style="font-size:15px;"> In July/August 2011, Judy Mares, at the time Chief Investment Officer of Alliant Techsystems Inc. (ATK), shared in a PIMCO DC Dialogue the five guiding principles that they established to guide the plan changes. She explained the following:
To start, we established a set of five guiding principles to help our policy committee as they thought about the plan design.
■ First, we decided that we wanted to continue to deliver retirement benefits consistent with the company’s business objective of providing employees with a solid foundation for retirement income.
■ Second, we wanted to encourage and facilitate our participants’ establishment of a final income replacement rate based on personal facts and circumstances and desired retirement income.
■ Third, we needed to continue to educate participants about the factors that influence retirement income adequacy, such as cost-of-living increases, medical costs, longevity – the various factors that are key to the development of a financially successful retirement.
■ Fourth, we sought to offer a plan design and fund lineup that seek to minimize the negative effects of participant behavior. We looked at as many behavioral finance studies as we could get our hands on, and certainly that body of literature suggests that we should imbed structures in the plan that are more opt-out than opt-in.
■ Fifth, we strove to implement a plan fee and expense methodology that’s understandable, transparent and reasonably applied across all participants. We could see that the Department of Labor was moving in that direction. But equally important was the sense that individuals could be better consumers when they know what things cost. Fee transparency helps people understand that component of decision making.
Finally, we presented these principles to our policy committee and gained approval. Then we started to look at the plan design, asking how the plan design addresses these principles, and whether we should think about doing things differently.
PIMCO PRINCIPLES FOR DC PLAN SUCCESS: BUILDING AND PRESERVING PURCHASING POWER
A key tenet of PIMCO’s own DC principles is that success is defined as “building and preserving purchasing power to meet retirement income needs for the majority of participants, regardless of the prevailing economic environment.” This definition has a subtle but incredibly important undertone, namely that the average outcome for participants is not enough on its own as an objective. Instead, as shown in Figure 1.1, the distribution of those outcomes across participants is critical. Think of it as a principle: Avoiding failure for some is as important as marginal gains for the majority. Said another way, we seek good outcomes for all plan participants. This principle requires a success metric (and accordingly an objective threshold to be defined) for avoiding failure, not just for achieving success. In Figure 1.1, we show people on the left standing in a shadow; this represents a probability distribution of those who may fail to reach 30 percent income replacement. You’ll see on this distribution that there are many on the right who may achieve more than 75 percent income replacement. We believe plans should set a target income replacement level and design their plans to minimize the risk of failure (i.e., people in the shadow) even if that means they will reduce extreme winners (i.e., people on the right).
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