DFA Shows New Focus on Retirement Planning at Chicago Conference

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.