The Road Less Traveled
Report

The Road Less Traveled

Minimizing Shortfall and Dynamically Allocating in DC Plans

James Sia
GMO, 2014
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Editorial Rating

8

Qualities

  • Innovative
  • Eye Opening
  • For Beginners

Recommendation

In the United States, defined benefit pension plans are largely fading from view as defined contribution (DC) plans take their place. Instead of looking forward to a regular pension, more and more workers will have to rely on nest eggs they have accumulated – since DC plans rely on participants to take an active role in saving for their future – and invested. Target date funds are one popular solution, but investment expert James Sia says the methodology their managers use for asset allocation may leave participants with a shortfall in retirement. He outlines a better way for plan sponsors to handle DC schemes that will build wealth for retirees. getAbstract recommends this instructive paper to future retirees, plan sponsors and those who run corporate retirement schemes.

Summary

Years ago, when most workers could depend on a pension plan to see them through retirement, few people paid attention to investment strategies. Today, as pension systems wane in the private sector and defined contribution (DC) plans grow, employees must save money and decide not only how much to invest for retirement but how to invest it. Many fund managers offer target date funds (TDFs), also called life cycle funds, as an easy, one-stop investment approach. TDFs follow participants through 40 years of savings during their working years and 30 years ...

About the Author

James Sia is head of defined contribution efforts for the global client relations team at GMO, a global investment management firm.

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