DC plan makes decisions for plan participants, nags them when they're not saving enough; Nobel laureate Merton one of the designers
Mutual fund manager Dimensional Fund Advisors is unveiling its twist on the defined-contribution plan: personalized individual managed accounts that make employee investment decisions for them — and nag them if they aren't saving enough.
“I've been critical of defined-contribution plans,” said Robert C. Merton, a Nobel laureate in economics and finance professor at Massachusetts Institute of Technology Sloan School of Management, and the company's resident scientist. Mr. Merton spoke Wednesday at a DFA-sponsored conference and explained the plan to around 150 financial advisers.
In his own remarks, David G. Booth, DFA's chairman and co-chief executive, said that the company wants to focus on retirement planning, and it's also working on a longevity insurance product and a plan for managing money in retirement.
The defined-contribution plan already has gone through a pilot program in Europe. This year, OBS Financial Services Inc. will pilot the program in the U.S. to its client base of institutional clients.
Mr. Merton said the plan, which he helped develop, addresses shortcomings in traditional defined-contribution plans. The plan takes in numerous personal details about participants, from age, gender and marital status to how much they put away in 401(k) accounts and what they can expect to get from Social Security.
DFA's plan takes an assertive role in hectoring participants to think about how much money they will need when they retire.
The firm crunches all that information to determine a retirement income target and make the appropriate investment allocations. When participants log in to their account, they see their income target and get a report card on whether they are saving enough.
On the sideline of the conference, Karri Keepers, executive vice president of marketing and sales support for OBS, said the company has high expectations for the popularity of the plan.
DFA has $230 billion in assets under management, $125 billion of from its network of financial advisers that offer its mutual fund investments to their clients.
One adviser in the audience asked what role financial advisers will have in the plan, since traditional investment advice won't be a part of it.
“Someone has to be watching what is going on; you can't have a black box,” Mr. Merton said. “The consultant plays a big role.”
Another role for advisers is to help set the targets for default investments, Mr. Merton said. “If you stick them all in Treasury bills, you are asking for a lawsuit.”
