, aside from age, are not customized to their specific situation.

Managed accounts can provide high levels of both individualization and execution. Interestingly, however, they aren't offered in as many plans as the other options. Plan sponsors might want to consider offering a managed account solution in their plans, alongside other advice options, to meet the needs of plan participants who are looking for a fully individualized and delegated solution.]]>