Defining and discovering "alpha" in participated-directed defined contribution retirement plans is perhaps the most difficult and important discussion in the industry today. Alpha in DC plans is very different than what asset managers pursue when they strive to beat their benchmarks, which is the hallmark of their abilities and ultimately defines their success. Alpha in DC plans is a measure of participants' success in replacing income within the plan.

How can the industry and financial advisers help plan sponsors help their participants to be more successful in retirement?

First, we have to acknowledge the monumental generational shift Americans are experiencing when it comes to retirement. Not only do we expect to live longer, but most baby boomers and almost all of the younger generation will not rely on government or employer-sponsored retirement plans. Instead, we will rely on a combination of Social Security, personal assets and DC plans.

These same DC plans, which were originally designed to be supplemental savings vehicles, are now being relied upon to be the cornerstone of retirement. Every participant is in effect managing their own personal plan without the knowledge, interest or wherewithal to even begin to attack the problem.

So if we understand the problem, even though it might be uncomfortable and without an easy answer, we are that much closer to finding the solution. While spending quality time with each and every participant to advise them on their personal plan would be ideal, in reality most of them cannot afford it.

The solution lies in the combination of a good DC adviser working with the right recordkeepers and asset managers. These providers use behavioral finance to create products and services that use participants' inertia and irrationality to help them do the right thing. Auto enrollment, deferral and the best possible default options incorporated in the Pension Protection Act of 2006 are a good start - but only a start. The quality and sophistication of the default options (whether target-date funds, risk-based funds or a combination of the two) is essential since most participants "set it and forget it."

The biggest effect on participant outcomes is the deferral rate, yet current practices encourage lower than optimal levels. The PPA suggests that we start at 3% and increase 1% a year up to 6%, while most plans match the first 3%-6%, if they have a match.

To get to where participants need to go, the deferral rate needs to be in the double digits. Why not set the default rate higher and match only amounts over 6%?

Returning to the question, where and what is alpha? The alpha is in the adviser who leverages the right partners to help participants not only increase the percentage of replacement income but also measure that success. While comparing a plan to industry norms is nice, why not just start improving the performance of the plan? Advisers who can say that they can help participants be more successful in retirement (that is, income replacement), and have the data to prove it, will be delivering alpha and will be highly sought after - just like the fund managers who consistently beat their benchmarks.

Barstein is the founder and executive director of The Retirement Advisor University at the UCLA Anderson School of Management Executive Education. Reach him at


Variable annuity sales surge With the equity markets' recent woes in the past, variable annuity sales perked up in 2010, according to the Insured Retirement Institute in Washington, D.C.

According to data compiled for IRI by Morningstar Inc., new sales were $136.6 billion in 2010, up 10.3% from 2009, when new sales totaled $123.9 billion. What's more, assets reached an all-time high of $1.5 trillion, lifting the variable annuity industry above the pre-crisis levels of the third quarter of 2007. "This is all new money," notes IRI President and CEO Cathy Weatherford. "We are on the front end of a curve of tremendous growth."

Consumer reticence toward variable annuities, which are essentially tax-deferred investment vehicles wrapped in insurance contracts, seems to be fading, according to Weatherford: "I think everybody was in paralysis for a while. But now people are figuring out how to position their portfolios to try to enjoy some growth."

In other highlights from the IRI report: consolidation within the variable annuity industry continued in the first quarter of 2011, with the announcement that Genworth Financial will exit the business.

Also in the first quarter, the variable annuity industry's focus on the fee-only market continued. SunLife issued a no-load contract, one that offers an optional lifetime GMWB rider that allows 5% withdrawals for a 65-year-old individual. SunLife is one of five carriers on LPL's newly established fee-only variable annuity platform, along with Allianz, AXA, Lincoln and Prudential.

The first quarter also saw the release of multiple lifetime GMWB riders. For example, John Hancock released one with a 5% withdrawal for a 65-year-old. Ohio National also released a lifetime GMWB with a 5% withdrawal for a 65-year-old.

- Steve Garmhausen, Financial Planning, a SourceMedia publication

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