Influencing Retirement Saving : Smart Beta in Defined Contribution Default Options

Concerns over the adequacy of lifetime retirement income are, more than ever before, a global phenomenon. Issues around participants' engagement and retirement security seem to be present across countries with different macroeconomic and cultural backgrounds, saving and social security setups. The traditional focus on fiduciary responsibilities, such as selecting managers and monitoring fees, has been expanded to cover areas such as participant usage and successful outcome, which are now some of the main areas of interest for industry practitioners. Prevailing academic research on the topic is grounded in the concept of the experiential learning cycle, namely that people learn from experience (see Goby and Lewis, 2000). The question then becomes how to improve participants' experience within existing Defined Contribution (DC) plans so to encourage them to save more and save regularly. In this paper we take a look at some of the features of smart beta strategies, (i.e. passively managed portfolios that move away from market capitalization weighted indexes), which make these strategies an interesting potential tool for DC plans. We then test this by using existing smart beta indexes in the context of a traditional lifestyle fund, where market capitalization indexes are replaced with smart beta indexes on pre-defined allocations