Chapter 8. Invest Better

Of the many parts that go into a retirement savings program, investment is where many large opportunities for improvement lie. We have already looked at the 10/30/60 rule, which tells us that only around 10 percent of the distributions in our base case savings model came from contributions: The remainder were earned in the investment markets. And we'll see in Chapter 9, which covers the question of fees, even a small drop in the annual investment return results in a meaningful pay cut for our base case saver. So the impact of a good or bad investment program is enormous. But investment is a complex subject. It's easy to get it wrong. And it's hard to balance the risk of investment, which we want to reduce, with the returns, which we want to increase.

That's why a good defined contribution (DC) system needs to find a way to get investment right. If there are ways to increase returns with no adverse consequences, they should be considered seriously. If at the same time there are ways to reduce the market risk to which those savings are exposed, that would be even better. In this chapter we show how both of those goals—higher returns and lower risk—can be achieved.


Throughout our analysis of the opportunities in the DC system, we have started by identifying the issue and its impact. When it comes to investment, the root of the problems lies in the fact that, for the most part, workers are not investment experts.

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