2. What the Book Teaches Us
• Acknowledge trend from DB to DC and expect
it to continue (cursory)
• 22% of all pension $ are invested in mutual
funds, expect to grow
• In DC plans, Investors in their 20s are slightly
more aggressive than those in their 60s
3. Shifts in the Workforce
• On average, workers can expect to change job
14 times
– Need Benefits that are portable
• Increased Life Expectancy
– Cost of guaranteed lifetime benefit much higher
Shift from Defined Benefit to Defined
Contribution
4. Probability of a 65-year-old living to various ages
100%
Male
Female
At least one spouse
75% 78 81 86
86
Probability
50% 85 88 91
91
25% 91 93 96
0%
65 70 75 80 85 90 95 100 105
Age
Source: Annuity 2000 Mortality Tables
5. Plan Features & Differences
Defined Benefit Defined Contribution
Benefit Type Lifetime Income Lump Sum
Benefit Portability
Quick Vesting
Employer Employee
Investment Risk*
Employer Employee
Investment Mgmt
Pooled Employee
Longevity Risk
6. The Shift from DB to DC
70%
65%
60%
55%
50% Defined Contribution
Defined Benefit
45%
40%
35%
30%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Broadbent and Palumbo, 2006
7. Responsibility for Retirement Savings
Individuals will be responsible for a higher percentage of their
income in retirement
64% from 18% 18% 36% from
your own sources outside sources
Earned Income Social Security
19%
Investments 44% Pension
Other
2%
Source: Social Security Administration, “Income of the population 55 or older using highest quintile $55,889 per year and higher – 2008,” April 2010. This
chart is for illustrative purposes only. May not add to 100% due to rounding.
8. What Workers Need to Know
(versus Before)
• How much I need, and the resulting required
savings rate
• How to evaluate investment options and form
an investment strategy
• And they need to be able to consistently
follow requires will power and strong
nerves
9. How Are they Doing?
• Paralysis by Analysis
– Average 401(k) > 18 Investment Options
– Inertia (Default Framing)/Procrastination
• Picking Previous Winners
• Naïve Diversification
– Diversifying with lifestyle funds
• Participation and Savings Rates too Low
10. The Cost of Not Following a Consistent
Strategy
Sources: Dalbar and Morningstar
11. Pick the Top Performing Funds?
Subsequent Performance of Top Quartile LC Funds
Top 30
Mutual Funds
1st 14%
Quartile
2nd
21%
Quartile
3rd 22%
Quartile
4th 43%*
Quartile
2001-2005 2006-2010
Source: Standard & Poors *Bottom quartile includes funds that were liquidated, merged, or changed style.
03-04-03
Performance is historical and does not guarantee future results.
Information from sources deemed reliable but its accuracy cannot be guaranteed.
