Global Retirement Plan Innovation - Dimensional Fund Advisors

Global
Retirement
Plan
Innovation
Outcome-focused
ideas from around
the world
Life BaLance SheetS 8
adviSor/tPa PartnerShiPS 11
GLoBaL BeStS & WorStS 14
SPotLiGht on GLoBaL fundS 19
WINTeR 2012

DC DIMeNsIONs wInter 2012
Global retirement
Plan Innovation ...............2
Legal Update .................6
401(k) Spotlight ...............8
ON THE COVER: Dimensional’s London Office
Dimensional Fund Advisors
Palisades west
6300 Bee Cave road, Building One
Austin, tX 78746
Phone: (512) 306-7400
Fax: (512) 306-7499
Advisor Focus ...............11
Global DC. . . . . . . . . . . . . . . . . .14
Academic Perspective ........16
Dimensional Focus ..........19
Fast Facts ..................20
Upcoming DC events ........21
the views and opinions of the third-party authors do not necessarily
represent the views of Dimensional Fund Advisors.
the articles are distributed for informational purposes only and should not be
considered investment, tax, or legal advice or an offer of any security for sale.
DC Dimensions is published for institutional and registered investment
advisor use only. not for public use. Dimensional Fund Advisors LP is an
investment advisor registered with the Securities and exchange Commission.
Photo by Lee christiansen

Letter FrOM tHe eDItOr
As we greet a new year with much-anticipated regulatory reforms, including a heightened
awareness of fee disclosures, we want to shine a spotlight on the basics of retirement
planning. In our second issue of DC Dimensions, we are pleased to feature an interview with
Dr. Zvi Bodie of Boston University, who helps put into perspective how we can think about
improving DC plan design. Focusing on the real risks faced by participants, Zvi offers a
unique approach to solving today’s DC plan design problems.
Many advances in retirement planning exist outside the US, so we think it makes sense
to spend some time analyzing those offerings. In our cover story, we interview Malcolm
Delahaye from Supertrust UK, a UK-based multi-employer plan. Malcolm explains his views
on next generation retirement solutions and his process for evaluating these programs.
we also head “down under” to talk with Dr. David Knox, a partner with Mercer’s risk and
Consulting business, who shares highlights from recent research into the world’s best and
worst retirement plans.
For advisors, we feature a timely piece by Dimensional vice president Apollo Lupescu
highlighting mutual opportunities that exist from partnerships formed by advisors and thirdparty
administrators.
we are also pleased to include an interview with the CFA Institute’s Stephen Horan, who
explores the role of human capital in private wealth management, as well as an important
legal/regulatory update from Ian Kopelman, chair of the DLA Piper LLP (US) employee
Benefits and executive Compensation practice group and the Plan Sponsor Council of
America (PSCA)’s legal counsel.
Sincerely,
TIM KOhN
Head of DC Services and Vice President
Dimensional Fund Advisors
tim.Kohn@dimensional.com
wInter 2012 1

Malcolm Delahaye
Director at SuperTrust UK
Global
2 DC DIMenSIOnS

Retirement Plan
Innovation
Outcome-focused ideas from around the world
By CUAtrO tOLSOn, regional Director, Dimensional Fund Advisors
Wwhen Malcolm Delahaye started his first job in Britain’s
pension industry, the year was 1966. “I recall it vividly
because it was the last time england won the FIFA world
Cup,” Delahaye says with a laugh. “we’ve been waiting
for another victory ever since.” while Britain’s days as
world Cup champion may be long gone, the nation’s
pension industry has moved quickly toward the future as
employers continue to replace antiquated defined benefit
plans with creative alternatives. >>
wInter 2012 3

“ It’s important for plan sponsors to shift their
focus from savings to generating better
outcomes for participants.”
—Malcolm Delahaye
In a career that has spanned more than forty-five
years, Delahaye has witnessed tremendous changes
in retirement plans, including the debut and debate
about defined contribution versions. As DC plans
continue to evolve, he believes it’s essential for plan
sponsors to remember what they should ultimately
deliver—a steady income in retirement. “DC plans
involve savings products, so it’s tempting to view them
as principally designed for saving,” Delahaye says.
“However, I believe it’s important for plan sponsors
to shift their focus from savings to generating better
outcomes for participants.”
while such a shift may require plan sponsors to
embrace new solutions, the idea of income-based
retirement planning is decidedly old-fashioned.
“Pensions were originally designed to provide
employees with a reliable source of income in
retirement, rather than a lump-sum retirement benefit,”
Delahaye says. “the goal was to help employees make
a smooth transition from their working years to their
retirement years while maintaining a similar quality of
life after they stop working.”
seTTINg The BAR hIgheR
In 2005, Delahaye and his business partner Dennis Kemp
launched Supertrust UK, providing DC plan solutions
to employers worldwide. the firm’s flagship product,
Supertrust UK, is a multi-employer retirement plan
designed to help small to mid-size organizations benefit
from the economies of scale enjoyed by larger plan
sponsors. Delahaye believes that joining a multi-employer
plan can be an effective way for growing businesses
to meet their fiduciary obligations to employees while
continuing to focus on their core competencies.
FOCusINg ON ReTIReMeNT INCOMe
Delahaye believes the next generation of retirement
solutions will need to focus on annuity-style
outcomes for plan participants—by helping them
address both inflation and longevity risks more
effectively. “while there are significant differences
between DB and DC plans, both in terms of how
the retirement plans are funded and who carries the
risk, many of the fundamental investment strategies
Lord hutton:
Combine Best of DB & DC
Lord John Hutton, who recently
chaired Britain’s Independent Public
Service Pensions Commission, is a
vocal advocate for bringing the best
elements of DB plans into DC plans.
At the 2011 National Association of
Pension Funds conference, Hutton
outlined three primary challenges that
he believes are currently facing DC
plan sponsors:
• Guaranteeing a satisfactory
income to plan participants.
• Protecting that income against
inflation.
• Generating income that will
potentially last for a participant’s
lifetime.
“ DC must
do all of the
heavy lifting
as we try
to reassure
people
about their
standard
of living in
retirement.”
–Lord
Hutton
4 DC DIMenSIOnS

and risk management techniques used in DB plans
can be effectively transferred to DC plans,” he says.
“we’re trying to bring participants the best of what
DB plans have to offer.”
As an early adopter of outcome-based retirement
planning, Delahaye expects to see this approach
gain more traction with employers as organizations
continue to review and update their benefit plans.
A changing regulatory environment in the US
and abroad—one encouraging greater fiduciary
responsibilities for plan sponsors—may be one of the
catalysts bringing change to many retirement plans.
“In my experience, employers often prefer to avoid
MALCOLM DeLAhAye is a director of
SuperTrust UK Pension Trustees Ltd., which is
responsible for the operation of the SuperTrust
UK Master Trust, a DC occupational scheme
set up in 2005 for non-associated employers.
Malcolm is also a fellow of the Pensions
Management Institute (PMI). Previously, he was
technical director at Godwins (now part of Aon
Hewitt), pensions development manager at P&O,
and pensions manager at Lend Lease. His trustee
experience has included a position as a memberelected
trustee and a trust company director.
“ Ultimately, I expect to see employers worldwide
becoming more actively engaged with their
employees in the retirement planning process.”
—Malcolm Delahaye
making key decisions until the last minute. People
need a catalyst for change,” Delahaye says.
Helping plan participants do a better job of
replacing income in retirement requires a new way
of thinking, notes Delahaye. “employers can no
longer afford to think of defined contribution plans
as simply another cash benefit,” he says. “As a result,
many employers may need to review their default
investment options in the context of the potential
they have to generate actual income in retirement.
Ultimately, I expect to see employers worldwide
becoming more actively engaged with their
employees in the retirement planning process.” �
wInter 2012 5

LegAL UPDAte
MAnAGInG FIDUCIArY
reSPOnSIBILItY
How plan fiduciaries can enlist the help of an investment advisor
By IAn KOPeLMAn, Partner at DLA Piper LLP (US) and PSCA’s Legal Counsel
Pitfalls await 401(k)
plan fiduciaries who
assume that, under
the employee
retirement Income
Security Act of 1974
(erISA), they can
eliminate their potential liability
with respect to the plan’s
investment options by retaining an
outside investment advisor. the
facts: erISA plan fiduciaries (e.g.,
the sponsor, a committee, or
another in-house fiduciary) are
never fully relieved of fiduciary
responsibility, even when an advisor
assumes that responsibility for the
investment of plan assets. However,
retaining an outside advisor can
help plan fiduciaries fulfill their
responsibilities under erISA.
A plan fiduciary has the duty to act:
(1) solely in the interest of
participants and beneficiaries and
(2) for the exclusive purpose of
benefiting participants and
beneficiaries, and defraying
reasonable expenses of
administering the plan. Further,
under erISA’s prudent man
standards, fiduciaries must
discharge their duties with “the
care, skill, prudence, and diligence
under the circumstances then
prevailing that a prudent man
acting in a like capacity and familiar
with such matters would use in the
conduct of an enterprise of a like
character and with like aims.”
translation: All fiduciary actions are
measured against what someone
who knows the area would do
under the same circumstances. If a
plan fiduciary does not know the
area, prudence requires the
fiduciary to get help from someone
who does. Decisions concerning
the investment options offered to
plan participants are one area in
which prudence may require the
fiduciary to get expert help.
Many plan fiduciaries are officers or
other employees of the plan sponsor
whose primary responsibilities do not
require investment expertise. In other
words, unlike an investment advisor,
the average plan fiduciary is not a
specialist in portfolio theory, financial
analysis, or investment management
and probably does not have the time
to become one. An informed
decision about the investment
options offered to plan participants
requires an analysis of information
such as past performance and
returns, fund volatility, fund
managers, turnover, and fees. this
process requires both time and
expertise, which can be in short
supply for the plan’s fiduciaries. An
“ It may be advisable to get expert
help—and it may be required.”
— Ian Kopelman,
PSCA’s Legal Counsel
advisor has greater and faster access
to relevant information regarding the
plan’s investment options. As a result,
an advisor’s analysis is likely to be
more exact, and the investment
options that are eventually selected
may be more in line with the
investment goals of the plan and
participants. thus, it may be
advisable to get expert help, and
according to Department of Labor
regulations, it is actually required:
“Unless they possess the necessary
expertise . . . fiduciaries would need
6 DC DIMenSIOnS

to obtain the advice of a qualified,
independent expert.”
An independent investment advisor
hired by retirement plan fiduciaries
may or may not accept fiduciary
status with respect to the plan, but
in either case, the in-house plan
fiduciaries retain fiduciary
responsibility for selecting,
retaining, or replacing investment
options offered to participants.
Both the selection of investment
options and the selection of the
investment advisor are subject to
erISA’s prudence requirement.
If a plan’s in-house fiduciaries
choose to hire an advisor to
assume fiduciary responsibility for
the plan’s investment options, and
to select and monitor them, the
erISA prudence requirement
applies to the decision to
delegate investment discretion
responsibility and to the selection
of the investment advisor.
regardless of the goal in hiring
an investment advisor, the
selection (and retention or
replacement) of the advisor is, on
its own, a fiduciary decision that
must satisfy the erISA prudence
standard. General considerations
for this selection include the
following:
• Experience with other similar
plans and investments, education
credentials, registration with
appropriate regulatory
authorities, reputation, and
references.
• Level of service, including
quality, suitability for the type of
plan and the participant
population, and value of
services relative to fees.
• Independence, particularly in
light of the expert’s compensation
and the potential for any
prohibited transactions.
• Fees and expenses (both
investment-related fees and the
expert’s fees), competitiveness,
and reasonableness.
Finally, documenting prudence in
the selection of an advisor requires
plan fiduciaries to maintain files with
the information collected and
reviewed in the decision-making
process, and to keep a record of the
analysis of the information and the
reasons for their decision. If the
fiduciaries are members of a
committee, minutes of the meeting
in which a selection was made—
including the number of candidates
considered—will provide this record.
Otherwise, a memorandum to the
file listing the same information can
serve the same purpose. �
Excerpted and adapted from the
September/October 2011 Defined
Contributions Insights magazine, published
by the Plan Sponsor Council of America.
wInter 2012 7

401(K) SPOtLIGHt
FrOM MY COrner
CFA Institute’s Stephen Horan speaks out on the need for
defined contribution plans to address the life balance sheet
concept, human capital, longevity risk, and more
By tODD erSKIne, regional Director,
and DerrICK AMeY, Senior Associate, Dimensional Fund Advisors
sTepheN hORAN, PhD, CFA, CIPM, leads university outreach efforts and
supports the development of private wealth management initiatives at CFA
Institute. He has authored or coauthored several books, including The New
Wealth Management: A Financial Advisers Guide to Managing and Investing
Client Assets. Prior to joining CFA Institute, he was a professor of finance at
St. Bonaventure University, principal of Alesco Advisors LLC, and a financial
analyst and forensic economist in private practice. He serves on the editorial board of the
Journal of Wealth Management and the Financial Services Review.
DC Dimensions: Stephen, you’ve
written that wealth managers can
learn from defined benefit pension
fund managers by applying asset/
liability management techniques
to managing investments. Can you
start by giving us an overview of
how a life balance sheet concept
and discretionary wealth can be
applied to help participants in
defined contribution (DC) plans
manage their own investments?
stephen horan: the life balance
sheet concept takes a more
comprehensive view of assets than
simply assets that show up on your
account statement. we want to
be thinking more broadly about
human capital, the value we derive
from other retirement plans, Social
Security, and other tangible assets,
such as real estate, etc. taking a
broader view of our assets is the
first step to understanding the life
balance sheet.
Second, we want to understand
and appreciate a person’s assets
within the context of liabilities by
thinking about liabilities not just
in terms of the mortgage on the
house but in terms of what our
investment goals are. that can be
an unintuitive way to think about
things because we’re trained to
think about our investment goals
as a good thing. the reality is that
meeting our investment goals
requires funding. those goals
represent cash outflows. that’s the
definition of a liability.
DC Dimensions: How would you
define human capital? what are
some of the risks to human capital?
horan: Strictly speaking, human
capital can be thought of as the
after-tax, actuarial present value of
our earnings—after tax because we
can’t spend what we earn before
those taxes are taken out, actuarial
because there is uncertainty around
how long we will work and in what
capacity we will work, and present
value because those cash flows
will accrue over time. we don’t get
them all at once. But the common
denominator is that human capital
is tied to our earnings.
DC Dimensions: So everyone’s
human capital can be different, and
8 DC DIMenSIOnS

ased on your profession, you can
have very different risk embedded
in your human capital?
horan: In terms of magnitude,
it’s surprisingly large for most
people. In the US, human capital
represents over 50% of individuals’
assets on a life balance sheet, even
up until their 50s, and that includes
accounting for the value of their
house or their private business.
Ignoring such a sizable asset
on the balance sheet really can
cause us to make under-informed
investment decisions.
there are three significant risks to
human capital. One is what I would
call a liquidity or a marketability
risk. It is not an asset that we can
call up our broker and sell today
and liquidate. these are cash flows
that need to be realized over time.
related is the second risk, which
is mortality or even disability.
Unforeseen circumstances, even
if they’re low probability, can
interrupt an earnings stream.
the third risk is asset concentration
or sector risk. If I’ve got one asset
that is very heavily weighted in my
portfolio, I run the risk of having an
overly concentrated portfolio.
DC Dimensions: Can you
determine an individual’s risk
tolerance using this life balance
sheet concept?
horan: An individual’s risk tolerance
will depend on his or her
discretionary wealth—that is, the
amount by which assets exceed
liabilities. this surplus is a buffer for
investment risk. For example, if my
assets are four times as large as my
discretionary wealth, a 10% drop in
asset value will decrease
discretionary wealth by 40%. So the
less cushion you have, the more
implied leverage there is on a life
balance sheet. If there’s more
leverage on the balance sheet, it
means I’m less risk-tolerant with
respect to those assets on the
balance sheet.
DC Dimensions: So discretionary
wealth is what’s left over after you
have accounted for your highpriority
goals (such as retirement),
and those goals are liabilities on
the life balance sheet?
horan: If everything is a high
priority, that means you’re going to
have far too little surplus (or perhaps
even a deficit), and it means you’re
really not very risk-tolerant. If, on the
other hand, you can prioritize your
goals so not everything is highest
priority, you’ve got more surplus on
your balance sheet because your
liabilities aren’t as large and you can
tolerate more risk.
DC Dimensions: How can we
get DC plan participants to think
about the difference between asset
and liability values, their required
income at retirement, the concept
of human capital, and this life
balance sheet concept as opposed
to wealth accumulation?
horan: the best way I know to get
people to think about asset/liability
management is to get them focused
on the surplus or the discretionary
wealth. this sometimes reveals a
dark reality. Often people define a
minimum required income that is
larger than the assets they have
available to fund it. In other words,
their surplus is negative. that’s a
very common circumstance, even
though people don’t typically go
through the analysis to reveal it.
the way people most commonly
address this is by putting capital at
risk in the hopes of earning a higher
return. that can be dangerous taken
to an extreme. taking more risk with
your assets does not decrease the
size of the liabilities.
DC Dimensions: How can a DC
plan participant deal with longevity
risk, and how can it be factored into
the participant’s investment plan?
horan: there are two ways to deal
with longevity risk. First, build up
precautionary savings, by which I
mean build up enough capital and
enough resources so that you’ve
self-insured. regardless of how
long you’ll live, you’re going to
have enough capital, but it is
expensive and not necessarily
efficient to build up that much
capital. the second way is to insure
it. If you’re going to insure it, the
two principal ways would be
through a traditional fixed annuity
or a deferred annuity, sometimes
called longevity annuities.
If I buy a fixed annuity, the insurance
company is going to turn around
relatively quickly and start giving me
checks. those near-term checks are
wInter 2012 9

cash flows that are not at all
difficult for the individual to
replicate on his own. what’s
difficult for individuals to do by
themselves is to create the cash
flow in the out years that’s
contingent on their lifespan. the
deferred annuity concentrates with
the insurance company the risk
that they’re most able to efficiently
LIFE BALANCE SHEET EXAMPLE
intermediate for. the deferred
annuity just gets rid of the earlyyear
cash flows that the investors
can more easily take care of
themselves.
DC Dimensions: Do you see a way
to apply this life balance sheet
concept to manage DC investments
on a larger scale?
The life balance sheet is a comprehensive accounting of an investor’s assets,
liabilities, and net worth—including human capital and all expected cash flows
from DB pensions and Social Security. The left side of the balance sheet lists a
client’s traditional financial assets, tangible assets, and implied assets. The right
side includes liabilities secured by tangible assets as well as implied liabilities tied
to investment goals. Leverage measures the investor's sensitivity to risk.
PORTION %
100
80
60
40
20
0
HOUSE
OTHER STOCK
COMPANY STOCK
COMPANY STOCK OPTIONS
NET EMPLOYMENT CAPITAL
$2,800,000
LEVERAGE=2.8
MORTGAGE
COLLEGE
RETIREMENT
DISCRETIONARY WEALTH
ASSETS LIABILITIES AND EQUITIES
Copyright (2011), Research Foundation of CFA Institue. Reproduced and republished from The New
Wealth Management with permission from the Research Foundation of CFA Institue. All rights reserved.
horan: Yes, it definitely creates a
framework whereby we can call into
question the appropriateness of
company stock as an investment
option in DC plans. the life balance
sheet illustrates how heavily
exposed most people are to their
employment. Additional company
stock exacerbates that already
excessive concentration.
the industry could also consider
developing a product that actually
accounts for the commonality of
human capital risks of participants in a
particular DC plan. Suppose I manage
a plan for the participants in the auto
industry. Participants have their human
capital tied to industrial production
and somewhat tied to interest rates. In
theory, they would want an investment
portfolio that doesn’t expose them
further to some of those common
risks. All participants are unique, but
employees of the same firm have
some common exposure. So, one
could imagine a DC plan-specific
product that’s designed to carve out,
if you will, a completion portfolio
tailored to those participants’ risk
exposures.
It’s possible to develop a completion
fund for DC plan participants, but it’s
only going to be an approximate
solution. It’s difficult to create a truly
customized solution based on things
that vary so much from individual to
individual and are predicated on so
much measurement error.
Developing a customized solution
that takes into account each individual
participant’s life balance sheet could
improve investment outcomes and
benefit DC plan participants. �
10 DC DIMenSIOnS
$1,800,000 $1,000,000

ADvIsOR FOCUS
MUtUAL OPPOrtUnItIeS
In DeVeLOPInG ADVISOr/tPA
PArtnerSHIPS
By APOLLO D. LUPeSCU, Vice President,
Dimensional Fund Advisors
A widely used
business strategy for
financial advisors
who work with
individual investors
is to establish
relationships with
centers of influence, particularly CPA
firms. these strategic partnerships
engender benefits for all parties
involved: Clients receive a more
comprehensive set of services, and
advisors and CPA firms develop a
new referral source that leads to
business growth while significantly
increasing their competitiveness.
A relatively untapped extension of
this strategy is to build strong
partnerships with third-party
administrators (tPAs) that can
benefit advisors engaged in 401(k)
business, as well as the tPA firms.
to be sure, some of the several
thousand qualified tPAs across the
US already offer investment services
(“producing tPAs”), but many
others do not generate revenue
from investment services. without
investment advisory services, the
latter group might be at a
competitive disadvantage relative to
firms with a more comprehensive
solution, and they may fail to
capture a potential revenue source
at a time when their services have
become commoditized in a “race to
the bottom” for fees. recent actions
by some large providers to
disengage independent tPA
services have added urgency,
leaving plan administrators in a
vulnerable position with fewer
referrals and slower growth.
As former president of the American
Society of Pension Professionals &
Actuaries (ASPPA), Sarah
Simoneaux, principal of Simoneaux
and Stroud Consulting Services, is in
a unique position to provide insight
on this emerging partnership
opportunity. She believes
independent advisors and tPAs
should develop a new partnership
paradigm that benefits nonproducing
tPAs and gives advisors
an opportunity to engage new
prospects, including “orphan” plans
likely to be created by the recent fee
disclosure regulations. “the vast
majority of tPAs provide very
“ the vast majority of tPAs provide
very high-quality services that
are frequently undervalued by
advisors and plan sponsors.”
— Sarah Simoneaux,
Principal of Simoneaux and Stroud Consulting Services
high-quality services that are
frequently undervalued by advisors
and plan sponsors,” she says,
adding that tPAs would like to see a
more balanced compensation
model that would motivate referring
401(k) business to the advisor.
In her opinion, advisor/tPA
partnerships are not more prevalent
wInter 2012 11

due to three factors:
commoditization of tPA services,
misconceptions of advisor/tPA roles
and compensation in servicing plans,
and the complexity and cost of
government regulations. traditionally,
the advisor in the small and mid-size
employer 401(k) market has
controlled the plan sponsor
relationship, bringing in the tPA as a
commodity provider as just one part
of the overall qualified plan sale.
“tPAs often feel they do the majority
of the plans’ servicing work for low
fees (especially compared to assetbased
fees frequently paid to
advisors) and that neither the plan
sponsor nor the advisor appreciates
their role in keeping the plan in
compliance,” Simoneux says.
“Advisors believe they’re held
responsible for tPA administrative
errors or service gaps and can lose
401(k) business as a result. the truth,
as always, is somewhere in between.
the most successful partnerships
exist when the advisor understands
the complexity of plan design and
administration, and the tPA values
the advisor’s role in working with the
investments and the participants.”
Successfully building these
connections is not trivial. Advisors
must identify the right firms to
mitigate the reputational risk if the
tPA can’t provide the level of service
expected by the plan sponsor and
participants. tPAs must balance the
risk of losing referrals from advisors
who might see them as competitors
with the opportunity to strengthen
their business and develop an
economically sustainable model.
Simoneaux believes both risks can
be mitigated by a well thought-out
business plan for the partnership,
with clearly defined goals and
objectives, a sales and marketing
strategy, and metrics to measure
success. Furthermore, she says
location and matching firm
“personalities” are major factors in a
strong, mutually beneficial
relationship, one in which both
parties provide true fee transparency
to the employer and participants.
Personal referrals from satisfied plan
sponsors and other advisors,
especially for local providers, are still
a good, traditional way for advisors
to identify quality service providers.
Simoneux also suggests using the
ASPPA service provider certification
(http://www.asppa.org), a process
that requires tPAs to go through a
rigorous, independent best
practices audit annually in order to
obtain and renew their certification.
High-quality tPAs should be able to
show that close to 100% of their
senior-level administrators hold
either ASPPA or nIPA (national
Institute of Pension Administrators)
“ the most successful partnerships exist when the
advisor understands the complexity of plan
design and administration, and the tPA values
the advisor’s role in working with the investments
and the plan participants.”
— Sarah Simoneaux,
Principal of Simoneaux and Stroud Consulting Services
credentials. excellent tPAs will also
have measurable service metrics,
not just statements about providing
high-quality services.
Although it is more complex to keep
track of multiple partners,
Simoneaux suggests that advisors
develop good relationships with two
to three tPAs. At least one partner
should be a local provider who can
go onsite to local employers’
offices. Another partner should have
the ability to do open-architecture
daily valuation recordkeeping. A
third partner should be considered
for specialty plan designs such as
cash balance plans, eSOPs, and
403(b)/457 plans. �
12 DC DIMenSIOnS

Dimensional Fund Advisors’
London office lobby.
wInter 2012 13

gLOBAL DC
InSIGHtFUL LeSSOnS FrOM
ArOUnD tHe wOrLD
A global expert grades the best and worst retirement plans
By tIM KOHn, Head of DC Services and Vice President,
Dimensional Fund Advisors
DAvID KNOx, Phd, a senior partner at Mercer australia, is the author of the
Melbourne Mercer Global Pension index, a report that objectively assesses the
retirement income systems in sixteen countries spread across the americas,
europe, and asia Pacific. he is also the national leader for research and actuary
for the victorian and tasmanian governments and the Western australian public
sector pension plan, and was the industry expert on a three-person team that
conducted a review of the australian military superannuation program. he is currently chair of
australia’s aSfa retirement outcomes committee.
with life expectancy increasing
and financial turmoil spreading,
providing sustainable retirement
benefits is not just a US dilemma.
retirement systems around the
world are facing—and meeting—
similar challenges. to glean some
important lessons from other
countries, we spoke with Dr. David
Knox, author of the Melbourne
Mercer Global Pension Index.
DC Dimensions: In looking at
global retirement systems, what
are the most common challenges
facing the architects?
David Knox: the biggest and
most common challenge relates
to the world’s aging population,
a population of people who will
need resources in their retirement
years. Globally, we are very
likely to see a few important
changes as people live longer
than ever before. First, we are
going to have to work longer
before retiring, and second, we
are going to have to save more.
Governments around the world
will also increase the age retirees
start to draw on their retirement
benefits, and reforms to pension
systems will increase coverage
and contribution rates.
DC Dimensions: the Melbourne
Mercer Global Pension Index
ranks the netherlands as one of
the best retirement systems in the
world, a position it seems to be
sustaining even as other systems
lose ground. what exactly makes
the Dutch system so good?
Knox: the Dutch system is not
perfect. we rank it a B-plus and
note that it is still going through a
reform process. Key to the success
of the system is that coverage is
very good. Virtually everybody
who is an employee is covered by
the pension system. the system
does not rely solely on government
funding. It’s also a fairly mature
system. Finally, when you take into
consideration the regulation and
governance requirements in the
netherlands, the system performs
very well there too.
DC Dimensions: Your analysis
ranks the US as middle of the
road, or a grade C, meaning
a system with major risks and
shortcomings. what can be done
to improve our system?
14 DC DIMenSIOnS

MeLBOuRNe MeRCeR gLOBAL peNsION INDex 2011
The Melbourne Mercer Global Pension
Index assesses the retirement income
systems in sixteen countries spread
across the Americas, Europe, and Asia
Pacific (see chart). No country’s system
has an index value above 80, which
represents an A grade. However, six
countries have an index value between
65 and 80, which represents a B grade.
With some adjustments or improvements,
these countries could be re-classified as
A-grade systems.
Knox: One of the things is to
broaden the coverage of the private
pension system. where the US falls
down is that less than half of the
private-sector employees have any
membership in a pension system.
there is good coverage in the
public sector, some coverage in the
private sector (but mainly with larger
employers), and very little coverage
in some sectors of the workforce.
the other factor we need to bear
in mind is that this money should
be used for retirement. In the
US, there’s some leakage in the
system. Some people tend to draw
down on their retirement savings
for other purposes, which means
when they come to retirement,
it’s not always as much as it might
otherwise have been.
Country
Netherlands
Australia
Sweden
Switzerland
Canada
UK
Chile
Poland
Brazil
US
Singapore
France
Germany
Japan
India
China
Average
Ranking
DC Dimensions: what can private
employers do to improve outcomes
for their DC participants?
Knox: Private employers
can improve the level of
communication to their
participants. As an example, most
participants will get a statement
showing their account balance
every year. If I have a $20,000
balance, what does that mean?
will this number grow to $100,000
or $200,000? In addition, can we
express this projected benefit as
an income stream? we’ve got to
start thinking in terms of income
streams and give participants
information that will engage them.
And I should note that this is not
just a US phenomenon. In brief,
plan sponsors need to change
the discussion and change their
vocabulary to encourage greater
engagement.
DC Dimensions: we hear a lot
about next generation DC programs.
what are the necessary attributes
of the next generation of defined
contribution products and services?
Knox: engagement and
communication is just one part of
next generation programs. the
second fundamental component
is to ensure portability. Finally,
we need appropriate defaults.
that means when people don’t
do anything because they’re
disengaged, they still have a good
outcome. And those outcomes
should target an income stream in
their retirement years. �
wInter 2012 15
2011
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
2010
1
4
3
2
5
6
7
–
8
10
9
11
12
13
–
14
Overall
Index Value
Grade
77.9
B+
75.0
B+
73.4
B
72.7
B
69.1
B
66.0
B
64.9
C+
58.6
C
58.4
C
58.1
C
56.7
C
54.4
C
54.2
C
43.9
D
43.4
D
42.5
D
60.6 C+

ACADeMIC PerSPeCtIVe
tHe CUrrent StAte OF neXt
GenerAtIOn PLAn DeSIGn
By tIM KOHn, Head of DC Services and Vice President, Dimensional Fund Advisors
ZvI BODIe is a finance professor at Boston university. he holds a Phd from the
Massachusetts institute of technology and is coauthor (with alex Kane and alan
Marcus) of the widely used textbook Investments. his textbook Financial Economics
is coauthored by nobel laureate robert c. Merton, resident scientist at dimensional
fund advisors. dr. Bodie’s latest book, written with rachelle taqqu, cfa, is Risk
Less and Prosper: Your Guide to Safer Investing.
the 2006 Pension Protection Act
(PPA) created some of the most
sweeping changes in pension
legislation since the original
employee retirement Income
Security Act (erISA) of 1974. Five
years later, the PPA continues to
redefine the defined contribution
(DC) plan landscape, offering the
opportunity for continued and
important innovation in retirement
plan design.
today, the focus of much thought
and debate is on how to produce
better retirement outcomes—
ideally transforming an industry
centered on savings to one
focused on providing retirement
income. that means innovation
should address some of the
structural flaws found in widely
used default investments—
qualified default investment
alternatives (QDIAs)—which are
typically asset allocation funds such
as target-date funds. Unfortunately,
almost all widely used QDIAs do
not properly address the income
needs of current or future retirees.
On the positive side, the current
state of plan design is a marked
improvement over the previous
paradigm. Coupled with the
PPA’s allowance for automatic
enrollment and automatic
escalation of participant
deferrals, target-date funds do
take into account the failure of
plan participants to proactively
manage their retirement savings
and they do offer adequate risk
diversification. Just as balanced
funds were an improvement over
investing in a single stand-alone
fund, target-date funds combine
the basics of behavioral economics
and offer a pre-set asset allocation
glide path. However, much more
can be done.
By focusing solely on asset
allocation, target-date funds
fail to take into account
participants’ unique demographic
differences (including human
capital, gender, income levels,
supplemental savings, and
spousal demographics) as well as
the fundamental issue facing all
retirees: how much money can
be used on a monthly basis to
cover spending needs. Bottom
line: today’s QDIAs don’t offer
what participants need the most—
monthly income in retirement.
Here, Zvi Bodie, PhD, professor of
finance and economics at Boston
University School of Management,
discusses the challenges facing
today’s plan sponsors as they
struggle to provide complete
benefits packages that not only
satisfy current regulations, but also
help to better prepare retirees for
the challenges of retirement.
DC Dimensions: what are the
top risks facing both individuals
16 DC DIMenSIOnS

and plan sponsors in the current
retirement landscape?
Zvi Bodie: For plan participants,
it’s risks to their standard of living
or income throughout life. the
resulting investment challenge is
to transfer income or resources
from the period in life when one
earns the most to the period in
life when one earns a lot less.
A risk under the DC system is
any disability that could affect a
participant’s ability to work and
therefore save. this is not only
true for the participant but also
for a participant’s spouse. there
are a lot of people in their 50s
with no desire to retire who are
finding out that they’re having
to retire a lot earlier than they
thought they would have due to
family disability.
with respect to plan sponsors, the
major impediment and the major
defect in a lot of plans is relying on
the fallacious idea that stocks are
going to do the heavy lifting, that
as long as the participant’s money
is invested—a large fraction of
it in the stock market—then you
can count on a high rate of return.
Stocks are risky in the short run,
and they’re risky in the long run.
DC Dimensions: what can plan
sponsors do now to better prepare
their workforce for retirement?
Bodie: there are a lot of things
plan sponsors can do. It starts with
basic education about financial
fitness and the importance of
getting out of debt. For a lot of
people, that is one of the biggest
challenges to saving. In terms
of building up a nest egg, I just
finished a book with rachelle
taqqu called Risk Less and Prosper:
Your Guide to Safer Investing. the
basic idea, contrary to what a lot
of the conventional wisdom says
about saving for retirement, is
that you have to first and foremost
worry about your basic needs.
You need to target a minimum
income level in retirement. Once
participants have covered their
minimum income levels, they
can take on more risk in order
to achieve a potentially higher
income stream. this message
needs to be delivered to plan
participants through plan sponsor
communication and education
programs, and/or be incorporated
by next generation defaults.
DC Dimensions: Speaking of
defaults, what aspects should a
default option have in order to
better prepare plan participants
for retirement?
Bodie: A good default option
is tailored to an individual plan
participant and his or her particular
circumstances. we need defaults
that combine the best features of
both defined benefit and defined
contribution programs. In other
words, the default should offer
defined benefit-like protection on
the downside, offer a minimum
guarantee, and be professionally
managed. Combining the best
of DC, the solution should allow
customization, portability, and
upside potential.
Zvi Bodie Coming
to a City Near you
Dimensional Fund Advisors is
partnering with Zvi Bodie to offer
a unique educational conference
series designed for plan sponsors,
consultants, and advisors.
Zvi will discuss plan design, next
generation retirement incomeoriented
defaults, and investment
lineups, and also deliver a primer on
human capital and risk. Dimensional
will offer sessions on ERISA’s decisionmaking
framework, selecting and
monitoring service providers, and
creating a compliant policy statement.
CFA Institute has approved this
ERISA Fiduciary Training Program,
sponsored by PSCA, for six
continuing education credit hours,
inclusive of one hour in content
areas of Standards, Ethics, and
Regulations (SER). CE credit for
this program will be automatically
recorded in your CE Diary if you
are a CFA Institute member.
Dates:
March 22
Dallas
July 26
Boston
August 23
San Francisco
November 8
New York
Registration details:
Please check your mail in early February,
contact your Dimensional regional
director, or sign up online at:
http://dfaus.com/zvibodie
wInter 2012 17

DC Dimensions: It seems like
target-date funds have filled the
“QDIA of choice” default since
2006 as the dominant savings
vehicle for participants. what
is the biggest shortcoming of
today’s target-date funds?
Bodie: the biggest shortcoming
is that there’s no income level
being targeted. the target-date
fund simply promises a certain
mix of inputs of the portfolio
composition. Plan participants
don’t care about the inputs; they
care about the outcomes. the
term that’s used in connection
with a target-date fund is a
“glide path,” which actually is
an apt analogy that brings to
mind a flight plan. How are you
going to get from where you
are now to where you want to
be at retirement? the current
generation of target-date funds
just tells you an expected time of
arrival. It just doesn’t say where
you’re going—that’s one hell of
a flight plan! Participants need
a certain destination—at least a
certain minimum level of standard
of living in retirement.
As I think of what happened
during 2008, when many targetdate
funds lost 30–40% of their
value for plan participants
who were about to retire, I am
encouraged to know that many
retirement plan sponsors are
now rethinking their approach
to their current default options.
next generation default options
need to offer a safe landing at
plan participants’ target date,
minimum income levels, and
fundamentals of both DB and DC,
and they need to accomplish this
at a reasonable cost.
“ Participants in defined
contribution plans don’t care
about the inputs; they care
about the outcomes.”
— Zvi Bodie, Professor of Finance at Boston University
DC Dimensions: You said, “the
plan participant really can’t do
it alone.” who else has a role in
helping participants achieve their
retirement targets?
Bodie: the employee benefits
department can have a
tremendous impact on participant
outcomes in the US. through
basic plan design, the employer
can help close the retirement
income gap. we used to think
that this was in large part the
government’s role, but we’re now
seeing that people are being
asked to do it on their own. An
employer can provide a very
valuable gatekeeping function in
this new retirement paradigm.
DC Dimensions: Looking to
retirement systems outside the US,
are there any lessons to be learned
that may help inform our readers?
Bodie: the Dutch have one of
the best retirement systems in
the world. However, it’s also not
sustainable in its current form
because it has promised too much.
the Dutch have to find ways of
lowering the level of guaranteed
benefits (or quasi-guaranteed
benefits) and shift more of the risk
to the participants. I imagine their
system will look more like ours in
the future.
Australia and new Zealand
have done the best job so far in
providing free, objective online
education to participants, but
that type of education only takes
you so far. even if you get people
to pay attention, there’s still
the problem of getting them to
implement. education alone, no
matter how well it’s done, is never
the complete solution. �
_______________________________
reAD MOre OnLIne
Find out more about the Dutch
system in a recent paper by Zvi Bodie
and Henriette Prast, titled “rational
Pensions for Irrational People: Behavioral
Science Lessons for the netherlands,”
on the Dimensional
DC Services website:
http://dfaus.com/dutch
18 DC DIMenSIOnS

DIMeNsIONAL FOCUS
SPOtLIGHt On GLOBAL FUnDS
By SteVe CLArK, Head of Portfolio Management,
and CrAIG HOrVAtH, CFA, Global Head of Consultant relations, Dimensional Fund Advisors
Dimensional’s global fund-of-funds
portfolios are designed to help
investors with different risk tolerances
achieve their long-term investment
goals. the portfolios can be a good
choice for defined contribution plans.
In many plans, a large proportion of
DC participants may lack the time,
discipline, or knowledge to manage
a retirement investment portfolio.
Dimensional’s global portfolios are
managed by professionals trained in
academic investment theory who
select specific asset allocations to
maintain proper diversification,
monitor asset class performance, and
rebalance the portfolios regularly.
the underlying funds include bond
Global Equity Portfolio
Component Funds
US EQUITIES
Core equity 1
Core equity 2
real estate
NON-US EQUITIES
International Core 1
EMERGING MARKETS
emerging Markets Core
Global 60/40 Portfolio
and/or stock funds that provide
highly diversified exposure to
thousands of securities across over
forty countries.
vALue-ADDeD AppROACh
the portfolios benefit from the firm’s
value-added asset allocation
approach that is designed to
maximize expected return for given
levels of risk and enhance portfolio
stability, all while keeping costs low.
each global portfolio is built upon a
specific combination of underlying
funds (see chart). this modular
structure affords maximum flexibility
to efficiently target overall portfolio
risk and adjust asset allocations.
Global 25/75 Portfolio
Component Funds
Component Funds
US EQUITIES
US EQUITIES
Core equity 1
Core equity 1
Core equity 2
Core equity 2
real estate
real estate
NON-US EQUITIES
NON-US EQUITIES
International Core 1
International Core 1
EMERGING MARKETS
EMERGING MARKETS
emerging Markets Core
emerging Markets Core
GLOBAL FIXED INCOME
GLOBAL FIXED INCOME
Short-term extended Quality
two-Year Global
Five-Year Global
Inflation-Protected Securities
Selectively Hedged Global
Inflation-Protected Securities
Intermediate-term extended Quality
Short-term extended Quality
eQuITy COMpONeNTs
the equity component of each
global portfolio employs
Dimensional’s core equity funds,
allowing investors to achieve global
asset class exposure in an efficient
manner that minimizes turnover and
transaction costs. the equity
components focus on the small cap
and value premiums in an effort to
enhance expected returns.
FIxeD INCOMe COMpONeNTs
the fixed income components of the
Global 60/40 and Global 25/75
portfolios are carefully chosen to
complement each portfolio’s equity
allocation, helping optimize the
tradeoff between dampening risk
and maximizing expected return.
QDIA
For plan sponsors who have decided
to use a balanced fund as a plan’s
qualified default investment
alternative (QDIA), certain
Dimensional global portfolios may
be the right choice. For more
information, please contact your
Dimensional regional director. �
Performance of the global portfolios will depend on the performance of the underlying funds. risks of the funds also include loss of principal and fluctuating value.
the international components involve special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.
Sector-specific and small cap investments can also increase investment risks. Fixed income securities are subject to increased loss of principal during periods of
rising interest rates. they are also subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. the funds’ prospectuses
further describe these risks in the Principal risks section. this information is provided for registered investment advisors and institutional investors, and is not
intended for public use. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and exchange Commission.
Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing.
For this and other information about the Dimensional funds, please read the prospectus carefully before investing.
Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com.
Dimensional funds are distributed by DFA Securities LLC.
wInter 2012 19

FAsT FACtS
OTHER
RETIREMENT
ASSETS
$13.4 trillion
DC PLAN
ASSETS
$4.7 trillion
DC PLAN
ASSETS represented
more than one-quarter of
the total retirement market
and almost one-tenth of
US households’ aggregate
financial assets at the end of
Q1 2011.
62% OF PLAN SPONSORS
Feel their responsibility includes taking an interest in whether
employees are moving toward a comfortable retirement
(i.e., replacement ratio).
ONLY 15% of plan sponsors believe most
employees will be prepared for retirement. 65% of plan sponsors
offer a qualified default investment alternative (QDIA) for the
automatic enrollment program.
More than 65% of Fortune 100 companies’ DC plans offer
between 11 and 20 INvesTMeNT OpTIONs.
Over 71% of MODERATE INCOME
($30,000–$50,000) workers covered by a workplace retirement
plan participate in that plan, while only 4.6% of those
employees not covered by a workplace retirement plan
participate in a deductible IrA.
MORE ThAN hALF
(57%) of Americans in the lowest income quartile
will run short of funds after 20 years in retirement.
55%
of plan participants prefer that a
professional investment expert make
decisions about how to invest money
in their DC plan. 51% prefer to put their retirement nest egg
in an account that manages how much is spent each year to
ensure they do not run out of money.
Plan sponsors report that about 40% of their participants
expressed disappointment when their 2010
TARGET-DATE FUNDS realized an average 30%
loss in 2008. 61% of all plan sponsors indicated they were at least
a little surprised when this loss occurred.
Sources: ICI, Federal reserve Board, IrS Statistics of Income Division, Deloitte, towers watson, employee Benefits research Institute, Boston research Group.
ABOUT DIMENSIONAL:
now in its thirty-first year, Dimensional Fund Advisors is a global
institutional asset management firm with around-the-clock trading
capabilities out of offices in Austin, Santa Monica, London, and Sydney.
the firm also has offices in Vancouver, Amsterdam, and Berlin.
Dimensional acts as investment advisor, or sub-advisor, for hundreds of
financial advisor and institutional clients, including corporate defined
benefit and defined contribution plans, public retirement plans, family
offices, financial institutions, endowments, and foundations. As of December
2011, the firm managed about 250 investment vehicles and had approximately
$214 billion in assets under management,
including $15.6 billion in DC assets.
20 DC DIMenSIOnS

upCOMINg DC eveNTs | 2012
JAN
FEB
January 30–February 1 | Austin, TX
DIMENSIONAL INSTITUTIONAL SYMPOSIUM
February 16–17 | Austin, tX
DIMENSIONAL ADvISOR
AdvAncEd 410(k) SYMPOSIUM
March 18–20 | new Orleans, LA
ASPPA 401(k) SUMMIT
March 18–21 | San Francisco, CA
MID-SIZED RETIREMENT
& HEAlTHcArE PlAn MAnAGEMEnT
March 22 | Dallas, tX
ZvI BODIE/DIMENSIONAL
EDUCATIONAL SERIES
sAve The DATe:
Zvi Bodie/
Dimensional Fund
Advisors
educational Series
MAR
March 22 Dallas, tX
July 26 Boston, MA
August 23 San Francisco, CA
november 8 new York, nY
Please check your mail in early February,
contact your Dimensional regional director, or
sign up online at: http://dfaus.com/zvibodie.
May 23–24 | Chicago, IL
diMEnSionAl AdviSor 401(k) WORkSHOP
June 5–8 | Chicago, IL
MID-SIZED RETIREMENT
& HEAlTHcArE PlAn MAnAGEMEnT
June 13 | Chicago, IL
DIMENSIONAL ANNUAL DC CONFERENCE
July 11–12 | Santa Monica, CA
diMEnSionAl AdviSor 401(k) WORkSHOP
July 15–18 | Seattle, wA
WESTERN PENSION BENEFITS CONFERENCE
July 26 | Boston, MA
ZvI BODIE/DIMENSIONAL
EDUCATIONAL SERIES
Dimensional’s 2012
Annual DC Conference
Chicago Booth
Gleacher Center
June 13, 2012
For conference materials for this event,
information about Dimensional’s Annual
Investment Symposium, or upcoming events,
please visit us at http://dfaus.com/dc2012.
wInter 2012 21
MAY
JUN
JUL

Leading Thinkers. Leading Edge Solutions.
CONTACT INFORMATION
For more information about the
services that Dimensional offers
to defined contribution plan
sponsors, consultants, and
recordkeepers, please contact:
TIM KOhN
(512) 306-4939
tim.kohn@dimensional.com
If you are an investment advisor,
please contact:
AshIsh shResThA
(310) 656-4211
ashish.shrestha@dimensional.com
Dimensional's Resource for DC Professionals
SLX 512: 01/12