8 Topics Worth Discussing About Target Date Funds · 8 Topics Worth Discussing About Target Date...
Transcript of 8 Topics Worth Discussing About Target Date Funds · 8 Topics Worth Discussing About Target Date...
8 Topics Worth Discussing
About Target Date Funds
1. The next market correction could bring lawsuits.
2. Fiduciaries are breaching their Duty of Care.
3. The TDF market is an Oligopoly/Monopoly, choking out innovation.
4. There are only 3 things that matter when it comes to TDF prudence.
5. There are only 2 TDF choices: (1) The Herd, and (2) Safety First.
6. The difference between The Herd and Safety is protection near the target date
7. One-size-fits-all is a failed model.
8. Breaking away from the herd is scary. “Different is risky.”
Let’s discuss the following presentation please.
Fulfilling Fiduciary Responsibilities
in Selecting Target Date Funds.
Intended for Purists.
Ron Surz
President
Target Date Solutions
(949)488-8339
Sub-advisor of SMART TDF Index
Hand Benefits & Trust, a BPAS
Company
Background
About Us
About Ron Surz
•MS in Applied Mathematics, University of Illinois
•Northrop Engineer designing electronic countermeasures to jam heat-seeking missiles
•Senior VP of Investment Policy at AG Becker pension consultants. Advised several $trillion in asset allocation & investment policy
•MBA Finance, University of Chicago
•Serial entrepreneur : Pension consulting, manager due diligence innovations, target date funds, hedge funds, factor investing…
About Target Date Solutions
• DBA of PPCA, a registered investment advisor and 3(38) fiduciary
• PPCA founded in 1992, owned entirely by Ron
• TDS founded in 2008
• Patented Safe Landing Glide Path
• Sub-advisor of the SMART Target Date Fund Index on Hand Benefit & Trust, Houston, launched in 2008
• TDS Book for Fiduciaries is on IFEBP Resource list
• Focus on Prudence
• Fiduciary Library, including videos
We recommend this book.
Authors
RIA 3(38) TDF Manager
ERISA Attorney
Professional Ethicist
IFEBP Reading List
Legal and Ethical Considerations
Legal: Sticks
The law is being written by the plaintiffs bar. In the next market downfall, will the plaintiffs bar
pursue the opportunity for “lessons not learned / excessive risk” lawsuits? When the 2008 debacle
occurred there was only $200 billion in TDFs. Today it’s 2 $trillion. Plus Jerome Schlichter & his merry
men are now warmed up on successful fee-based lawsuits.
Even though a fiduciary has not yet been sued for breaching their Duty of Care, is it ethical? Fiduciaries are
responsible for harm to their dependents that should have been prevented.
In 2008 the participants in 2010 Target Date Fund lost 30%. They were unable to retire as planned and were
forced to work longer or had to retire to a less than a dignified retirement. Excessive risk was responsible, &
TDFs have become riskier since.
Ethical: Carrots
Incentives modify behavior and come as carrots and sticks.
Follow the Herd • Fiduciary Comfort:
• Procedural Prudence
Safety First • Fiduciary Duty:
• Substantive Prudence
• See A Very Different
Glide Path
2 Choices
Indexes
Index
Break away
from the herd.
The Herd Vanguard has become the Industry Standard.
Competitors’ glide paths cluster around Vanguard’s.
Fiduciaries are wrong for running for cover to the
same-old-same-old, unsafe at the target date
Bundled Service Providers Own the Industry:
It’s a Dangerous 3-Provider Bubble
Note: These providers are not fiduciaries,
except their Collective Investment Trusts.
Collective Investment Trust (CIT) or
Mutual Fund?
See Employee Benefit Advisor
Mutual funds and CITs are regulated by different organizations and therefore follow a different set
of rules and regulations. Since CITs hold only qualified retirement plan assets, they are regulated
under many of the same laws that govern retirement plans. CIT managers are ERISA
fiduciaries, which is the highest fiduciary standard under law. CITs are not regulated by the
Securities Exchange Commission like mutual funds. They are regulated by the Office of the
Comptroller of the Currency, which is part of the U.S. Treasury.
The difference in regulations ultimately has an impact on the price and fees. While CITs are
heavily regulated, they do not have to comply with the SEC rules that govern retail investments
and therefore have the potential to provide considerable savings that can be passed down to
participants.
Well-intentioned, but misinformed, fiduciaries
are Breaching Their Duty of Care
QDIA is the Form of a Safe Harbor.
The Substance must be diligently selected. Fiduciaries
cannot throw darts at the QDIA dartboard.
Choosing the Oligopoly may seem safe, and it might be if they provided the best TDFs. But
there are better choices. Popularity is not synonymous with prudence.
What should fiduciaries consider?
Break away from The Herd
Distinctions Without a Difference
“To” versus “Through”
Demographics / Custom
Active vs Passive
Open vs Closed (Proprietary)
Mutual fund or Collective
Bundled service provider, or not (DCIO)
3
3 Things That Actually Matter (1) Fees: Less than 50 bps all-in
(2) Diversification:
Global Stocks, Global Bonds,
Global Real Estate, Commodities, Natural Resources,
etc
(3) Defend at Target Date: No Risk
Source: John Hancock
Diversification
Risk Control
Low Fees
Choosing the Most Prudent
Target Date Fund
Diversification
Risk Control
Low Fees
Choosing the Most Prudent
1. Most withdraw 2. Buy a Lifetime Annuity 3. Prior to PPA, Cash/Stable Value was default 4. Professor Daniel Kahneman pain of loss 5. Risk zone: lifestyles, sequence of return risk 6. Demographics 7. No Fiduciary Upside 8. Once in a lifetime 9. The current economic environment is shaky. 10. Survey says participants want safety
10 Reasons for no risk at the target date
We seem to have forgotten 2008, so TDFs have become
riskier, competing in the performance horse race.
The next round of litigation could try to recover the losses
suffered in the next downturn.
Hippocratic
Oath
Sequence of Return Risk
This chart shows two 30-year income scenarios. The solid line shows a withdrawal plan that started off with three years of negative
returns in a row. The dotted line represents a withdrawal plan with the negative years at the end. Both plans started with $250,000
and both took out $12,500 per year inflated by 3% for inflation. No other actions were taken to manage income withdrawals. Both
plans had a 6.6% average annual rate of return on the underlying investment for the 30-year period.
Source: MFS Research
Ending Value is $1,700,000
Without Withdrawals
A Currently Compelling Reason for Safety:
The Shaky Economic Environment
If something cannot go on forever, it will stop. Herbert Stein Economist.
There are 75 million Baby Boomers in the Risk Zone
Source: Mass Mutual
Beneficiaries Want to be Protected in the Risk Zone
Mass Mutual Retirement Savings Risk Study
Rather than Safety
Risk at the Target Date: Only a Handful Defend
Market Average
Low Risk Low Drawdown
& Low Volatility
High Risk High Drawdown
& High Volatility
Source: PIMCO Glide Path Analyzer
Funds in this quadrant
tend to get low
Morningstar ratings
Risk at Target Date:
Equity Allocations of Big 3 are Way Too High
60 55 55
T.Rowe Vanguard Fidelity
65% of Total TDF Assets are With These 3 Bundled Service Providers.
There is little or no vetting.
Have Fiduciaries Really Embraced This Much Risk at Target Date?
Diversification
Risk Control
Low Fees
Choosing the Most Prudent
Source: Morningstar
Fees: Get What You Pay For
Challenge: Control costs AND provide broad diversification
15 16 17 21 28
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53 63 65 68 69 71 73
79 80 82 86 89 90 91 92 92 93 95 96 97 98 98 99 100 101 102 102 105 105 110 110 111 113 117 119 121
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Risk Control
Low Fees
Choosing the Most Prudent
$ Examples of Broadly Diversified
Source: PIMCO Glide Path Analyzer
The Most Popular Are Concentrated in US Stocks
Combines Safety, Fees and Diversification
Morningstar Ratings Reward Risk Because Risky
U.S. Equities Have Performed Best
Performance Horserace
Example of a Popular Fund
With a 4.1 Morningstar Rating, Near Top
Characteristic Measure Quartile (1=top)
Safety 10% safe at target 4 (bottom)
Fees 93 bps 3 (near median)
Diversification 3 out of 6 assets 4 (bottom)
Fiduciary Score: 1.4, 5th from bottom
Prudence Scores versus Morningstar Ratings
Source: Target Date Solutions
Top 20 Bottom 20
Diversification
Risk Control
Low Fees
Sound Design
Choosing the Best Target Date Fund
Prudence
Patented Safe Landing Glide Path®
Unique Investment Structure: Patent 8352349
Integrates 2 Nobel prize (1990) winning discoveries with principles of modern finance
The Risky Portfolio is extremely well-diversified: World Portfolio moves Efficient Frontier up & to the left. Dr. Harry Markowitz won the Nobel Prize for the Efficient Frontier.
The “Capital Market Line.” Dr. William F. Sharpe won a Nobel Prize for it.
US Stocks & Bonds
Higher Return, Less Risk
Return
Risk
Liability Driven Investing (LDI) guides the allocation along the line. “Liability” is current account balance. Lose no $.
Risk
Patented Safe Landing Glide Path®
Asset Allocation Patent 8352349
Defend at Target Date
Beyond the Target Date: Re-Risking
Dr.Wade Pfau and Michael Kitces: Reducing Retirement Risk with a Rising Equity Glidepath
( or Annuitize?)
Breaking Away From the Herd
The Herd
One Size Fits All is a Failed Model
The Glass Slipper
Solutions: Managed Accounts, Custom TDFs, Hybrid TDFs
And now Personalized Target Date Accounts
Introducing Personalized Target Date
Accounts
Personalized Target Date Accounts™ integrate the best in Target
Date Funds with the best in Managed Accounts to create
solutions that are tailored to the individual participant.
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PTDAs #1
Default is Conservative
As a practical matter
Business Risk: Not Using the Big 3
Be Brave
No one ever made a difference by being like everyone else.
PT Barnum
8 Topics for Discussion
1. The next market correction could bring lawsuits.
2. Fiduciaries are breaching their Duty of Care.
3. The TDF market is an Oligopoly/Monopoly, choking out innovation.
4. There are only 3 things that matter when it comes to TDF prudence.
5. There are only 2 TDF choices: (1) The Herd, and (2) Safety First.
6. The difference between The Herd and Safety is protection near the target date
7. One-size-fits-all is a failed model.
8. Breaking away from the herd is scary. “Different is risky.”
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