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DFA Shows New Focus on Retirement Planning at Chicago Conference

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Signs of the changes percolating in the retirement market were everywhere on Wednesday at Dimensional Fund Advisors’ first-ever conference focused on the defined contribution space, from the jokes DFA’s David Booth told at the expense of the existing king of the retirement market, Fidelity, to the news of the investment product DFA is rolling out to serve as a combination default option and lesson in responsibility for employees who are the least engaged in their retirement planning.

Nearly 200 advisors, plan sponsors, consultants and recordkeepers attended the one-day conference, held in the rarefied atmosphere of Chicago University’s Booth School of Business—named after DFA cofounder, chairman and CEO Booth, who had made a $300 million donation to the school.

The gathering, which also included a keynote speech by former U.S. Senator and New York Knicks star Bill Bradley, kicked off with a short speech by Booth, DFA’s cofounder (with Rex Sinquefeld), about the history of the fund company. Austin, Texas-based Dimensional, which had $232 billion under management as of June 30, is known for its ties to academia, its passive investment approach and its cult-like following among advisors. The company has been working on penetrating the retirement plan market for the past couple of years. It has $17 billion in retirement assets, up from $11.2 billion on Dec. 31st of last year.

Booth’s speech helped introduce a new DFA product it hopes will catch on with advisors and plan sponsors: Managed DC. It was rolled out overseas about four years ago and is used by three large plans, each with thousands of participants. “So we have three clients,” Booth said, then paused for the punch line. “So we don’t have as many clients as Fidelity, but about as many happy clients.”

Managed DC puts employees into a set of DFA funds that are designed to produce an income stream in retirement while minimizing downside risk. It also gives employees updates that tell them if they are on track to be able to produce the income stream they will need in retirement and gives them options to increase their contributions or opt for more risk if they aren’t on track.

Robert Merton, distinguished professor of finance at the Massachusetts Institute of Technology, who designed the product, emphasized the shift in mindset from accumulating wealth to producing income, which he said needs to occur. “Jane Austen had it right,” he said.

As readers of Austen’s early 19th century fiction, such as Pride and Prejudice, will know, the characters (usually the overbearing mothers) referred to a man’s value in England’s early 19th century on an annuitized basis. “So Mr. Darcy didn’t have 100,000 pounds; he had 5,000 a year,” Merton said, referring to his annual income rather than the much larger sum he had inherited.

A Counter to Target Date Funds?

Managed DC can be seen as a counter to target date funds, which proved hugely popular but stumbled during the financial crisis. Like target date funds, Managed DC differs from old-fashioned defined benefit plans and annuities in one important way: the income is not guaranteed.

Advisors at the conference—most if not all already clients of DFA—said they saw promise in the new product, and that they’re excited in general at DFA’s push into the retirement market.

“I’m impressed at the human capital in the room,” said Erich Reinhardt, vice president of advisor relations for Loring Ward, a San Jose, Calif.,-based all-DFA RIA with $700 million in AUM. It offers retirement services to smaller advisors and has gathered about $80 million through 70 advisors placing business with it.

Attendance at the conference was unexpectedly strong: 190 attendees versus the 125 DFA had first expected. Many advisors have been seeking to add 401(k) business in part to provide a stable income stream that they didn’t have during the financial crisis, but also because reforms in Washington, D.C., provide increased opportunities to fee-only and fee-based advisors.

One key to DFA’s growth so far is that it is working with a number of large advisors like Loring Ward, who act as TAMPs, offering a suite of retirement plan services (like recordkeeping, investment advice and DFA funds) to smaller advisors. About 50% of the growth comes from plans, and about 50% from advisors, said Tim Kohn, DFA’s VP and head of defined contribution sales. The distribution strategy could be seen at work at the conference: Reinhardt said Loring Ward might add Managed DC to its platform.

Aspire, a St. Petersburg, Fla.-based recordkeeper, is adding Managed DC to its platform, which serves 125,000 participants in 4,500 plans with $4 billion in assets, in November, said Pete Kirtland, president. “It’s not a silver bullet,” he said. “But it’s going to improve participant behavior and improve the likelihood of retirement success.” 

Dollar Bill and the State of Retirement

Former Sen. Bradley added the 30,000-foot view to the conference. He noted that Washington, D.C., will have to grapple with the retirement system, including Social Security, and predicted it would happen “in the first year of the new president’s term.” That would be beneficial, he argued. “America has to have a system to allow the majority of Americans to have a successful retirement.”

He suggested that the retirement age should be raised and that some income tax proceeds should be devoted to Social Security. He also said that state and municipal retirement pension plans should be swept into the Social Security system—and argued that the political pressures are building to force change.

“Right now, you have a steel worker, maybe from the south side of Chicago here… He lost his job, he lost his health care, he got 30 cents on the dollar for his pension. You also have state and municipal workers, teachers with very rich pensions.

“So you’re saying to the steel worker that in order to pay this lucrative defined benefit plan, we’re going to raise your taxes?

That’s not a winning political strategy.”