Instttute for Perastlm Plan Management 

~lcftc#d~.~~ofEP~andmRf?~- 

Commeab to the Department of Labor 

combinatbn ofdata obtained hIlt3EU.S. ~~~uthE said sccwity 

/ Adminisitation, and the Cmil of Life Tmmrs (ACLI) indicate that the 

,> . \r INDIANA UNIVERSITY-FURDUE UNIVERSITY FORT WAYW,E 
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Retirement Facilitators: Policy 

Considerations for Increasing the 

Role of the States in Assisting with 

Retirement Savings 

Geralyn M Miller' 

'Ihts pa^ invmtip~ tfre Impact of within ahks with 

~b~t inmewing the~~s~QASDlbai9mdty~ 

h the SOEjRl Semrity AdmMstratlon, data on annuity premium I& hn the 

Am~CoweilolWh~,andMwelUA~~pMedolll.In 

Q$t of the-of the wmvedw- ~~c 

oold~,~~W~,thiSh~rescPlnchPlndhgstromthts 

study ssgprt prevh d pm ~ttQnal mmq data and Indleak that 

spebkdemograghia may havea dgdfim~ ImpeEtonhmhl pm Given 

the v~tied natum of d mm- withhfthefndlvldual state, thk 

may htlrrefmplicatioIlsfor~d~inwbhg&hmsuwd 

mmInthe~sl.wlnaeam. 

INTRODUCTION 

R etirement savings in the United States is becoming increasingly 

important to decision-makers across America, and with good reason. 

The ability of the %ial Security Administration to sustain current re&- 

ment knefit kvels in the United States for futuv generations of retirees 

has been the subject of soeial discourse and scholarly studies (GonzalezEiras and Niepelt, 2008; Hakkio and Wiseman, 2006; Mitchell, Myers, and 

Young, 1999). While former generatims of retirees h America enjoyed 

'WW for PmE&ml PIan Mamgeamt, Indhm Univ~-~ Uni* Pwt 

Wayae, 2lOl H Codiseum W., Neff 328, Porl Wayne, IN -1499, Phw 26WSl6350, 

dhgmaph.edu 

GERALYN M. MILLER RWI REMEMT FACILITATORS 

one rdk solely on Social Security benefits. Many people in the United 

Stah have built up dnmen t income hugh separate rebent savings 

gamed in large measm through their years of employment. Public 

pension ph, for instance, have covered federal, state, and municipal 

employees, along with the contrib u tiom they have made to Sodal Security. 

Trade unions arid many private employers have pmvidd xetirement benefits to their workers, commonly, many of these workers W- pm 

vided a lifetime spdk level of income through ddmed hefit @B) plans. 

Retirement plans have recently moved away from DB plans in favor of 

defined contribution @C) plans that are, emtially, managed hv&mmt 

savings plans. But DC plans donot ndy guarantee a lifetime income, 

and the sharp rise in their usage in !he and 1890s (Munnell, WU 

and Jivan, 2003) may be cause for concern. The large numbers of baby 

boomers about to coupled with increased longevity may result in 

insufficient lifetbe incomes for large numbers of people (Orth, 2006). 

Furthermo~, fewer p'rivate employers than in the past are providing 

pension plm, which may be a wdt of the growing admhktmtive burdens placed on them by govenunent regulators (Clark and MeDermed, 

1990; Purceil, rn). 

The United States is governed by complex, multilevel deckion-making 

ht varies fmh one state to moikz Nebmska, for example, has a unicameral form of I~a~re, while the other 49 stab have bicameral forms. 

Obvhndy, unique considerations led the people of Nebraska to choose a 

diit form of go~em~mt thm all other states, Policy-making in the 

individual states, therefore, is subject: to the compositian of unique demographic factors within each state. 

Scholars have demozlstmkd that state policy-maling is strrmgly Muaced by the culture that characterizes A state, which is generally 

influenced by its &phic location (EIwir, 1984).5 Pozitical culturn is 

inhem~tly about shad Mds and values within and amss groups by 

virtue of the influence of public opinion (&&sen, Wright, and MGivg~ 

1993). Ehddmm (1991) has demonshated that culture interacts with 

her ktors in influencing state policies, lending credence and sustainability to the earliex work of Kinhid (19821, who argued that the two 

a* intricately connected. Subsequent studies (e.g., Hanmn, 1992 and 

No& 2001) pmvide support for Elazar 's argument as well as foi. its 

%lam mgwd that the dWm of the United Stam hre n culture that is bullt upon three 

ethfies, which he labeled modistic, bdividuahk, and tmditlmbtk These three 

subruttum were based, he aqpes, in migration pt&ms of the early settk who depitd 

their phial Mek and vah unewdy muex Me mnhy. He bdleved that ammt differ~~~ aam~ tk mhy can be tmced to the hflm of the mrly settlers. 

I endurance as a classification scheme. Public policy-making does not take 

place in a void; it is subject to the enviro~~ment in which it is crafted. 

A host of demographic variables affecting state policy-making activities and outcomes has been identified over the years. Changes in popdation size and patterns present both opportunities and challenges for state 

! policy-makers over time. More heavily populated states face different sets 

of challenges than their more sparsely populated counterparts. The challengs are usually welcomed in those states that experience growth, but 

not so for those states in which population declines and tax dollars become 

further constrained. Scarce resources, after all, breed conflict. The farther 

scarce resources must stretch, the greater the likelihood that conflict will 

occur. 

Dye (1966) found that wealth and education level were important in 

explaining differences in spending across the states. The greater its internal 

resources and the higher its median income level, the more a state will 

spend on programs for its residents. Race has ken shown to be an important factor in a number of policy areas, including the retirement arena, 

where it has been linked symbolically with Social Security in social discourse (Winter, 2006). Ethnic minority populations, such as Hispanicj, 

Asians, and Native Americans, tend to be concentiated in specific states 

and, therefore, impact the policies of those states more than others. 

Furthermore, the concentrations vary by ethnicity. The burden of service 

provision to large populations of immigrants generally falls on the shoulders of the states and becomes a contentious issue in border states such as 

Texas, Arizona, and New Mexico, which seek solutions to the tide of illegal 

immigration. This is cause for concern in light of evidence that minorities 

may accumulate less retirement wealth with the shift toward defined 

contribution plans (Even and MacPherson, 200T). A 2005 report published 

by the National Council of La Raza indicates that although the vast majority 

of Hispanic workers pay into the Social Mty system, they receive 

disproportionately fewer benefits from that system than their white and 

African American counterparts (Grillo-Chop and Rodriguez, 2005). Additionally, the report indicates that there is also a sizeable group of workers 

who, by virtue of the types of jobs in which they are employed, are 

ineligible for contributing into socia1 security under current rules. Those 

workers are totally dependent upon their own savings for retimnent. 

Gender also has been linked to policy-making at a variety of levels, 

from the sub-na tional level to the international level of microeconomic 

policy-making, with regard to monetary concerns (Scheve, 2004). Both race 

and gender have grown in importance in the fieldof American state politics 

and policy over the years (Brace and Jewett, 1995). In the field of scholarly 

inquiry into American economics, race and-gender have been accepted as 
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GWL* M. MILLER 

the U.S. Government's policy of selling annuities to Native Americans in 

exchange for their lands! These products are an integral part of the 

retirement savings portfolios of citizens across the states and can bz used 4 

as a measure of the savings retirement pattern (Warshaws ky, 2001). In spite . 

of this, annuities are not a preferred means of retirement, accounting for a - 

small percentage of retirement savings. Still, with the advent of newer 

annuity pmducb in mt years, such as flexible annuities, they seem to ., 

be growing in popularity once again (Brown and Poterba, 2006). 

Another measure of retirement income is the benefit received from the . 

OASDI age-related portion of the Social Security Administration. Given 

tbe rather limited purchase of annuitie in the U.S. retirement savings realm 

and, conversely, the heavy reliance on Social Security, the socioeconomic 

variables were tested against the numbers of beneficiaries acruss the states 

receiving the OASDl age-related payments. Jointly, annuity premiums and 

Sodal Security receipts give us a dear view of the patterns of reliance on 

retbmnent support vehicles. The impact of these socioeconomic variables 

on public policy-making decisions at the state levels can provide insight 

into what considerations in a state enhance or detmct from its citizens' 

re-ent savings behavior. In testing for the influence of socioeconomics 

on retimnent savings pattems, guided by the existing theory, the expected 

impacts on the dependent variables are presented in Table 1. 

EMPIRICAL RESULTS 

There is a good deal of variation across the states with regard to 

&oecono& and levels of premium collected from the sale of annuities 

and social security benefits. For example, the percentage white popuh tion 

in the 3&74 age bdet may range as much as 70 parent across individual 

states, while the Native American/ American Eskimo percent population . 

ranges by only 12 percent. The percentage of males and females in the states 

varies by only 4% with a mean of .49 and .51 for males and femal$b, 

respctively. Tnble 2 demonstrates that while there is certainly variation in 

most of the variables, both dependent and independent, that variation is 

fairly constant across the yaws of study. An ANOVA test revealed that the 

only sigruficant differences were in household income, which has gone up 

as expected. There were no siphmnt differences for any of the other 

variables over the four years. 

*For a wlktion of historical accounts of an~luities, visit the Amuity Musetun at 

www.immed~temuI~.cm/iurnuilymuseum/. 

. .' Table 1. Expected Outcomes . .. , %:*!,: .. I. - .Ti . ,,' ?*,: !%:::. y Sigtli[*~mnt .- - . , - #-, :. ; sipifimnt . .;- , ;,p t contributors to Significantdetrabors , ! , contributors to Significant detractors increases in numbers hm illcreases irl ., ._ - ..-. . ?., :,: - ,. . i- in a~lnuity from increases in of OASDI old-age rlurnkrs of OASDI 

: : .C%;f -: .. . . . . . , .y. ,::,: premiums a~muity premiums Mts old-age hnefits : I I.. - / . '4-5 ", .* , , -.+ . ii . Mdia~l income - - . . u;. Medlan income . - A 4n-s , Percentage of high - Percentage of high - '2 sChOOl graduates -, ',. -:. school graduates __. ,I A .I Percentage of whites Percentage of Percentage of whites Percentage of . d.. and Asians Hispanics, Afrimn and Asiala Hispanics, African 

Americans, ad Americans, and ' '. Native Americans/ Native Americans/ 

Alaskan Natives Alaskan Native 

Percent of men Percent of women Percent of men Percent of womm 

. '. 

Table 2 demonstrates a more specific view of the variation across the 

stab. Hawaii consistently ranked the lowest in population of 30- to 74- 

year-old whites, while Maine and Vermont had the high& levels. Vermont, 

Maine, and West Vvginia had the lowest populations of 30- to 74-year-old 

Hispanin, while New Mexico consistently had the highest population. It 

is important to keep in mind that since this dataset represents only four 

years, it has some distinct hitations that a longer period of time would 

eliminate. The range of the two dependent variables, annuities (as percentage of this age group) and OASDl benefits, disphys a frequency pattern in 

the states as well. Annuity premiums were lowest in Mississippi, Montuv, 

New Mexico, and Texas; they were highest in the District of Columbia and 

&lawme, Social Security benefits were lowest in the District of Columbia 

which, interestingly, is where the pantage of annuity premiums was the 

lughest. The highest levels of Said Srmrity benefits are found among nine 

statesIdaho. New Hampshire, North Camlina, Oregon, South Camha, 

South Dakota, Ternem, Vermont, and Wisconsin. 

Results of the two regression models are displayed in Table 3. These 

results were both expected and surprising. As indicated earlier, median 

income was expected to be a significant contributor to increasing the 

annuity premium levels and wodd, conversely, detract from the OASDI 

levels. This was the case, with a sipficant md positive t-value of 7.032 on 

the logged annuity premium levels and a sipficant negative t-value of 

-2.513 on OASDl benefits paid out in these hut years. The variabies for 

education (percentage of high school graduates) and region (using a 
Table 2 Mptive Peroentages Acm the State 

2M)3 2004 2005 #Wid Ali four years 

VARIABLE Mean SD Range Wan SD Range haean SD RAW MBan SD Range Mean ,SD - 
Table 4. Cults of won Analysis for Two Mod& 

Black 

Anm+ml hllhn/- 

Native 

dummy variable for southern stater) were sigd3citnt and positive, but 

because of issues of rndticobwrity, they were dropped from tfaebiodel. 

me dative percentages of whites and Asians were expected to have 

a -cant and positive impact on the snle of annuities but a negative 

impact on OBI Wdcuy levels. This was not the case; the variable for 

pcmtage of whites indicated a negative, but insi@cant, impact on 

muity pdm and 0ASI)I. beneficiary levels. This was true for the 

variable xepmting percentage of Asians as well. 

As hypothesii, with regard to the remaining variables, the results 

were mixed. For instance, effecb of the percentages of membexs of the 

remaining thre minority groups tested-Ahim Americans, Hispanis, 

and Native Ammicans/Ahskan Natives-varied. Though it was hypothesized that each of these variabIeg would have significant negative impact 

T 

< !I 

on both of the dependent variableg, it was hue only for levels of Sod 

mty hdciaries. In terms of annuity pdum levels, only the va 

able for percentages of Hispania was signkt and negative? 

Finally. gender is swcant in terms of Social Security only for mt 

with regard to OASDL Higher prcenbges of women in the shis neith 

contribute to nor detract from annuity premium levels or the numbers 

OASDl beneficiaries. This stands to reason, since hw have always ba 

moe men than women in the workforce, parlmh1y in positions eligil: 

for Social Security benefits. Remmkhg that these variables wm ca 

strained by age (30 to 74), it appears that men are the main purchasers 

annuities. 

NationaI studies using survey data have indicated that socioeconom 

cortsiderations a= important with regard b mthmnt planning and pr 

padnes. ~his&lendsfurthercredence'tb thosestudies in that tl 

data used in this study axe hard data, not gleaned fmn surveys &at ms 

be hkrmtly problematic It is important to know that income is a si@ 

ht demmimnt within the states with regard to bcial behavh 

involving mthnmt because it further that national find W, 

Although the rsults were mixed for the other variabl~pcificdR 

ehkity and gender--the significane found in this dataset indicates S. 

these are important considerations at the state level and that state pow 

makers need to pay close attention to them in anticipating future p& 

ckmands. 

DISCUSSION 

Ample evidence from financial behavior studies indicates problems j 

how well American citizens ph for their ~~t years. Pu~o

state policy scholars provide convincing arguments that state sodnomic conditions are important components in policy-making. These tw 

bodies of literature, when taken togem provide a sbmg base of how 

edge for a better understanding of retirement income and public polk 

direction. Indications from this research point toward pohfhl pmblen 

in the not-toodistant future in acammdating the needs of the elderly. 

Before enacting a bhket state facilitation of private pension prrw 

sion, decision-makers are well advised to consider the unique dm 

graphic patterning within each state. Some states may face burdens in eve 

7i is Inhsking to note that the variable representing pe-ges of Hkpmics wss si; 

nihnt In WI th au-kd model Euad the mode! with mhed depende: 

variabies 
considering such a plicy plan, where other states wauld not. This may 

help to explain why some stab struggle to maintain healthy funding levels 

in &eir public pension ph while others appr to have no such difhdty. 

For example, We Island and West Virginia have fun- problems with 

heir public pension systems that may require, at least in the case af Rhde 

Island, that taxpayers make up the de£ici~'~ Although Iwry (ZW) argues 

that the states' expertise in the administration of pension planning is good 

reasun for involving them, this may not be true for all states. The fact that 

stab are responsible for admirrisbtion of their own public pension 

planning is not a guarantee that their efforts ate efficient and productive. 

Another consideration is the interstate impact of intrastate poliq. 

Lessons learned fmm the "welfare magnet" &oh demonstrate the 

effects that poky-making in one state can have ar~.oss other states in the 

p~cess of economic competition (P- and Rom, 1980). While it is 

imgossible to predict with complete accuracy how poky-making will take 

shape, decision-makers should anticipate problems that will create 

demands on the states and develop solutions based on predictive models. 

=ven that Hbpda constitute one of the two fastest-pwing populatims 

in the US., and that 3 a pup they e inclined to under-plan for retirement and lack opprhmity to am Social Security benefits, state and 

national decision-makers need to be cancemed. 

M hidings are not absolute; &ere is much work to be done in 

understanding - how sdoeconomic corn~~s in the state affect policyparti&ly with rqpd to planning for their citbms' rdhment 

needs. This is a first a-pt to iden* the conditions favoring a storm 

brewing on the horizon. Future research must drill deeper into the socioeconomic layers to better understand khe behaviod that &ct 

policy outcomes. At a minimum, decision-makers in and aans the states 

shod be aware of the potential problems and consider how various types 

ofpoliciesmight allwiatetheproblems.P&aps it is assimpleas providing 

rdjremmt produds pmviders (both public and private) a platform for +e 

inevihble discussion if the potential problems become a reality. One thing 

is clear. will constitute a fore to ke recbd with, given their 

numbers. Stab can be pro-active by taking steps to Better understand 

socimamomic impact on retirement savings and craft polid= that witl 

alleviate potential economic burdens and accommodate the chaneg 

needs of their citizens. 

Since the passage of the McCamn-Ferguson Act of 1995, the regulation of insurance products has generally been left to the state. The desk- 

'opebph S RI. ranbs tead-bhst in public pension financing (7he PWcttw Crnal, December 23, M.) 

REIIRMEMT FACILITATORS 

ability of specific retirement savings pmducts, such as annuities, is subject 

to the cultures and politics of each state. The National Assodation of 

Insuranoe Coumissi~~ners reports that " Washkqkm lobbyists have pushed 

for a f&rd insurance charter and a new regulatory regime in Washington 

that would dhhish or supplant successful and effective statebased consumer The stage is set for a heated debate as to whee the 

most eff&ive regulatory ovasight of retirement savings mechanisms can 

and will exist. Future policies depend upon who will be &d at the table 

for that debate. ChrIy, a uniform national policy may result in difhing 

economic conditions withim individual states. We could end up seeing a 

mmme of the "magnet" effect that occurred when welfare policies 

emanabed from the national government, but this.- centered on retirement savings policies. 

- REFERENCES 

Ashie, MJ (2008) Sodal Security Administration Slatentent, available online as of 

July #lOS at www~akuri~.gw/mystatement/~plel.hh . Bmckelman, K (1991) Political Cdture and State Development Policy, PubIius 21: 

4962. 

Brace, P and A Jew& (1995) The State of State Politics Research, Politiral Rmh 

QuaTtedy#:~l. 

Brown, J and J Poterba (2006) Household Ownemhip of ~&ties, Working Paper 

11964, Natiml Bureau of Economic R-rch, he. 

Chen, Z and SA DeVaney (20Wl) What Factors Affect the Houshold Net Worth of 

Employees and Businw Ow-?, Finnncinl Semi- Reaiew 11: 381-39l. 

Clark, RL and AA McDermed (1990) The Choice of Pensim Plans in a Changing 

Regulatory Environment, AEi Studies No. 509: 143: A 

Cole, CR, KA AacCuJIough, ad SP Park (2006) An Examination ofthe Current State 

of Retirement hv@s with a Fams on Individual hemptionq Jolrrnal4 Ins~rrrrna lsslle~ 29 (a): 1W-I32 

IhVmey, SA and TC Zhng (201) A Cohort Analysis of the Amount in Dew 

'Contribution and Individual Retirement Accounts, Financhl Cotrrtsellng and 

Phning 12: -102 

Donwan, T, CZ M-, and DA Smith (XW9) Shte ad hl Politics: lnsfitutions 

nd R@n, Florence, KY: Cengage Learning, Inc. (forthcoming) 

Dye, TR (1-1 Politia, Ewtmm'ts nnd the Public: Pdicy Ollfwmes in the Anteriaan 

States, Chimp Rand McNally. 

Removing the Emperor's New Cloth~: What Do We Really Know about Target-Date 

Funds? 

While the pension fund industry maintains that it is a competitive market ma, as such, should 

ranah Gree from regulatory ovasight, the cons~us of the academic literature is that this 

industry is anything but competitive. One of this industry's recent trends in retirement savings 

products is known as target-date funds (TDFs). These funds claim a self imposed discipline of 

risk reduction as the retiree approaches some pdetedned date. However, these funds are 

mtially mutual funds with a twist and are not perfect rethnent instruments. In this paper, 

some standard definitions of market failure arc applied to the pension fund industry. This issue 

is further examined through the use of the technique of content analysis. The goal of the 

research is to highlight the pi- of seemingly "& investment vehicles for retirees. 

JEL classification: GO 1, G23, G28 

Keywords: Pension Funds, Govern~ent Regulation, Agency Costs 

Gdyn M. Miller, Ph.D. 

hmciate Professor of Management and Marketing 

Carolyn Fabian Stumph, Ph.D,* 

Assistant Profasor of Economics 

Richard T. Doerma School of Business and Management Sciences 

Indiana University Pudue University Fort Wayne 

2101 E. Coliseum Blvd. 

Fort Wayne, IN 46805-1499 

260-48 1 -6475 

Fax: 260-48 16879 

Email: ~c@rofw.odu 

*contaponding author 
Ametic uepression has hit at the worst 

possible time for retirees. The first baby boomer applied for Social Security benefits in 2008 

what is e be the largest wave of retirees in the history of the country. Fudermore, . . .:. 7 

those retirees will probably live longer than any other cohort of retims has in the past as our life 

expectancy increases. As cunsumer costs rapidly escalate, re* must 

income dollars stretch farther than they ever anticipated having to stretch them. 

Just as the-first ~f these< baby boom-em begin to retire, though, the Conference Board's 

;-d..;, $<?.*-. .*,:& -, . *,$ , uT: *=I . . . . 

Consumer Confidence Index has taken a serious downturn. In February of 2009, Consumer 

,.;., L-c,&:; 7 

, y. . ': . ,a '4 

Confidence had fallen to 25%, down from 37.4% the previous month to its lowest point since the I -9.:- 1 -,c- J ,. ; , :J . 

inception of the meex in 1967. While consumer confidence rebounded sub~~a~~~ m k2 

spring, it was down again ia June. It is safe to say that Americans truly believe the country is in 

economic trouble. Not since the early part of the 20' century have we depended so heavily on 

our governmental decision makers to find a means of righting things, to shepherd us through the 

storm in which we find ourselves. It is imperative, therefore, that those in key decision making 

roles have as much of a foundation of factual, knowledge at their disposal as is humanly possible 

to help them arrive at as optimal a solution as is possible in a republican form of democracy. 

Fifty years ago, the most prevalent form of pension plan was the defined benefit plan. An 

employer promised a worker a given level of income upon his or her rethemat from the\ 

organization. That benefit would be sustained for the remaining lifetime of that worfier anii was 

often passed on to the swviving spouse in a decreased form for the duration of the spouse's 

lifetime . upon . the death of the worker. So prevalent was the defined benefit plan that it became '. >.J.>. 9'5v,P 

synonymous with the concept of pension in the minds of most Americans. Over the course of 
* .. . .. . -, 

? r: .,. && .' "-tk;&;:J,& U ,-&&, >-A. ,A La 

2 , :&. !*:z.' 

kc,]" [.;,'- ; 

,-. ' 

I? .:':: , :-' ,- 

-a , . .&,,. 

L. A. 5: th al decades, though, the defmed benefii'~plan has given way to a newer form of 

q 

1. pension plan, the defied contribution plan. This type of plan operates much like a savings pl 

F ,. in that the monies available to people when they retire vary by individual. These persod 

retirement accounts come in several different forms but essentially all rest on a foundation of 

specific asset accumulation strategies. They are also affected by a variety of fmtors within their 

operating environments such as market forms, management perspectives, and the financial 

sophistication of individual participants. 

As the individual retirement account has become more prevalent among employer 

sponsored plans, it ha^ also evolved from its humble beginnings into a myriad of complex 

instruments that are largely misunderstood by the average participant. While healthy economic 

mnditions fostered the growth of the individual retirement savings account, along with growth in 

asset accumulation in the 1990's, the recent economic downturn has caused concern about the 

ability of these types of instruments to sustain the livelihoods of retirees who are increasingly 

dependent upon them. In an effort to alleviate those ooncerns, much attention is being given to a 

relatively newly merging trend in retirement savings pducts. These products, which may be 

marketed as being safer than traditional retirement savings alternatives, are known as targetdate 

funds (TDFs). Because of the illusion of fiduciary responsibility, these funds are gaining 

popularity among plan sponsors. According to the Employee Benefit Research Institute (EBRI), 

the use of these types of retbment savings funds is expected to continue to grow in the future? 

Target-date funds (also lolorn as life-cycle funds) all falure a range of asset classes with 

a declining equity exposure as a participant reaches a predetermined date, theoretically one 

chosen for its close proximity to the anticipated retirement date of a Target-date 

funds are designated as one of the Qualified Default Investment Alternativw (QDIAs) under the 
,, *.?!I !+ y 

. These funds make use of what is known as a glid 

formed by changes in the mix of asset allocation Meen riskier assets and more conservative 

ones over time, which di 

glidepath ate demonstrated in Figure 1. Based on our existing knowledge of retirement savings .-.r'=- .;ki:f.>-!- -- PiL> - &.;.;.$,,,: *., : ' .: ; ' . ,.&, , ,,. 7 ur-~ ! . .* - - >7 7- 'v-- w , , <. , ..sgK?$jj,i, &$ ,..,; .,:.- - -, *;.*: -,,< ;.\*:::.*&, , * .;-., !- ;" .., :..; -. :f4 ;; ;>> , , ,La-'., ,.$ 

,:< :, . .. .. ., .! .l:rr$.f ,.7-f . .. I;Er&F+,,wa .- - - .-lx~i .,:G . JA 

behamor, as well as hie mpadts offeierit' diiwh-turned &et ictibitjl 'oii retmmknt savlngs 

portfolios that appears to be the result of a tendency toward heavy concmtration in equities, 

these types of funds make intuitive sense. Meed, they may be a promising vehicle in the fight 

to foster adequate levels of retirement savings, but they also may contain a fundamental problem 

that nds to be addressed by policymakers sooner rather than later in order for these 

Targetdate fun& are, amtially, mutual funds with a twist. As such, they are not 

perfect instnunmts since they involve elements of risk and have costs associated with their 

operation. Like most mutual funds, targetdate funds require the managerial expertise of 

someone who will "research, select, and monitor the performance of the securities that the fund 

purc~.'d Essentially, expertise aside, the overall functioning of these funds is dependent 

upon the specific set of choices made by the individuals who are charged with those tasks. 

Not surprisingly, given the nature of the fun&, there appears to be quite a bit of variation across 

the existing target-date fund families. That variation includes such things as risk potential 

associated with equity alldon, administrative costs associated with the operation of the funds, 

and even the performance of the funds with respect to levels of retirement savings realized by 

participants across funds upon reaching the chosen targetdate (Copeland, 2009; Nagengash 

2008). 

Given the variation that exists across these funds, the choice of placement into one of 

these funds rather than my other of the funds, can have a dramatically different impact on the 

levels of retirement savings available to a plan's participants upon reaching retirement. For this 

reason, this paper argues that a public policy must be developed that allows for sufficient 

regulatory oversight of the choice of fund altematlves that parhclpants are oUered to ensure that 

they have access to the potential for optimal retirement savings accumulation. The only way that 

this can be achieved is to ensure that there is open market competition with regard to the fund 

choice made available to the plan spomm. In the absence of adequate oversight, the potential 

for bias in the selection of fund dtematives made available to plan sponsors and, ultimately plan 

participants, could act as a barrier to access to an optimal investment pduct by virtue of a 

distributional inequity in the marketplace. Policy must include the creatibn of a mechanism 

allowing for oversight by an impartial third party in the selection and management of the spac5c 

target date funds offered to and by plan sponsors and, in turn, to participants. 

II. Literatare Review 

As previously discussed, we know that the pension arena has shifted substantially over 

time, moving hm the traditional employer sponsored defined benefit plan as the most prevalent 

type of plan to the newer defined contribution plan. These plans expose participants to market 

driven risks which, when poorly diversified, can have a significant impact on available 

retirement savings amounts particularly hr those who do not have other assets available to them 

(Port* 2004). Given recent troubles with market activity, the retirement savings of many 

Americans have been subshntially reduced. Furthermore, other assets such as real estate 

holdings have been impacted negatively as well. Many individuals rely on the equity in their 
homes for income when they retire, but the market for housing has declined significantly in the 

past several years also. In short, American retirees are in a very precarious position. 

Scholars also tell us that peopk how very little about finances including the workings of 

pension plans and how to manage their personal assets (Gustman et al; 2008.) They appear to 

lack knowledge of even basic financial, concepts such as inmt compounding and risk 

diversification (Smith and Stewart; 2008.) There are wide discrepancies with regard to bcial 

planuing in our society; those with few rewzvca, the poor and minority populations in 

particular, appear to lag far behind in planning for retirement (Lusardi and Beeler; 2007.) 

Inadequate financial knowledge may contribute to inadequate retirement savings for 

individuals. Studies based on data hrn firms that offer financial education to their workers 

indicate that the education appears to increase participation and contribution rates to 401(k) plans 

(Bemheim and Garrett, 2003; Madrian and Shea, 2001 .) We have much to learn, however, about 

the degree to which financial education programs contribute to increasing retirement wealth. 

Furthermore, these studies wa conducted using prs2008 financial crisis data. We have no way 

of knowing whether or not the impact of finettlcid education will have the same impact post2008 because the data is not currently available to test this hypothesis. 

Scholars and industry members alike are engaged in seeking new products to fit the post2008 retirement planning needs of tomorrow's rebes. Targetdate funds are gaining in 

popularity as an innovative approach to retirement planning. At the present time, there are 

hundreds of mutual funds in existence in the United States. Some range from a single fund to 

multiple funds packaged together* Some are independently run and others are part of a family of 

funds held by a single entity or hierarchy of entities such as brokerages and/or insurance 

companies. The lion's share of the activity in these funds, though, is held in a handful of fund 
Wlie~ at the present time. The information contained in Figure 1 on page 5 clearly illustrates 

this point. 

The basic principles of economics demonstrate that targetdate funds appear to share a 

number of characteristics with previously identified industries where regulation has been 

demonstrated to have improved market results. Examples of this might include the 

phmaceutical, energy, real estate, and food safety industries (Frank and Bmmke; 2009.) This 

means the private market, on its own, will not provide a socially optimal price (administration 

fee) or quantity (number of retirees covered or amount of retirement savings) of this good. 

Specifically, a higher than optimal price will be set and a less than optimal amount of retirement 

savings will be achieved. In the case of a &et failure, a role exists for the government to 

improve the mket result. This improvement could take a number of forms which are 

considered in the conclusion. However, as will be demonstmbd below, the issues munding 

the targetdate fhd industry are similar to those evident in the pharmaceutical industry. In the 

case of the pharmaceutical industry, a clear mt step is regulation through the Fd and Drug 

Administration. Other steps are currently being considered as part of the health care reform 

debate. While there are a number of ways to analyze this issue with respect to targetdate funds, 

we focus on the areas of monopoly power and infodon asymmetry. 

Although there are many providers of targetdate funds in existence, as previously 

indicated, the lion's share of the market for targetdate funds is concentrated in the hands of a 

few fmm. Also, the dterdves available to a particular investor through an employer's plan are 

subject to even further limitations. Even when the mutual fund market as a whole is considered, 

there is sufficient evidence indicating that market power is concentrated in the hands of a few 

firms. Luo found that the majority of the mark-ups of mutual fund fees are due to the market 
power possessed by the funds (2002). Another source indicatm that the top two hundred fund 

managers control more than half of the total market capitahition (Bogle; 2002). Naturally, 

those fms managing target* funds would have greater Wet power than the mutual hd 

industry as a whole because of the limited number of alternatives typically offered to any given 

employee in a retirement savings program. 

On the topic of market power, the mutual fund industry, in its own defense, may point to 

the concentration ratios reported by the U.S. Census Bureau. These numbers, however, report 

only broad categories such as Portfolio Management and do not give an accurate picture of either 

the choices available to participants in a retirement savings plan or the structure of the industry. 

The critical concentration ratio literatwe is informative on this issue. The critical concentration 

ratio is defined as the level of concentration beyond which an industry becomes effectively 

collusive so that profits, margins and prices rise with concentration (Azzam, Rosenbam and 

Weliwita; 1996). Bain first identified this concept and found a critical concentration ratio of 0.7 

at the eight-h level (1 951). As identified in Figure 1, the targetdate fund market is domiaatad 

by five ks who service 85% of the market. It is evident, even when we do not account for an 

investor's available choices, that these five firms enjoy substantial market wnml. 

The literature concerning infomation asymmetry in retirement planning is also well 

established. The individual investing for rdrement sometimes lacks the financial qhistication 

necessary to monitor the fund manager's behavior* The fund manager may also have a shorter 

term focus than the invator. One study found that private fund families outperform public fund 

families due to the problem of infomation asymmetry and the fbcw of fund managers on short 

term gains (Ferris and Yan; 2009). Their results indicate that, when hd managers have a 
shorter tenn focus, the agency conflict between the fund management company and the investor 

is more acute. 

The evidence of market failure in the market for target-date funds is sufficient to warrant 

further research by academics and considdon of appropriate regulatory masum by policy 

makers. When one additionally considers the more current findings of behavioral economics that 

suggest investors are not rational maximizers, but satisficers, the need for action is even moxe 

compelIing (Byron; 2005). As dsficers, investors are not always choosing the best strategy for 

retirement saving, but merely choosing one that they perceive is good enough. They do not 

always go far enough in searching for the alternatives within the alternatives provided by the 

plan sponsors. It is clear that targetdate funds may be initially appealin& but should be used 

judiciously. 

In the next section, we directly consider and quantify the relevant information about these 

new instruments. This id~m is categorixd so that we may evaluate both general 

information hut target-date funds as well as infinnation supporting our conjecture of market 

failure due to market power and infodon asymmetry. 

IIL Methodology 

In order to better understand the knowledge that we currently hold with regard to targetdate funds, we conducted a seouch using Lexis Nexis Academic News search to identify articles 

ajparing in a six month time frame between February 1,2009 and August 3 1,2009 in which the 

term targetdate fund appeared in U.S. publications, The seovch yielded a population of 198 

original articles. 
Additionally, tmmripts of the oral testimony provided by twenty-eiat (28) witn~ 

appearing before a panel of regulators at a hearing held jointly by the Department of Labor and 

the Securities and Exchange Commission into the nature of targetdate funds on June 1 8,2009 

were used for this analysis. 

A content analysis of the data was perfmed using Nvivo qualitative software that 

allowed for identification of word mcy and thematic concept identification and frequency? 

Content analysis using Nvivo software has, generally, been well regarded by researchen in the 

business arens for its ease of utility and depth of functionality? Data were coded jointly for 

articles and testimony, as well as coded separately, For the most part, ding concentrated an 

the range of data mums rather than the frequency within sources, For example, we were 

interest4 in knowing how many of the articl~ contained pertinent hfbrmation rather than how 

much of the articles were devoted to it. The exception to this involved infbdon pertaining to 

the dehition of what target-date funds involve where we needed to gat a measure of whether or 

not the definition provided was clear enough for ease of understanding. 

In line with the two-part focus in the previous section, the data were examined for text 

related to monopoly control of the funds and asymmetry of the infodon between fund 

participants and providers of the funds. Beginning with the kst of the two-part focus of 

analysis, we coded the data for text that supported the concept of monopoly power with regard to 

target date fund producers, We ah conducted text searches on the following terms and/or 

phrases: 

1. Competition, compete, competitive; 

2. Monopoly, monopolies; and, 

3, Market, markets. 
The data were also coded for thematic text relating to the concept of monopoly power on a case 

by case basis in the articles and testimony. 

In order to assess the asymmetry of the information that exists in the public domain with 

regard to knowledge of the particulars of target-data products, we gauged the general amount and 

depth of the infomution evidenced in the data. The data were ded for the existence of 

educational information and ass- as to the quality of the information available in the articles 

and pieces of testimony. Quality of the information, when present, was determined by the 

number of lines of text devoted to the definition and coded into three groups: 

1. Exceptional - article or testimony contained a minimum of 10 lines of educational 

information with sufficient detail for the average plan participant to glean a 

comprehensive understanding of the function and mechanics of target-date M, 

2. Adequate article or testimony contained a minimum of 10 lines of educational 

information of a descriptive nature sufficient for the average plan participant to 

glean some undmtandhg of the of the concept but not the function and 

mechanics of targetdate funds; and, 

3. Mediocre - dcle or testimony contained la than 10 lines of text that provided 

an huff~cient mount of detail for the average plan participant to undmtand 

either the concept or the function and mechanics of targetdate funds. 

Text searches were perfomd for specific educational or descriptive infbrmation 

provided using the following terms andlor phrases: 

1. Glidepath, gIi& path, glide paths, glidepaths; 

2. Flaw, flaws, and flawed; and, 

3, Transparency, transparent, disclosure, disclose, 
p' ,-v , +. I 

.: : ' .. >. - .- , ',-. 

Additionally, text samh&war porf~ded to assew the levels of infomanon related to 

issues surrounding targetdate funds that were not necessarily of a educational name. The types 

of information and the particular types of infbrmation available have been demo- to play a 

role in media bias which, in tum, impacts the impression of the information that is leR (Yi and -T I. . . - ., -. 3-Y.1 -**-.:; ;*- :;;,-)A - ?:+ ??.:,,;">k-&q;ik&.b& >'i .A -- - -. 

~&ary; 2007.) That search included the following tams add~or phrase^::;^ -,. ! 

.* :. 

1. Fiduciary responsibility. 

2. Conflict of interest; 

3. Record keeper, keepers, keeping 

4. Academic, scholarly; and, 

5. Research and studylstudies, 

In addition to the word searches, thematic coding was performed as mentioned above. 

Themes were divided into nine basic categories of infomation as follows: 

I. Asset allocation; 

2. Conflicts of interest; 

3. Educational 

4- Difference between individual target date fun&; 

5. Crisis of trust or public confidence; 

6. Need for regulatory action; 

7. Politics; 

8. Qualified default investment alternative designation by the Pension Protection Act 

of 2006; and, 

9. Serious flaws in target date funding. 
IV, Analysis and Results 

Much of the information involving target-date funds revolves mound their market 

activity. As depicted in Table I, one hundred fifty-nine (1 59 or 80.3%) of the articles and twentythree (23 or 82.1 %) of the witnesses discussed TDF's in terms of Wet activity. Clearly, the 

idea of a functioning market is associated with these products. Although the tern "monopoly" 

was used in only one article, It appears that the markets may not be as competitive in nature as 

one might expect given that only twenty-four (24 or 12.1 %) of the articles and (1 0 or 35.7%) of 

the articlw linked any discussion of markets to the concept of competitive activity (shown in 

Table IT), Ovdl while it is clear bm these data that market activity is dent in the minds of 

the reporters and the witnesses, and the low percentage of discussion of competition might 

suggest the presence of monopolistic control of this industry, we cannot say so conclusively, In 

order to make this assdon, a bmder array of data would need to be analyzed. We can suggest 

that this bears furher study, thou& since logically one might expect to find a higher level of 

linkage between the !ems, competition and market activity in a hely operating market 

environment. 

Table I. Sources Containing lnfodon Related to Market Activity 

Totd Refeming Articles Total Witnesses Refming 

Witnesses 

Articles 

% of % of 

Total Total 

Numk Number Number Number 

198 159 80.3 28 23 82.1 

Table 11. Sources Containing Information Related to Competitive Market Activity 

Total Referring Articles Total Witnesses Refaling 
Articles Witnesses 

% of % of 

Total Total 

Number Number Number Number 

198 24 12.1 28 10 35.7 

Moving on to our analysis of information asymmetry d target date funds, we found that 

there was plenty of evidence to suggest that little is known or, at least, understood about the 

functioning of these products. Of the 198 articles and 28 cases of witness testimony described in 

the previous section of this papa, Table III shows that there were 67 (33.8%) hcles and 10 

(37.1) cases of testimony that contained information of an educational nature. On the swe, 

alone, it is apparent that slightly more educational information is provided in hearings than is 

available thK,ugh news articles. A deeper level of analysis indicated, though, that mom detailed 

information is available through the hearings than through the articles. The articles and 

testimony that contained educational infodon were divided into three pups: 

articledtestimony with marginal amounts of information, adequate amounts, and exceptional 

amounts. Overall, when the sources contained information, orid testimony contained more 

comprehensive infomion. 

Table III. Sources Containing Educational Infb&on 

Total Referring Mcles Total Witnesses Referring 

Witnesses 

Articles 

% of % of 

Total Total 

Number Number Number Number 

198 67 33.8 28 10 37.1 

- 

I.,. 

.,. -*, -:. , , 

, ,

. . YI: 7. 

,., ;, d '; .-

;:-' '- 

*4.<;, 

;,,, ,a::- ,, 
. .. , . 

54; ' " 

of targetdate funds. Similarly, three (3 or 30.0??) of the 10 cases of testimony that contained ?$>4 

; W< 

educational information were considered marginal. On the other hand, 22 (28.6%) of the I 

articles and 7 (70.0%) of the testimony cases contained amounts that were sufficient for the 

average individual to glean either a basic or extended knowledge of what target* funds are all 

&out. Of the total population of sources, then, only 29 (1 2.8% of the 226 sources) contained 

information of a sufficient level to provide for understanding of targetdate funds. So, the 

information that is available to plan participants, as well as to policy decision m&m, is not rich 

in mum* It must be filtered for the kernels of sound educational information that exist amidst 

among the other types of information that are present in the environment. 

Table IV. LRvels of Idomtion Contained in the Sourc~ 

Total Refaring Articles Total Wit-- Refaring 

Wihmses 

Articles 

% of % of 

Total Total 

Number Number Number Numbcr 

Marginal Information Lwels 

77 55 71,4 10 3 30.0 

Sufficient Information Levels 

77 I 22 1 28.6 1 10 I 7 1 70.0 
Of course, while there are other sources of information that may be accasible to 

information seekers, it is not information that is dly forthcoming. It must be mined for, akin 

%' 

to panning for gold. Ph participants are working people who do not spend the major& 01 mew 

time mhing for this type of infomtion. In general, as studies cited above indicate, the 

amount of information regding the basics of pension planning that they hold is woafull~ .- . . ,.*L-T ., ;.y,, 

deficient for any rational decision malung to cccur. Given the small amount of salient 

information available to them, it is little wonder they hold limited howledge about pensions in 

gend and, certainly, know little about this specialized form of retirement savings product, 

They are being asked to use a product that is not completely understood by experts. This is 

evidenced by the fact that only one academic contributed to the information made available in 

the Department of Labor hearing into target date funding. 

In addition to the limited amounts of educational information, there are conflicting 

definitions of what constitutes targetdate funds and, subsequently, how they are used. It was 

clear from the available information that the nature of wha& specifically, constitutes the correct 

glidepath, which is the central feature of a target-date fimd, is or should be about. As one 

witness stated in refhg to the conflicting dehitions, ''Perhaps the only common ground is 

that there is no consensus.. .*" Furthermore, there was ample evidence that these hd 

instruments are flawed. Seventy-eight (34,5%) of the sources contained text that referred to their 

flawed nature, So, even if the average participant can search out enough infomation to 

undmtand what the concept of a target fund is, they are lefl with a choice of what may be a set 
Perhaps, most tern of the evidence regarding information asymmetry I ' : .< ' .dof sources that referred to making these funds, along with the process of implementing and 

regulating thorn, more &sparent. The search on the words, transparency, trampamt, 

disclosure, or disclosed revealed that 73 (36,9?/a) of the articles and an overwhelming 2 1 (75.00!) 

of the witnesses used these term in their ~myY One article explicitly referred to this 

indicating that, 

". . .wrKers need beer information abut the mix of investmen& in #heir 

fsr& One of the issues expected to be discuaped at today's hearing B whether regulators 

skould mpimfind wmpanies to improve dbcimre so investors can decide whether a 

jd b appropriate for them.'* 

The fund providers, obviously, have the infomation regarding the specific mixes of investments, 

fees charged, glidepath tmjgctoriea, and so on, but it is not rtaching the average parbcipant hm 

what we, and the regulators, could tell based on this drtta. 

Thematic coding gms beyond a search for the wific wards @/or terms ht clearly identify a conecpt by 

mhing for words that allow tb marhr to make an hkqmtatbn dhm as an indirect pomyal of the 

concept. For example, if me waatod to M taiul discussion of a minor evant, one d search fa Ihc terms 

"d mmremc," "non-major incidence," ''nnan-ms&opheP and so on. Hem, th meamher uses text to make an 

interpiation of tk text's appmxiudon of a concept. Al- tlwc ere many works on qdtidvc me&&, 

Miles (1994) provides an Wth explanation of the barrefits d this tshniqm. 
. . .. . ... , , , . 9 . . .? , , ,r> J..!', .& . '&, -,,?&-.* :T?&,G)~-;* --. : 

--P =" 

For a discussion of the benef~rs and mpctability of NVWO see Bamley, P. (1999) The bricolw with a 

co~puter: piecing together qualitative and quantitative data. QuaIitadive Health Rssemh, 9,279 - 287. 

Seth Masters. Quote from: U.S. Departmmt of hbor&curitia & Exchange ComPduion joim hearing. 

"DOUSE Haring On Target Date Funds And Similar hvestmnt Options." pats: 6/18/09). Available at: 

htttr:f/www.do~~$a Amssed 0210911 0. 

Block Samdra. (hme, 18 2009). Reguhtors take ahard look at targetdate M, meting today asks if investors 

are informed. USA Thy, 6A. 

y.,: 

I!.. *. 

. ' . 

L -

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