AN OBJECTIVES-BASED APPROACH TO DC INVESTING
“Sixty percent of
workers report
the total value
of their savings
and investments...
is less than
$25,0001.”
More than 30 years have passed since section 401(k) of the IRS code set the stage for the
ascension of defined contribution (DC) pension plans as the primary retirement savings
vehicle. While DC plans may offer employees greater control over their retirement outcomes
and better accommodate a more mobile workforce, successful DC plans require a high level
of engagement by both plan sponsors and participants. Myriad factors such as savings rates,
market timing, asset allocation, and investment guidance can all play a critical role in
achieving a successful post-employment outcome.
Some Alarming Statistics
Data compiled by the Federal Reserve and
the Center for Retirement Research showed
that “the median household headed by a
person aged 60 to 62 with a 401(k) account
had less than one-quarter of what is
needed” to maintain its standard of living
in retirement. 2
In 2007, the GAO projected that almost
37% of all workers born in 1990 would
reach retirement with zero plan savings. 3
Deloitte Consulting, in its 2010 401(k)
Benchmarking Survey, reported that only
15% of sponsors said most employees will be
sufficiently prepared financially for retirement.
In an upcoming series of presentations and white papers, MFS® will explore alternative ways
of thinking about the core investment lineup, including investment options that align more
closely with the way participants think about their retirement needs.
Too Much of a Good Thing?
40%
37. 5
35%
30%
28. 8
Percentage of Plans
10%
15%
20%
25%
11. 3
7. 5
7. 5
Ravi Venkataraman, CFA, is
senior managing director and
global head of consultant
relations at MFS Investment
Management®. Prior to joining
MFS®, he was president and CIO
at Mercer Global Investments
and also led the DC practice at
Mercer Investment Consulting.
Jonathan Hubbard, CFA, is
director of national accounts,
Defined Contribution Investments at MFS. He is a member
of a team of DC professionals
dedicated to serving investors
and those who advise them.
Source: Towers Watson, The Defined Contribution Plans of
Fortune 100 Companies for the 2010 Plan Year, January 2012
Number of investment options for new contributions
0
5%
46+ 41-45 36-40 31-35 26-30 21-25 16-20 11-15 6-10 < 6
1. 2 2. 5 0 1. 3 2. 5
In its 2011 DC Survey, Plan
Sponsor reported that the
typical DC plan offers 16
investment options from
which participants can
choose. While this number
is down considerably from
the early 2000s, industry
studies continue to show
that participants are overwhelmed by investment
decisions. Participants still
go into “analysis paralysis,”
keeping their assets in cash
and, perhaps worse, letting
popular media lead them
into chasing the latest
“hot dot” strategy.
Beyond this issue of complexity, the existence of multiple options does not necessarily
translate into effective diversification; indeed, quite the opposite. Equities make up the
majority of investment options in the typical DC plan, and though they may be differentiated
by style, market cap, or region, recent correlations tend to be very high: upwards of 80%.
Further, plans that offer just one or two bond funds may lead participants to believe that
fixed income is less important or should receive only a small allocation.
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