Is it right just because everybody is doing it? How much is too much?
Ron Surz, President of Target Date Solutions, has a long and distinguished career in institutional investment management and consulting. We asked Ron to participate in the Multi-Employer Benefit Fund Podcast to share his unique perspective on target date funds and the glide paths that various firms are using today. Ron’s research suggests that the amount of risk these portfolios are exposed to around the time participants are retiring (both before and after) should be of great concern to plan sponsors and participants. He provides compelling information to support his assertion and we think it deserves attention and discussion among trustees and their advisors.
You can also gain valuable insights and education about target date funds through the resources listed below.
Articles are available at:
https://targetdatesolutions.com/fiduciary-corner.html includes Ron’s Metamorphosis book
Articles on investment manager due diligence are available at:
An Understanding & Selecting TDFs is available on request from me Ron@TargetDateSolutions.com or on Amazon at https://www.amazon.com/Fiduciary-Handbook-Understanding-Selecting-Target/dp/1633180115/ref=sr_1_1?keywords=surz&qid=1569251675&s=books&sr=1-1
Metamorphosis book is also available on Amazon at https://www.amazon.com/Remarkable-Metamorphosis-Target-Date-Funds/dp/6202314788/ref=sr_1_5?keywords=surz&qid=1569251821&s=books&sr=1-5
This is The World of Multiemployer Benefit Funds podcast with your hosts, Tom Shanklin and Traci Dority-Shanklin, managing partners at Sisu Investment partners. If you’re interested in labor and union benefit funds, well, you’ve landed in the right place. We are a go-to source for all things union benefit fund related and we are going to bring you interviews with key decision makers and fund professionals that guide these plans. They’ll share their insights, experience, unique perspectives, all of the latest developments, and tips to unlock the mysteries of multiemployer benefit funds. The time is short, so let’s get started. Please welcome, Tom and Traci.
Traci Dority-Shanklin 00:45
We’re delighted to have Ron Surz with us today. Ron is the CEO and CIO of Glidepath Wealth Management and president of PPC Incorporated and its Target Date Solutions subsidiary. He serves on the board of the Investment Management Consultant Association and on several advisory committees of the Chartered Financial Analyst Institute.
Traci Dority-Shanklin 01:08
Tom has known Ron for over 20 years and has always respected and admired his thoughtful in-depth and analysis of the investment environment. Some of his research and concepts have been published in numerous professional journals and he has authored and co-authored several books on target date funds. We have invited him here today to discuss his views on target date funds, an essential component of the defined contribution pension plans. Ron will discuss some very serious concerns he has about the structure of target date portfolios and the inherent risk it represents to participants approaching or entering retirement. He will talk about a different approach to the asset allocation issue that he thinks would be more prudent and we think particularly relevant to participants in union sponsored defined contribution plans. We are hoping that his comments will stimulate some discussion on target date portfolio construction and how we measure risk in these accounts. Welcome, Ron, to the multiemployer benefit funds podcast.
The World of Multiemployer Benefit Funds podcast, unlocking the mysteries of multiemployer benefit funds.
Traci Dority-Shanklin 02:18
We’d like to start all of our interviews by asking you to tell us a little bit about your career path and ultimately how you ended up in your current position.
Ron Surz 02:30
Well, Traci, you already sort of said so of my career path, but I started with Northrop when I earned my master’s in Applied Mathematics and learn something that many engineers probably learned. And that is, I was working on a project and that got completed and then I was told to roam around the halls and find another project right when you have a job anymore. So, so much for job security in that kind of environment. So, I started looking around for other opportunities and found an opportunity with in the day, the largest pension consulting firm in the country, H G Becker. And I joined them primarily as a computer programmer, but that was at my desk for about a week. And my boss walked in and asked me if I wanted to raise. So, it was, it was already a great place and I said, what do I need to do?
Ron Surz 03:21
And he said, “Go to school.” So the raise basically was a full tuition at the university of Chicago. So, I got my second master’s at the University of Chicago, an MBA in Finance. And once I had that I moved out of writing code to a consultant, so I became the senior vice president for investment policy studies at AG Becker. Becker was sold to SEI as you’ve said. And then I left and started a firm with two partners and then in 1992 and since I’ve been just doing stuff I enjoy, so I have been a serial entrepreneur doing a whole variety of tech stuff, and in 2006, friends were calling and saying, there’s this thing coming up that’s going to be huge and you need to get on. It’s called target date funds. So I did.
Traci Dority-Shanklin 04:09
Can you give us a quick definition of target date funds and then Glide Path?
Ron Surz 04:16
I guess I assumed everybody on the call would know because target date funds have become such a big deal. So there, they started out at a few billion dollars and then the Pension Protection act of 2006 identified them as the qualified default investment alternative. And over the last 12 years they’ve grown to more than $2 trillion. So what they do basically is they take a fair amount of risk for young people and in fact most of the target date funds are North of 80% inequities for people who are 20, 30 years old. And then they gradually decreased risks through time. And that’s a pattern of moving from high risk to lower risk. It’s called a glide path, and we’re going to get into this, but you would think that a glide path would land safely and most target date funds are similar, roughly 80, 90% in equities for young people, but there’s a whole range of equity allocations at the target date ranging from mine as low as 15% in equities to another provider I won’t mention is as high as 70% in equities.
Ron Surz 05:25
That’s the target date. So, what’s going on is significant disagreements about how much risk to take for people who are about to retire. And interestingly enough, early on in target date funds, the common practice was for the participants to withdraw. So, it didn’t really matter much what you did after this, after the retirement date because most people took their money out. But that’s changing, and especially union plans are encouraging the participants to stay in the plan. And the press is definitely picking up on, what would we call it, a decumulation, uh, path. Basically, how do you invest for people in retirement? Uh, there’s 75 million baby boomers now who are either about to retire or in retirement and there’s been a significant breakthrough in what you do on the decumulation phase. So, I – I want to come back to that – I’m setting the stage for that.
Ron Surz 06:24
So, that was the overview. There’s a glide path – big disagreement as to how much risk to take out the target date. A brand new innovation of three years new about how to invest people in retirement. So I created my own glide path. We needed to think about, and I think to all the creators of target date funds need to think about this. What should the objective be? And I came up with this really profound objective and listeners to this call should write this down because it’s, it’s really important. My objective for my target date fund is do not lose the participants money. So, that might sound like it’s a pie in the sky, but you can in fact design S allocations that will protect people when they need the most protection. So, in terms of my target date fund design, I don’t want to lose participants’ money.
Ron Surz 07:21
So, what I want to do is keep them well-diversified but start to protect when that diversified portfolio might lose money. So my analysis has shown that if you stand in one [inaudible] portfolio for 15 years or more, really good chance you won’t lose money. So I don’t move to defend until 15 years from the target day. And then what I do when I do defend is I use a Nobel prize money theory. Dr. Willendorf sharp was awarded the Nobel in 1990 for what’s called the Capitol market line. And what’s that capital market line basically shows that the graphic really says it’s better than that to be able to, but when you move to defend, you can move to lower risk assets like bonds and the graphic that would move you down a frontier. And that’s basically what all of the other target dates funds do. So, as they get closer to the target date, they move to bonds, which by the way, long term bonds are pretty risky today.
Ron Surz 08:21
So, that’s not particularly a good way to control risk, but it’s what everybody is doing. I don’t do that, uh, the capital market line won the Nobel prize for showing that you’re best off controlling risk by moving to cash and listeners on this call are going to say, I don’t get paid for any cash, so I’m not going to do that. Um, but it’s, it’s not the idea of getting paid for something anybody can do. It’s the idea of, of controlling risks in a way that most people can’t. So when you move to control, if you keep this well-diversified portfolio, and you take some of it and put it into a safe asset, my safe asset is treasury bills and Treasury Inflation-Protected Securities or TIPS. And then the rule for helping me decide on how to move along that line is basically liability driven investing. So I guess to make the worst case loss from today to the target date and move it enough aside into the safe assets such that if that loss were to occur, the fairly stable return on the reserve assets will make you whole. Nobody is doing that. And all I’ll say is there’s – that is financial engineering.
Tom Shanklin 09:34
Ron, I think we’ve become victims of the group think, if you will. Uh, perhaps to our disadvantage. And I put it like this, I mean, these are why we look to have these podcasts [inaudible] people let them more what other opportunities are out there and perhaps a different way of thinking about things. But you know, there is, uh, also this concept of managing to and managing through. And if you could talk about that in terms of the focus of the portfolio over time, once you get to the target date and maybe you know, where is that glide path before and then after the target date, typically, and in your situation.
Ron Surz 10:14
Right. So, the terms “to” and “through” re-coined at the joint hearings in 2009. And the fund companies showed up to those hearings and justified their high risk at the target date by saying that – that target date is a speed bump. We’re managing through that date through to death. So we’re target death phones and that’s why we take high risks because people are going to live longer and the medicines they need for not saving enough is there’s a lot of risks. Some of the, some of the fund companies said awhile ago, we’re not where we’re expecting people to take their money out. So, uh, we really are trying to end at the target day. And the implication from that was that the two funds are lower risk at the target dates than the through funds. That’s simply not true. So, I can, so the definition of “to” has come to be reaches the lowest equity location at the target date. The definition of “through” is reaching the lowest equity location some time beyond the target date and return.
Traci Dority-Shanklin 11:17
So, why is this strategy appropriately suited for unions?
Ron Surz 11:21:
Why? I have a large union plan as a client and I know that they liked the design of my glide path very safe at the target date. And I haven’t gotten into the, um, the breakthrough and the retirement glide path. Um, but I think union plans should be concerned about the next direction and using glide paths that will maybe not harm the participants in nearly as much. And I – I’m in a group of maybe three or four target date funds that defend reasonably well at the target date. The other roughly 50 target date funds are, I’m going to say it, they’re all like Vanguard. Somehow Vanguard has become the leader in target date funds. They become the standard. They actually have about 40% of the $2 trillion in target date funds.
Ron Surz 12:13:
So, they’re definitely the – the, the biggest target date fund in the world. But that doesn’t make them right; in fact, I think they’re flat out wrong. But, uh, that is what it is. So a handful of target date funds do defend. They very rarely get considered in target date fund searches. Because, and I’ve written about this by the way, I have a library, so I’m like, uh, target date fund, third [inaudible] solutions website with a whole bunch of articles for people who are, if they’re interested. And then, Traci, mentioned the two books. I’d be happy to send those books that are for sale; I’ll sign for free to people on the podcast that would like to see them. But I’ve lived this firsthand now for a decade. Advisors have come to believe that they expose themselves to both fiduciary and business risk if they don’t use Vanguard, Fidelity, or T. Rowe, and that is a breach of the duty of care.
Ron Surz 13:12:
So, these safer target date funds, more prudent target date funds as near as I can tell, very rarely get considered and a manager searches for target date funds. So the belief that it gives you fiduciary protection, this is flat out wrong. If you’re not really doing your due diligence and seeking the best and particularly the best for participants, then you are breaching your duty of care. Now I want to tell you about two servings. And I’ve told you my belief that the target date fund should be safe at the target date. But, um, manufacturers, um, life did a survey of beneficiaries two years ago now and among the questions that they asked the beneficiaries was, what would you prefer? Safety or growth in your investment portfolio? More than 85% of the people in their sixties said, safety. Give me safety. I want to be protected.
Ron Surz 14:04:
A much lower percentage than that. 85% roughly of the young people said, I want growth. So, neither one of those is a surprise. But what it does is it confirms that if you were to ask the beneficiaries what they want, they would tell you they want to be safe. Then PIMCO did a study, they repeat the study every year. So the most recent study is from 2018 and the survey is of advisors and they asked the advisors what would be the maximum loss you would expose your clients to at age 65? And the answer was 10%. Now, I can tell you categorically that anyone who looks seriously at 55% equity allocation with the balance of long-term bonds should figure out that there’s – there’s much more than a 10% loss exposure then that allocation. By the way, when they asked the consultants what loss exposure they would accept for a young person say in their twenties and thirties the answer was 40%, so surveys confirm that beneficiaries and advisors want safety at the target date, but the advisors go ahead and you start these funds, they don’t provide that safety. So, there’s just a total disconnect there.
Tom Shanklin 15:19:
What are your concerns about traditional target date funds?
Ron Surz 15:22:
Target date funds are way too risky currently at the target date. There are 55% inequities and that’s not the whole problem. Most of the balance of the portfolios and long term bonds, so I view it that roughly 80, 90% of the portfolio is risky. That’s more risky than target date funds were in 2008.
Tom Shanklin 15:42:
Ron, I think we also have a much greater number of participants in these plans today than we did back in 2008.
Ron Surz 15:50:
Yeah, target date funds now are $2 trillion. So, there are many more participants in it than they were in 2008 and 2008 it was – it was only, uh, $200 billion. So it relatively just – just beginning. So many more people will be affected. The baby boomers have now definitely move squarely into that risk zone and the risk zone is the five to 10 years before and after retirement. So, we’ve got 75 million people who essentially have right now their accounts are pretty much as high as they’re going to be in their lives and losing a substantial portion of that is painful for them of course. But I think could very well spill over into society ’cause we’re – the U.S. does take care of its elderly, but I don’t know if there’s a limit to how far they can go.
Traci Dority-Shanklin 16:45:
You seem to be ringing the alarm bell on the market.
Ron Surz 16:47:
Yeah. Let me tell you one of the articles that – I wrote this article and put it on Seeking Alpha. It got 50,000, 5-0 – 50,000 reads the most I’ve ever gotten. I published a lot on Seeking Alpha, and it’s about the world’s debt problem, and I’ll throw out a sensational figure for you and um, you should challenge me on the figure. If you had to guess what the per capita world debt is, which each individual in the world owes, what would you guess that number to be? It’s $200,000, and there’s whole lot written about why this whole debt thing can’t go on forever. This concept called modern monetary theory is sort of what’s driving the continuation of this crazy market. And modern monetary theory says you can borrow as much as you want if you’re the government. It’s good – good tomorrow, you just keep doing it.
Ron Surz 17:42:
Well, thoughtful economists think it’s voodoo economics and won’t last forever, but part of that seems to be working, but it’s going to blow up. So, something will cause the next correction, market, recession, whatever. I think it’s likely to be the debt, but certainly it could be other things like the trade war with China could cause serious repercussions. Certainly any nuclear disaster could, so something will happen. And to put your head in the sand and say, you know, let’s just keep investing in the U S because you know, this is a great country and great market and all will be well. Many people are saying that. I don’t think it’s realistic. It can’t happen. So, I think most people would agree that we can’t enjoy these great markets forever. But where there’s big disagreement is, well, how bad will the correction be? How long will it last?
Ron Surz 18:31:
And nobody knows. But I do think the current situation where interest rates are being manipulated, $13 trillion of global debt are priced to provide negative yields. And that’s just crazy. Government that where you know, for every dollar you put in you’re gonna get less than a dollar back. Something’s not right with this picture. So, I – I think we’re in serious trouble. And you know, every day I look at the market and it’s filling up again then I watch the news and everything is good, and I can sleep at night something – something will break. And then I think, you know, Warren Buffett’s comments about when the tide goes out, we see him swimming naked, will come to prevail.
Traci Dority-Shanklin 19:11:
Really, it’s very important for multiemployer plan trustees to think about looking at their target date funds as well. And those that have defined contribution plans probably have something like a target date in there as an option.
Ron Surz 19:27:
Traci Dority-Shanklin 19:27:
That I know firsthand that these trustees spend a lot of time educating themselves on the various investment, um, strategies that are brought before the board. And I think maybe the problem that the target date funds is that they don’t spend as much time there because they really have relied on the professionals: the Vanguards, the Fidelitys, the T. Rowes, where they’re – they’re basically saying, okay, you guys have created these and we trust that.
Ron Surz 19:57:
Traci Dority-Shanklin 19:57:
It sounds like there is a need for them to not take that at face value and to look more deeply. So that’s some advice that I’m taking away from this. But do you have any other advice that you would put forth to – to union trustees, plan sponsors, their professionals, their investment professionals.
Ron Surz 20:22:
So, I would say to plan sponsors, open your eyes, realize that the current situation is this – this dangerous, not just for you as fiduciaries, but for your beneficiaries. And the other thing I’ve been doing lately is trying to reach out to the beneficiaries as best I can with articles and so on. But the beneficiaries really should try to learn what exposure they’re going to have when they’re about to retire. And I don’t think many do because most of the money there is by default. And I think that there’s a lot of trust built into relying on your employer to do the right thing for you. But in this situation, that doesn’t work. So you really should learn what the risk exposure is going to be for you at the target date. And if it’s 55% or anywhere near there, get out. And I know that’s sort of something the fault of people don’t want to do. They don’t want to be on their own, but they really should do it to protect themselves.
Tom Shanklin 21:15:
Yeah. I think it raises an issue, Ron, that, uh, I mean, going back 20, 25 years, I know a lot of the funds I was consulting to, they had, uh, what was called an annuity plan at the time. And that was – that was trustee directed. And during that time period, a lot of them converted those to participant directed DC plans, which are analogous to the 401k’s. And it was done so to escape the fiduciary responsibility and basically, you know, a lot of due diligence went into selecting the provider and the funds and the default on everything else. Uh, and then in many cases they – they sort of said, okay, we’re done with this, uh, it’s all in your hands now. But you know, the constant message that, uh, you know, I was certainly telling people was that, look, it’s not done. You have the, the burden of the education.
Tom Shanklin 22:04:
You have to monitor these plans. They’re – they’re – we have the – we have the lawsuits today about the excessive fees and some of these programs. You know, and this is sort of coincident with the whole OCIO concept that’s going on now where a lot of the trustees on the D – on the DB side are also turning over the responsibilities and ultimately the buck stops with the trustee. And um, you know, no matter which of their benefit funds we’re talking about, they are the ultimate authority in terms of making sure things are operating correctly and are properly positioned and so forth. So, I think it’s just a wake-up call on several levels that – that trustees need to double down on their efforts in terms of monitoring these plans and asking the hard questions of their consultants and their money managers and just making sure it’s, uh, it’s all heading in the right direction and they’re prepared for the future because we are in a changing environment and we know we have a lot of issues there. But, uh, Ron, I think it’s been a great, great session. I think we covered a lot of ground and hopefully we have raised a few eyebrows around the world and can get a little more dialogue on this as we go forward.
And that’s it for this week’s episode of The World of Multiemployer Benefit Funds Podcast. We would love to hear from you, and if you have any comments, questions, or suggestions, head over to www.multiemployerfunds.com and let us know. Tom and Traci, thank you for joining us and we look forward to next time. For even more information and resources, head over now to www.multiemployerfunds.com and get involved.