Getting More from Less in Defined Benefit Plans: Three Levers for a Low-Return World

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Wharton Pension Research Council Working Papers
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Low-return environment
defined benefit pension plans
active equity management
factors
private equity
hedge funds
Economics
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Berkowitz, Daniel B
Clarke, Andrew S
DiCiurcio, Kevin J
Stockton, Kimberly A
Wallick, Daniel W
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As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. This paper examines three levers that can enhance portfolio outcomes in a low-return world. The levers include: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria—its magnitude of impact and the certainty that this impact will be realized. Our analysis indicates that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.

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2017-09-01
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The published version of this Working Paper may be found in the 2018 publication: How Persistent Low Returns Will Shape Saving and Retirement (https://pensionresearchcouncil.wharton.upenn.edu/coming-soon-persistent-low-returns-will-shape-saving-retirement/)
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