In part 1 of a 2-part series, Sean Fullerton, senior defined contribution investment strategist at Allspring Global Investments, speaks with Philip Chao, founder and chief investment officer at Experiential Wealth, about what success looks like for defined contribution, or DC, plans and if “success” is even the word we should be using to think about it.


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Sean Fullerton: I’m Sean Fullerton, senior DC investment strategist at Allspring Global Investments, and you’re listening to On the Trading Desk®. What follows is part 1 of a 2-part discussion I had with Philip Chao, founder and chief investment officer at Experiential Wealth, and we talk about what success looks like for defined contribution, or DC, plans and if “success” is even the word we should be using to think about it.

Sean: Philip, thank you so much for joining us today. For folks who are listening in and may not know Philip, he’s the founder and the chief investment officer of Experiential Wealth. So, it’s an organization that provides discretionary portfolio management for families and for institutions, as well as fiduciary investment advice to plan sponsors for retirement plans. And Philip, as the CIO there, he also writes a very in-depth quarterly commentary with his macroeconomic views and how those views can impact the way that portfolio allocations are done going forward. So, Philip, really excited to have you on here. Have I missed anything?

Philip Chao: Well, you’ve already said probably more than I deserve, but thank you. Thank you very much. And you know how much we enjoy spending time talking to each other. And thank you for inviting me.

Sean: I think today we’re going to start off talking about success for DC plans. Philip, do you want to share some of your thoughts about how plan sponsors and how advisors are currently defining success?

Philip: Ever since 2006, law came into existence where it brought to the general consciousness of behavioral finance and using qualified default investment alternatives where it gave rise to auto-enroll and auto-escalation. I think a lot of people define success as gosh, how many people are participating or are we increasing that? And gosh, how many people are deferring more than they have ever deferred and watching the assets of their account naturally grow? After 2006, now it’s 2022. Many, many, many years later, I think over time we are, as an industry and as the demographics continue to age, which is natural, we start thinking about outcome and that word means different things. Outcome for a client is different than outcome for an individual. And so, we are still trying to find ways that can make a broad statement about success. But as you and I know, really that broad statement may not apply to every plan and every individual. So, to answer your question even more specifically, I think what we do or what I have done is to really start a conversation first. Starting a conversation with my plan sponsors and saying, why do you even have this plan? And it will take up half an hour of discussion to get to really thinking about the question you are asking.

Sean: I agree with you. It’s such a different discussion than how did our funds do over the past quarter or the past year? And I think it’s the right place to start a discussion and then get down into some more detailed conversations. And when you’re having that 30-minute discussion, what are some of the things that are a definition of success or maybe aren’t the definition of success and they kind of have to wrap their brain around what really is success?

Philip: So, success is not a word that we actually use because the flipside of success is failure. And we really are not trying to go towards, hey, you have failed. I don’t think they have failed. It’s how do we improve, right? And so the question is what are we improving to do? What is the outcome we’re driving at? And to start thinking about outcome is really thinking about the purpose of the plan, which is providing a vehicle where employers and employees can make contributions into and grow in a tax-preferred way that will reach a certain destination that allows it to provide a lifetime supplemental income that they will not outlive. Now that’s a very long statement, but that’s the outcome. The problem is that, and this is an age-old problem, is trying to quantify something that’s qualitative. So how do we find the qualitativeness and make it quantifiable is the trick. So many times at the end of that 30-minute call is to realize that we need to be shooting for something. And it is unique to your plan and unique to your client or participants. But at least after that conversation, everyone on the committee is starting to focus on what is driving us forward. It’s not just return. And studies have shown that even the greatest return isn’t going to get you there if you don’t contribute or if you don’t increase your contribution.

Sean: We know that income replacement rates are useful, but very much a blunt measurement. But kind of as a base case, we assume somebody starts at age 25. They’re making $50,000 a year. They retire at 65. They’re targeting 80% income replacement. They start saving 9%. By the time they retire, they’re saving 14%. And using that modeling, we spit out a very simple number, which is 12%. 12% is the probability of shortfall that somebody wouldn’t reach that 80%. And we’re not saying necessarily that 12% is good or 12% is bad. But one finding that really kind of blew my mind was that if a participant were to save 1% more over the entirety of their career, that reduces, in this case, the probability of failure from 12% down to 9%. But if a participant kept the same savings rate, but instead of retiring at 65, they retired at 66, then the shortfall risk actually falls to 8%. So, in other words, delaying a year to retire can be more impactful than saving more for your entire career. Why is it so impactful? I think there’s a few different reasons. One is because it’s an extra year of saving an income that can happen. Also, unfortunately, it probably reduces the amount of time spent in retirement. And then Social Security, which I’m looking forward to chatting with you about, delaying Social Security can have some really positive impacts on income for life. So there’s a couple of different variables that we can help plan sponsors look at. If I change my match, if my participants retire earlier than expected, if they work part time in retirement, all of these things we’re able to analyze. And so actually, I’d love to hear your thoughts on managed accounts and other kind of more precise ways to deliver and measure success for participants. And where do you think there’s innovation? Where do you think there are challenges right now?

Philip: So managed accounts, I think, is the ideal. I think if everybody can have a managed account, we will be better off. Of course, managed account fees and charges eat into their return. But all of that is probably secondary to behavioral bias of not being engaged. In order for success to happen, we need to get more granular. To get more granular, like you said, well, you know, if you work a year longer, if you put more money away, if you even be aware of how short you are behind that required that you need. Just to be aware hopefully will trigger some synapses that will make you want to do something. Well, to do that, they need to be engaged. So, at the end of the day, what is it that we need to do is to look at the behavior biases and do it for them in ways that do not require them to be really active, which is the purpose of a managed account. So until we have that nirvana, which we will not have, the ideal world of no conflict and no cyber issues and everybody’s willing to give up as much data as possible to do it for them, which I don’t see that as a reality anytime soon, until then, we need to take the best information we can to personalize it for each individual without having to require them to be active and engaged. We have so many biases. And also, we’re living in an information saturated, overburdened world and we only have so much attention. We’re overworked, overextended in so many ways that we’re just simply not going to have time to think about something that happens 20 years from now.

Sean: I think it’s the book, Thinking, Fast and Slow, I believe, where the analogy is made that reason is the rider on top of the elephant of emotion. And usually what reason is doing is ex post facto, trying to explain why we went in the direction that the elephant decided to go. So, I agree with you.

Philip: And the elephant always wins, by the way.

Sean: The elephant always wins. Absolutely. If it’s not engagement, and I think that’s still up for debate, there are potentially behavioral ways to get people more engaged. If it’s not engagement, then is it auto everything?

Philip: So, I think there’s no question. And every state that is looking at auto IRAs (individual retirement arrangements) or auto anything is really about putting people’s money in a way that they have no choice. And Australia, I believe, has something like that and other governments. Recognizing that we can talk until we’re blue in the face, it’s not going to make much difference. We just have to do it. And I think part of it is taking the data that we already have to personalize it, continue to ratchet up auto enrollment, auto escalation, and for employers who really care, put more money in. And we’re going to talk about Social Security. And one of the beauties about Social Security is that everybody puts in 7%, I mean, including Medicare, six point whatever. And guess what? It works. The only thing we will worry about is counterparty risk. Is the U.S. government going to continue to print the money they need to print to fulfill their promise? That’s a different discussion. So, we constantly try to reinvent the wheel when we have evidence in front of us repeatedly that that’s how it works. Because the elephant is going to move a certain way and it’s moved that way for a million years. And so let us not try to change direction of the elephant. Let us redefine the pathway so the elephant can travel. It’s just understanding the human nature and human behavior. And rather than try to change it, let us leverage of that and find ways that we can help the elephant to get to that destination.

Sean: Philip, this has been a fantastic conversation and I’m looking forward to continuing it in the next of our series.

Philip: Thank you very much. I look forward to the next time we spend time together.

Sean: Well, that wraps up this episode of On the Trading Desk®. Please check out part 2 of my discussion with Philip as we take a deep dive into social security. If you’d like to read more market insights and investment perspectives from Allspring Global Investments, you can find them at our firm’s website, To stay connected to On the Trading Desk® and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, Amazon Music, or wherever you get your podcasts. Until next time, I’m Sean Fullerton and thanks for listening.

Listen to part 2.


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