The Retirement Plan Solution: The Reinvention of Defined Contribution

The Retirement Plan Solution provides a clear solution to the problems that have popped up with the defined contribution plan. The authors' solution is twofold. The first addresses the accumulation process in which the retiree is making and saving his or her money during the working years. Here, workers are earning much, much less than they could be if they were given the right education and investment tools. Many are over-confident, are projecting the past, and are simply confused by too much choice. Instead of earning the returns that the market provides, they earn much less, purely because of their behavioral tendencies. The authors identify a few solutions to this problem, including "target date" investment plans as a default option that aims at spreading risk sensibly for the average participate over the participant's working lifetime. The second solution addresses the decumulation process in which the retiree is spending his or her money during the retirement years. Here, the problem stems from the fact that the payout from a DC plan is in one lump sum, after which the retiree is left to his or her own devices. Faced now with the dual problem of managing assets and making the assets last for an uncertain, and increasing, longevity span, retirees are even less well informed than during the accumulation phase. Again, the authors suggest more education and by a changed focus in the periodic reports provided to participants.