Evaluating Goals-Based Default Strategies In Defined-Contribution Retirement Funds.pdf

The paper presented at the Actuarial Society of South Africa's 2015 Convention by SM Levitan and RC Merton discusses investment strategies for defined-contribution (DC) retirement funds, focusing on whether an appropriate default strategy exists. In South Africa, DC funds are prevalent, with members often enrolled in a default lifestage investment strategy based on age or time until retirement if they do not choose their own investments.

Historically, defined-benefit (DB) plans guaranteed income at retirement, such as 60% of final salary after 30 years. However, most DB plans have transitioned to DC arrangements, shifting risks like market, interest-rate, and longevity risk from employers to individuals. The ultimate retirement benefit depends on contributions, contribution period, returns, and investment strategy.

The paper proposes a goals-based default investment strategy aimed at achieving an appropriate level of retirement income, similar to the objectives of DB funds. It critiques current lifestage defaults and emphasizes that while DC fund liabilities are merely accounting numbers representing accumulated savings, the need for a stable retirement income remains unchanged from DB plans.

In the U.S., 401(k) plans serve as examples of early DC funds, initially supplementary to DB benefits. The paper argues that all retirement systems, except DC funds, promise benefits in terms of income, aligning with how individuals typically plan their living standards. Thus, it suggests that a retirement plan's goal should be to provide a consistent income stream during retirement.