SUSAN MANGIERO, PH.D., AIFA, AVA, CFA, FRM, Pension Governance, Incorporated
Email: smmangiero@pensiongovernance.com

Risk is on everyone's mind these days. Volatile markets and rapidly changing demographics exacerbate already large funding gaps for some defined benefit plans, motivating pension fiduciaries to look for potential higher returns in the form of complex securities, derivatives and portable alpha strategies. As famed economist Milton Friedman said, there is no free lunch. Greater risk accompanies higher returns. In assessing financial uncertainty, pension decision-makers will likely want to make sure that the due diligence of external managers - especially those who employ leverage inducing strategies - includes a rigorous assessment of traders' risk management policies and procedures.

On the accounting front, newly proposed asset disclosure rules, if approved, are slated to force change by requiring pension plans to categorize investment risks. Valuation rules such as FAS 157 are likewise causing change by forcing recognition as to how economic interests are marked to market or marked to model. Headlines about billion dollar losses in the financial sector are a reminder that effective risk management is a fundamental determinant of the economic viability of any organization. For plan sponsors, poor process may result in a host of problems such as those relating to liquidity, funding status and/or regulatory compliance. Low interest rates and recessionary pressures pose additional challenges, often leaving employers little room to maneuver. Participants, shareholders and taxpayers are potentially exposed to significant losses if the identification, measurement and management of pension risk fall short of best practices.

Recognizing that meaningful change, as needed, cannot occur without knowledge of the status quo, the objectives of this research are threefold - (a) understand why and how plan sponsors employ derivative instruments, if at all (b) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (c) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market. A total of 162 retirement plan decision-makers in the United States and Canada represent survey-takers.

JACK VANDERHEI, Temple University - Risk Management & Insurance & Actuarial Science, Employee Benefit Research Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
SARAH HOLDEN, Investment Company Institute
Email: sholden@ici.org
LUIS ALONSO, Employee Benefit Research Institute (EBRI)
Email: alonso@ebri.org
CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

Over the past two decades, 401(k) plans have grown to be the most widespread private-sector employer-sponsored retirement plan in the United States, and now serve as the most popular defined contribution (DC) plan, representing the largest number of participants and assets. In 2007, 48.5 million American workers were active 401(k) plan participants. By year-end 2007, 401(k) plan assets had grown to represent 17 percent of all retirement assets, with $3.0 trillion in assets. In an ongoing collaborative effort, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) collect annual data on millions of 401(k) plan participants as a means to accurately portray how these participants manage their accounts. This paper serves as an update of EBRI and ICI's ongoing research into 401(k) plan participants' activity through year-end 2007. The report is divided into four sections: The first describes the EBRI/ICI 401(k) database; the second presents a snapshot of participant account balances at year-end 2007; the third looks at participants' asset allocations, including a new analysis of 401(k) participants' use of lifecycle funds; the fourth focuses on participants' 401(k) loan activity.

As with previous EBRI/ICI updates, analysis of a consistent sample of 401(k) participants (those that have been in the same plan since 1999) is planned; this additional analysis is expected to be published early in 2009. It should be noted that the year-end 2007 401(k) data reported in this analysis, by definition, do not reflect market losses or participant account activity in 2008. The impact of the 2008 financial market performance on average 401(k) balances is strongly affected by age and tenure of the individual participant, and it would be inaccurate to make a single estimate of an average 401(k) account outcome for 2008.

GAOBO PANG, Watson Wyatt Worldwide
Email: Gaobo.Pang@watsonwyatt.com
MARK J. WARSHAWSKY, Watson Wyatt Worldwide
Email: mark.warshawsky@watsonwyatt.com

We establish an empirically based lifecycle model to gauge savings and replacement rates for maintaining a steady living standard over life. We consider a variety of scenarios and demonstrate that savings rates vary substantially with individuals' economic and demographic situations as well as retirement plan provisions. This result highlights that meaningful retirement planning must be specific to individuals or households and be based on a comprehensive knowledge of living means and needs.

BOLONG CAO, Ohio University
Email: caob@ohio.edu

Portfolio rebalancing policy is one of the most common policies given by financial advisors to their clients for managing their clients' retirement portfolios. The out-of-sample performances of different policy testing methods have rarely been compared. We propose using bootstrap aggregation (bagging) based on stationary bootstrap as an innovative way in testing rebalancing policies. We show that in most cases, by a three to one chance, the out-of-sample performances of the rebalancing policies chosen by bootstrap aggregation can be better than the ones chosen by Monte Carlo simulation or in-sample testing for several performance measures and three different portfolios. We use all three methods to select rebalancing policies from periodical rebalancing, the rebalancing policies with fixed bands triggers and equal probability triggers at different checking frequency and the buy and hold strategy. We find that the investors should check their portfolios more than once per year and fixed bands triggers are preferred to the equal probability triggers in most cases.

PETER J. BRADY, Investment Company Institute
Email: pbrady@ici.org

Despite only having been in existence for 27 years - less than a typical working career - some analysts seem to have concluded that 401(k) plans are a failure. For example, Munnell and Sundn (2004, 2006) argue that the 401(k) is "coming up short" due to, among other factors, low contribution rates among those participating. A recent government report concludes that "low defined contribution plan savings may pose challenges to retirement security" (GAO, 2007). In addition, Ghilarducci (2006, 2008) has proposed to replace 401(k) plans with Guaranteed Retirement Accounts, in part due to belief that 401(k) plan participants will not be adequately prepared for retirement. This paper illustrates that moderate 401(k) contribution rates can lead to adequate income replacement rates in retirement for many workers; that adequate asset accumulation can be achieved using only a 401(k) plan; and that these results do not rely on earning an investment premium on risky assets. Using Monte Carlo simulation techniques, this study also illustrates the investment risk faced by participants who choose to invest their 401(k) contributions in risky assets, or who choose to make systematic withdrawals from an investment account in retirement rather than annuitize their account balance.

KEVIN WHITMAN, Government of the United States of America - Social Security Administration
Email: Kevin.Whitman@ssa.gov

In the 1930s, amidst concern about the ability of existing pension programs to provide former railroad workers with adequate assistance in old age, Congress established a national Railroad Retirement system. This system is primarily administered by the Railroad Retirement Board (RRB), which is an independent federal agency charged with providing benefits to eligible employees of the railroad industry and their families. Today, the Railroad Retirement program is closely tied to the far better-known Social Security program, and although the Railroad Retirement program and Social Security share a number of common elements, key differences also exist between the two in areas such as funding and benefit structure. This article describes history of the Railroad Retirement program, reviews the benefits provided by the program, and examines RRB's financial operations, using elements of the Social Security system as points of reference.