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Creating sustainable retirement income in 401(k) plans
Creating sustainable retirement income in 401(k) plans
one of their biggest fears – running out of money in 
1 American Benee ts Council. “401(k) Fast Facts.” June 2013. 
hJ p://www.americanbenee tscouncil.org 
products – traditional annuities and guaranteed 
minimum withdrawal benefit features – is to offer
retires. On the first issue – how much replacement income 
is adequate – many observers use 75-80% of final pay as a 
• 
• 
• 
• 
•
• 
•
www.drinkerbiddle.com 
CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY | NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN 
© 2014 Drinker Biddle & Reath LLP. 
All rights reserved. 
A Delaware limited liability partnership | One Logan Square, Ste. 2000 | Philadelphia, PA 19103-6996 | (215) 988-2700 | (215) 988-2757 fax 
Jonathan I. Epstein and Andrew B. Joseph, partners in charge of the Princeton and Florham Park, N.J., offices, respectively.
• The replacement income issue: 
See, for example, “Workforce Management and Retirement in a 
401(k) World,” Watson WyaJ Insider (September 11/ 2007). 
See, Cantore, Tara, “MetLife Finds Too Many Pre-Retirees with 
Faulty Math,” Plan Adviser (October 2011) 
See Allianz RFI Response, at page 4. 
See, for example, Aon Consulting, “Aon Consulting/Georgia State 
2008 University Replacement Ratio Study.” 
• Longevity: 
• Withdrawal rates: 
• InEation risk. 
6 Reish, Fred, Ashton, Bruce and Byrnes, Pat, “The Problem with 
Living Too Long,” Institutional Retirement Income Council (2010), 
hJ p://www.iricouncil.org/docs/The%20Problem%20With%20Liv 
ing%20Too%20Long.pdf. . . For more recent information, see Society 
of Actuaries, Exposure DraG, RP-2014 Mortality Tables, February 
7 One recent study showed that more than 33% of those interviewed 
had no idea how much they could safely withdraw and roughly 
25% expected to be able to withdraw more than 10% of their 
retirement savings each year. See, Lee Barney, “American All Over 
the Map on Retirement Drawdown Rates,” Money Management 
Executive (October 13, 2011). 
8 William P. Bengen, “Determining Withdrawal Rates Using 
Historical Data,” Journal of Financial Planning, October 1994, 
pages 171-180. . . Some more recent studies have suggest that a 3% 
withdrawal rate is more appropriate in the investment environment 
of the e rst decades of the twenty-e rst century. . .
• Cognitive risk: 
Investment or sequence-of-returns risk: 
2000s. The risk arises when a retiree takes withdrawals – 
which are necessary to pay his living expenses – from a 
9 See Allianz of America, Behavioral Finance and the Post-Retire-ment 
Crisis (A Response to the Department of the Treasury/Depart-ment 
of Labor Request for Information Regarding Lifetime Income 
Options for Participants and Beneeciaries in Retirement Plans), 
prepared by Prof. Shlomo Benartzi, UCLA, at page 9 (April 29, 
2010) (the “Allianz RFI Response”); see also BMO Retirement In 
stitute, Financial decision-making: Who will manage your money 
when you can’t?, July 2011, which reached similar conclusions 
based on studies of the Canadian population. 
See, David Laibson, “Cognitive Impairment: Precipitous 
Declines in Cognition Can Set the Stage for Poor Decisions 
About Retirement Finances,” which appears in the Allianz RFI 
Response, hJ p://www.dol.gov/ebsa/pdf/1210-AB33-617.pdf. . 
. Professor Laibson’s research showed a signie cant decrease in 
“analytic cognitive functioning” as people age and that older 
adults make e nancial mistakes. In ee ect, older people are less 
able to make cogent e nancial decisions, to analyze e nancial data 
and properly consider risks, which suggests that they are less 
able to make sound decisions about their e nancial security once 
they reach their 80s…a point when they may live another 10 or 
more years. . .
11 ERISA §404(a)(1)(A). 
12 ERISA §404(a)(1)(B) 
Id. . . Emphasis added. 
should 
14 29 C.F.R. §2550.404.a-1(b)(1). 
See, generally, Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C. 
1995). 
See, generally, Fink v. National Savings and Trust Company, 
F.2d 951, 962 (D.C. Cir. 1984). 
Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984); cert. denied 
sub nom, Cody v. Donovan, 469 U.S. 1072, 105 S.Ct. 565, 83 
L.Ed.2d 506 (1984). 
18 ERISA Regulation Section 2550.404a-1(b).
19 ERISA Regulation Section 2550.404a-4(b)(1) and (4). . . The 
regulation relates only to the selection of an annuity provider in 
a dee ned contribution plan, but the precepts in the rule may be 
applicable to the selection of a GWB product by analogy.
20 Mungan, Kenneth P. “The 6% Rule: Determining Portfolio 
Withdrawal Rates using Stochastic Analysis and Managed Risk 
Equities.” Milliman.com/insight. September 14, 2014. Milliman, 
Inc. 
21 Dalbar, Inc. “2013 QAIB Quantitative Analysis of Investor 
Behavior.” March 2013. Dalbar, Inc. 
22 Mungan, Kenneth P. “Performance of Insurance Company 
Hedging Programs During the Recent Capital Market Crisis.” 
Milliman.com/insight. December 1, 2008. Milliman, Inc.
* The backtest is based on a $100,000,000 investment from 1/1/2000 to 12/31/2013. The S&P 500 is an unmanaged index that is not 
available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a 
1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical 
illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will 
consistently lead to successful investing.
* The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that is not 
available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a 
1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical 
illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will 
consistently lead to successful investing.
* The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that 
is not available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ 
both include a 1% fund management fee but do not include taxes, sales charges, or any other expenses. The returns for the 
‘Hypothetical Investment (2.5% per year)’ do not include fees, taxes, sales charges, or any other expenses. The rates of return are 
hypothetical historical illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that 
the investment process will consistently lead to successful investing.
24 Source: United States Census Bureau, “Net Worth and 
Asset Ownership of Households: 2011, Table 4. Percent 
Distribution of Household Net Worth, by Amount of Net 
Worth and Selected Characteristics: 2011,” hJ p://www. 
census.gov/people/wealth/ 
saved 
need
Appendix B-2: Ee ects of Volitility 
The Sequence of Returns Ee ect 
25 In this example, if the investor starts with $100, the 
investment will increase to $150 (a 50% increase) and then 
fall to $75 (a 50% decrease). 
26 Russell Kinnel, Morningstar, 4/16/2013, “Why Investors 
Lag the Returns of Their Funds: Volatility proves challeng 
ing for many shareholders,” hJ p://www.morningstar.com/ 
advisor/t/73663027/why-investors-lag-the-returns-of-their-
With the Standard & Poor ’s 500-stock index near 
an all-time high, it’s worth considering how 
investors in stock mutual funds have fared in the 
market rally that began more than 4 years ago. 
Not so great, according to latest Quantitative 
Analysis of Investor Behavior study by Dalbar Inc. 
Fund investors have signie cantly underperformed 
the S&P 500 over the past 3, 5, 10 and 20 years. 
While average stock fund investors did almost 
match the S&P 500s 16% total return last year, 
they lagged the index by nearly 4 percentage 
points per year from 1993 to 2012. 
27 Tom Anderson, Forbes, 3/28/2013, “Fund Investors Lag 
As SP 500 Nears All-Time High,” hJ p://www.forbes.com/ 
sites/tomanderson/2013/03/28/fund-investors-lag-as-sp- 
This analysis is based on SP 500 returns from 1/1/2000 to 12/31/2013. The SP 500 is an unmanaged index that is not 
available for direct investment. The returns do not include fees, taxes, sales charges, or any other expenses.
• Even Keel Managed Risk Fund – this fund 
• 
Fund – This fund uses U.S. small and mid- 
• 
– This fund uses developed international 
• Even Keel Explorer Managed Risk Fund – 
28 Product descriptions may be found at www.evenkeelin 
vestments.com/#products.

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Creating sustainable retirement income in 401(k) plans

  • 3. one of their biggest fears – running out of money in 1 American Benee ts Council. “401(k) Fast Facts.” June 2013. hJ p://www.americanbenee tscouncil.org products – traditional annuities and guaranteed minimum withdrawal benefit features – is to offer
  • 4. retires. On the first issue – how much replacement income is adequate – many observers use 75-80% of final pay as a • • • • •
  • 6. www.drinkerbiddle.com CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY | NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN © 2014 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership | One Logan Square, Ste. 2000 | Philadelphia, PA 19103-6996 | (215) 988-2700 | (215) 988-2757 fax Jonathan I. Epstein and Andrew B. Joseph, partners in charge of the Princeton and Florham Park, N.J., offices, respectively.
  • 7. • The replacement income issue: See, for example, “Workforce Management and Retirement in a 401(k) World,” Watson WyaJ Insider (September 11/ 2007). See, Cantore, Tara, “MetLife Finds Too Many Pre-Retirees with Faulty Math,” Plan Adviser (October 2011) See Allianz RFI Response, at page 4. See, for example, Aon Consulting, “Aon Consulting/Georgia State 2008 University Replacement Ratio Study.” • Longevity: • Withdrawal rates: • InEation risk. 6 Reish, Fred, Ashton, Bruce and Byrnes, Pat, “The Problem with Living Too Long,” Institutional Retirement Income Council (2010), hJ p://www.iricouncil.org/docs/The%20Problem%20With%20Liv ing%20Too%20Long.pdf. . . For more recent information, see Society of Actuaries, Exposure DraG, RP-2014 Mortality Tables, February 7 One recent study showed that more than 33% of those interviewed had no idea how much they could safely withdraw and roughly 25% expected to be able to withdraw more than 10% of their retirement savings each year. See, Lee Barney, “American All Over the Map on Retirement Drawdown Rates,” Money Management Executive (October 13, 2011). 8 William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994, pages 171-180. . . Some more recent studies have suggest that a 3% withdrawal rate is more appropriate in the investment environment of the e rst decades of the twenty-e rst century. . .
  • 8. • Cognitive risk: Investment or sequence-of-returns risk: 2000s. The risk arises when a retiree takes withdrawals – which are necessary to pay his living expenses – from a 9 See Allianz of America, Behavioral Finance and the Post-Retire-ment Crisis (A Response to the Department of the Treasury/Depart-ment of Labor Request for Information Regarding Lifetime Income Options for Participants and Beneeciaries in Retirement Plans), prepared by Prof. Shlomo Benartzi, UCLA, at page 9 (April 29, 2010) (the “Allianz RFI Response”); see also BMO Retirement In stitute, Financial decision-making: Who will manage your money when you can’t?, July 2011, which reached similar conclusions based on studies of the Canadian population. See, David Laibson, “Cognitive Impairment: Precipitous Declines in Cognition Can Set the Stage for Poor Decisions About Retirement Finances,” which appears in the Allianz RFI Response, hJ p://www.dol.gov/ebsa/pdf/1210-AB33-617.pdf. . . Professor Laibson’s research showed a signie cant decrease in “analytic cognitive functioning” as people age and that older adults make e nancial mistakes. In ee ect, older people are less able to make cogent e nancial decisions, to analyze e nancial data and properly consider risks, which suggests that they are less able to make sound decisions about their e nancial security once they reach their 80s…a point when they may live another 10 or more years. . .
  • 9. 11 ERISA §404(a)(1)(A). 12 ERISA §404(a)(1)(B) Id. . . Emphasis added. should 14 29 C.F.R. §2550.404.a-1(b)(1). See, generally, Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C. 1995). See, generally, Fink v. National Savings and Trust Company, F.2d 951, 962 (D.C. Cir. 1984). Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984); cert. denied sub nom, Cody v. Donovan, 469 U.S. 1072, 105 S.Ct. 565, 83 L.Ed.2d 506 (1984). 18 ERISA Regulation Section 2550.404a-1(b).
  • 10. 19 ERISA Regulation Section 2550.404a-4(b)(1) and (4). . . The regulation relates only to the selection of an annuity provider in a dee ned contribution plan, but the precepts in the rule may be applicable to the selection of a GWB product by analogy.
  • 11. 20 Mungan, Kenneth P. “The 6% Rule: Determining Portfolio Withdrawal Rates using Stochastic Analysis and Managed Risk Equities.” Milliman.com/insight. September 14, 2014. Milliman, Inc. 21 Dalbar, Inc. “2013 QAIB Quantitative Analysis of Investor Behavior.” March 2013. Dalbar, Inc. 22 Mungan, Kenneth P. “Performance of Insurance Company Hedging Programs During the Recent Capital Market Crisis.” Milliman.com/insight. December 1, 2008. Milliman, Inc.
  • 12. * The backtest is based on a $100,000,000 investment from 1/1/2000 to 12/31/2013. The S&P 500 is an unmanaged index that is not available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a 1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will consistently lead to successful investing.
  • 13. * The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that is not available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a 1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will consistently lead to successful investing.
  • 14. * The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that is not available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a 1% fund management fee but do not include taxes, sales charges, or any other expenses. The returns for the ‘Hypothetical Investment (2.5% per year)’ do not include fees, taxes, sales charges, or any other expenses. The rates of return are hypothetical historical illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will consistently lead to successful investing.
  • 15. 24 Source: United States Census Bureau, “Net Worth and Asset Ownership of Households: 2011, Table 4. Percent Distribution of Household Net Worth, by Amount of Net Worth and Selected Characteristics: 2011,” hJ p://www. census.gov/people/wealth/ saved need
  • 16. Appendix B-2: Ee ects of Volitility The Sequence of Returns Ee ect 25 In this example, if the investor starts with $100, the investment will increase to $150 (a 50% increase) and then fall to $75 (a 50% decrease). 26 Russell Kinnel, Morningstar, 4/16/2013, “Why Investors Lag the Returns of Their Funds: Volatility proves challeng ing for many shareholders,” hJ p://www.morningstar.com/ advisor/t/73663027/why-investors-lag-the-returns-of-their-
  • 17. With the Standard & Poor ’s 500-stock index near an all-time high, it’s worth considering how investors in stock mutual funds have fared in the market rally that began more than 4 years ago. Not so great, according to latest Quantitative Analysis of Investor Behavior study by Dalbar Inc. Fund investors have signie cantly underperformed the S&P 500 over the past 3, 5, 10 and 20 years. While average stock fund investors did almost match the S&P 500s 16% total return last year, they lagged the index by nearly 4 percentage points per year from 1993 to 2012. 27 Tom Anderson, Forbes, 3/28/2013, “Fund Investors Lag As SP 500 Nears All-Time High,” hJ p://www.forbes.com/ sites/tomanderson/2013/03/28/fund-investors-lag-as-sp- This analysis is based on SP 500 returns from 1/1/2000 to 12/31/2013. The SP 500 is an unmanaged index that is not available for direct investment. The returns do not include fees, taxes, sales charges, or any other expenses.
  • 18. • Even Keel Managed Risk Fund – this fund • Fund – This fund uses U.S. small and mid- • – This fund uses developed international • Even Keel Explorer Managed Risk Fund – 28 Product descriptions may be found at www.evenkeelin vestments.com/#products.