Managed Accounts vs. Target Date Funds: The Live Debate

[0:00] JD: Let me introduce you to our debaters. He writes books, people. He's been in the industry for decades. He likes popping big collars, helping baby boomers. He resides in a Cali surf town called San Clemente. And more importantly, this guy lives, breathes and sleeps freaking target date funds. Yeah, buddy. Yeah, buddy. And in the other corner in the sport jacket, a one time advisor, then worked for Transamerica, Trans Am, then Stadium, which I would consider stadium and original gangster of the managed accounts and 401k. That's my opinion at least. Still at Stadium, which is now part of the innovative United Kingdom company. I'm getting that right? Is that where they're from Originally, that is. [0:59] Todd: Yeah. [0:59] JD: Based in London, now innovating in the US under the label US Smart. Smart usa. Co. Sorry for that. His name is Lacy, he's not Spacey, and he'll put your TDF in a jiu jitsu hold like Joy Royce Gracie. I did have a beer before this one. That was smooth defending managed accounts. At this point. Hello, Todd. At this point in the show, everybody, Todd would like to share a few words with the audience. Todd, take it away. [1:39] Todd: Sure. Thanks, J.D. thanks for having me. Before I say anything, I'd like to say that the views I express on the show are mine and mine only and do not ne really represent the views of Stadium or Smart, which means I can just let it rip, say whatever I want. [1:56] JD: Thanks for disclosures, Todd. Appreciate that. [1:58] Todd: Sure. [1:59] JD: I would like to say that all of my opinions are the same as Chad's. Just no, never mind. Let's see, let's go through the rules. Let's see. Two 401k pros enter one 401k pro lease. It's Tall can talks. And these are the rules of the show. It's a debate style format where you cannot interrupt or interject while your competitor is talking. You must wait your turn. You will each have a limited time to talk, which is monitored by the tall can beer graphics below you. So as you talk, your beer will empty. When you're out of beer, you're out of talking time. Okay, speaking of beer, you have both come prepared with your own tall can. You'll be sipping from that. I would recommend that you not recommend. These are the rules of the game. You must finish that tall can by the end of the show. So a good rule of thumb would be keep up with the tall can below you with your real tall can that you're drinking. Okay? I'll be asking you like president. It'll be more like A presidential style debate. I'll set off the topic, tell you who's going first. You take as much time as you'd like or as little time as you'd like. You can. And just like a presidential debate, if I ask you about, you know, fees and you want to riff and go off on something else and talk about the border, go right ahead. It's up to you. You riff along all the way you want. We are going to be playing acro Sin. So if you say an initialism or an acronym, you must drink from your penalty drink. Excuse me, I know you both come prepared with those. Chap Our champion. Please pay attention to the chat bar because you will be nominating someone into the finals to be to win Chat bar champion. Last week's champ, our champion was Danielle and her chosen charity. Oh, sorry. In December, we're doing a charity gig. Chap Our champion chooses a charity, retireholics, donates 150 bucks to that charity and and then we post it out on LinkedIn and see if we get a bunch of other people to pile on to doggy pile on and donate more money. Daniela, Danielle nominated Planned Parenthood. We put in 150 bucks. She actually mashed her 150 bucks. And if you go to my LinkedIn profile today people and look for the post, you can hop in, add some money there. We put the link there to where you can go donate. They're not hard to find and we are already north of $600 thanks to many of you out there donating. And so if you win Chopper Champion tonight, talking to you out there, you will have to choose the charity of your choice for next week. Okay. Oh, let's get ready to rumble. I think when you do that, you're supposed to pay like a million bucks or something. Like I'm going to get in trouble for that. That guy's got that like patented or something. Todd, I'm going to start with you. Target date funds have had massive adoption over the past 10, 15 years. I mean they're pretty much the go to vehicle in 401k plans. Lay out for us in your opening statements where manage account services are today. Take as much time as you need. Make this your opening general case for why manage accounts should be the go to solution for advisors, plan sponsors, participants and the industry as a whole. Take it away, Todd. [5:28] Todd: All right, good question right out of the gate. So first of all, just one thing I think hopefully Ron and I agree on and everyone that's listening in that participants need help right we know that they're confused, they always have been. So they need, they need advice, they need support. The question is, how do you deliver that help to participants? Target date funds, to be clear, have been a great thing. I think over the course of the many years they've been in place, they probably do a better job than people investing on their own. Question is it the time to innovate? Are we at a place where there is a better solution than the one size fits all solution that has been in place? If you think about it, in our lives, we demand customization in everything. Whether it's Netflix or Amazon or custom sport coats or golf clubs or home renovations, it's all customized. Yet in retirement plans where most of us hold our biggest or our second biggest asset, we accept a one size fits all solution. I think in five years, maybe three years, we're going to look back and say, and kind of laugh at the approach that we've taken for the vast majority of retirement plan assets notion that every single person of the same age should be invested the same way in a vehicle that oftentimes invests in underlying proprietary investments. I think again is laughable. So when thinking about managed accounts, there has been significant evolution over the past number of years. I think we should start thinking about them in terms of the objections that people have had for a long time and hopefully this doesn't steal your thunder. Ron, but biggest objection has been cost. People say it's not worth it, it's too expensive. Well, it's all relative. Our fees 10 years ago in many cases were over 1%. Today they average 20 basis points. You can build a fully customized solution that is in a managed account chassis that is less than the cost of a actively managed target. Paid fund usage also been an issue. Admittedly when you offer a managed account on an opt in basis, the utilization is 10% or less. It needs to be a qualified default investment alternative for their for participants to really benefit from it. You'll see 80% plus participation there. A couple other quick points, limited data five years ago, 10 years ago, record keepers didn't have very robust data sets to basically allow for significant customization. That's changed. You know, we've been in the business 25 years. In the past five years we've seen that the data elements expand greatly which allows us to customize in an automatic way without requiring participant engagement, which is difficult. Some would make the argument that there is no value for managed, for managed accounts for, for younger people, you know, every 25 year old, why do they need to be in a managed account, just stick them in a target date fund, tell them to put 10% away and they're good to go. What about the 25 year old that inherited $500,000? Should that 25 year old be in the same allocation as the 25 year old that didn't inherit any money? What about the one that's risk first and will make a bad decision if the market tanks? So we would argue that there is value for younger people just like there is older people. Last two points. Hard to oversee, hard to monitor. A lot of advisors say, I don't know how to look at them, I don't know how to compare them, they're complicated. That's changed. We have over eight institutional 338s that have now approved our managed account. Others have gone down the same path. Advisors are now big in the managed account game, so we are seeing more oversight and more due diligence on managed accounts than we ever have. Last, is availability still a little bit of an issue? Most record keepers offer one. We're seeing more offer many so they can give their clients and advisors choice. So they're everywhere now on almost every record keeping platform. The question is, when will there be a menu of choices to allow for fiduciaries to make a decision across, you know, different variations? So all in all, it is now time to, to, I think, support and continue to invest in, in managed accounts. They represent personalized solutions, oftentimes at a reasonable price, that are proven to have a positive benefit for participant outcomes. [10:11] JD: Well done. Thanks for the outline. You covered lots of territories. I was a little worried about your beer there. I mean, you've already chugged through a quarter of that. I'm gonna, we're gonna slide you up with a mouth. Oh, sorry. [10:22] Ron: Thank you. [10:24] JD: We're gonna slide you up with about 30 points for a solid overview. And I'm gonna deduct 10 for the sport code, so. Okay, here we go. Ron, it's your turn. We've heard from Todd. He's getting his general overview of manage accounts and how they cover all those areas. What say you about target date funds? Come on, everybody loves these suckers. We all use them. [10:49] Ron: You're here. [10:49] JD: Give us your opening statements. [10:51] Ron: Thanks, jd. So, no, I'm an advocate of target date funds, but I'm even more of an advocate for change. So Todd and I are really starting on the same, I think keynote that these things really can and should get better. So with that thought in mind, I'm going to leap into the several facts There's a lot of homogeneity in target date funds. And Morningstar just recently sent a letter to the Department of Labor sort of saying, you know, this two through thing and all that. They're, they're all pretty much like one another, but they also wrote a similar article saying there's too much risk in target date funds. So one of the things I said six weeks ago on your show was if you're looking, you're going to see that at the target date, target date funds are about 85% risky assets. So this whole thing about age and, and being different and all that, they're, they're, they're, they're risky and what's going on now. So in 2008, you saw that risk. What I do. Thank you. [11:56] JD: That's for using great vocabulary. Keep, continue on. Don't worry about yourself. [11:59] Ron: Thank you. I didn't know I was going to earn that. I'll try to do more of that. So 2008, we, we saw them 2010 funds lose 30%. For the next 13 years, there was no risk. So there's no concern about the risk at the target date. Now this year that is happening and target date funds are unraveling before our eyes. And what that's doing, I think, is causing the marketers of managed accounts to really increase their marketing. And that's really going on. So when I started to get prepared for this, I said, so what is a managed account? And in theory, there are as many managed accounts as there are people using them. They're all different. But I think there are two ways to differentiate them. The group of managed accounts that are actually managed by a person who is dealing with that individual, learning all about him, talking to him, holding his hand, that's a really good managed account. They have nothing derogatory to say about that. But my belief is that the majority of managed accounts are computer managed and not truly personalized because you're asking someone to answer a bunch of questions and the whole cookie cutter gets involved and sort of getting them some direction based on whatever that questionnaire happens to be. Now, there is also bifurcation and target date funds, and this is something I really don't think many people know. So most of the industry is at 85% risky at the target date. There's a small group of target date funds that is not that risky. And it's about 30% risky at the target date. And probably the biggest fund in that ilk is the Federal Thrift Savings Plan, the largest savings plan in the world. Is 30% of risky assets, 70% in their fund giving, which is guaranteed by the government. I was managing smart target date funds and that was also very safe and followed my patent to glide path. I run a target date fund for the Office Professionals International Union and that's also very safe at the target date. But what I really want to talk about today is voice of client. So what do the part? First of all, who is the client? Is it the participant or is it the plan sponsor? Well, I think it's the participant. And the defaulted participants have spoken. They said, I want you to do it for me. I don't want to fill out a questionnaire. I don't want to tell you about myself. I just want somebody who's going to do it for me. Then there's the surveys. This is, I think key to the bifurcation of the Target defund industry. MassMutual does a study of beneficiaries. And the amazing thing about this study is the beneficiaries say, and I think most believe that they are protected at the target date, that they can't lose money. And that's so far from the truth that the voice of client, if the client's the participant, that's being ignored. Except for the safe group. The safe group is hearing that voice and protecting at the target date. Then PIMCO does a study of consultants and this is really eye opening. Consultants say that as people near retirement, a loss of 10% or more would be extraordinary. Not permitted. Through September of this year, the target date industry is down 17%. The safe group is down 5. We've already blown through that unacceptable risk level for 2022. Morningstar also just wrote an article that says too much risk at the target date. So I'm sort of sharing Morningstar because, hey, they're Morningstar and I'm not. But then the critical thing comes up about so what is the best for the plan participant, by the way, in terms of the plan sponsor being the client, the voice of client, They've spoken. Target date funds are by far the biggest choice. I think they're making the wrong choice. And we can talk about that at the end here about ways to improve. But in terms of best for the participant, another Morningstar study did something really incredible and know the end of the day is who's richer? Are you richer in target date funds or are you richer in managed accounts? And they calculated, I'm not sure how they got their arms around this, but they calculated dollar weighted returns. And the idea behind the dollar weighted return is you can't eat time weighted returns. They're the same for everybody. But to the extent that you're making contributions, that matters a lot, especially as you're near retirement. Well, I don't have the numbers, but the drum roll should be the target date funds won the race of earning the best dollar weighted rates of return. So the contention that, you know, somehow the managed account gets you to do smarter things doesn't really play out if you'll use this dollar weighted rate of return, which by the way, I have an article that's coming out next month about asking people who report performance and target date funds to use the dollar weight return. Oh, you took the ten way. [17:21] JD: That's a penalty for self promotion of your article that's coming out next week. Oh, let me ask. [17:25] Ron: I thought it was helpful to people. Okay. [17:28] JD: And, and I'm gonna give you an extra 10 because apparently people like the sport quote more than I do. So they've been, they've been clamoring more points for you. [17:37] Ron: Little did I know. [17:38] JD: Ron, you brought up. [17:40] Todd: It's customized by the way. [17:43] JD: Very nice. As I temporarily shift from the, the back and forth debate, can I ask you guys, the in 2022 when stocks and bonds did not perform inversely and they both went down to Ron's point of some of those target day funds closer to the 2020 suite having negative 17% returns didn't. I'll ask you this, Todd, real quick. I mean, wouldn't manage accounts face that same problem? I mean managed accounts must have used bonds in the traditional way. Most of them remember we're not speaking on behalf of stadium, just in general, so I'm assuming they had that same stocks and bonds 2022 problem. And is that naive for me to [18:24] Todd: say, well I think every managed account's built a little differently, J.D. so it's. If it's a static or strategic allocation where middle of the road, 60, 40 for someone, then probably. But there are a lot of flavors. There are managed accounts that incorporate tactical and we have a legacy managed account that invest according to that style. And I'm not promoting it at all. I'm just saying we do. And so that performance has been better than your typical just stock bond allocation. So I think generally speaking you're probably right. But in general, look across the, across the board to see the differences in how they're building their portfolios. [19:00] JD: Manage accounts. There is in general, didn't step into 2022 and say hey guys, hey girls, let's stop using fixed income. [19:08] Todd: No. [19:09] JD: Yeah, they Couldn't for some of the same reason, Target. Okay, let's shift to fees. A lot of people reached out to me prior to today's debate and a lot of their, their passion seemed to be centered around fees. I heard some people talk about the fact that they felt like manage account services was a way to compact to combat fee compression. Believe it or not, like, oh geez, our industry is really squashing us down. So let's create something else where we can actually make some revenue from it. There are others that feel like target date funds beneath the surface are making revenue that we're not even aware of. And then there's the whole fund to funds thing. So in a general concept of fee structure, and I hope the two of you can kind of point a light on which of these solutions you think can be more transparent and maybe more fair when it comes to a fee structure standpoint. The managed accounts are the target dates. I'll start with you, Ron. Is our target dates in a better situation to be fee fair than the evil managed accounts that are looking to take all that money from our pockets [20:24] Ron: more so now than five years ago? So there's been very successful lawsuits about excessive fees. So the plan sponsors are now sensitized to what the fees are. So they have come down, I'm guessing here a little bit, but I think the average target date fund fee was around 60 basis points. Now it's probably in the 30s, so it's come down substantially. And Vanguard, of course is a champion at 10 or less. So that's a very low fee we have. I know you've talked to Vito. So Vito, I think is on this call. He is sort of telling the world that the part of the reason the collective investment trust fees are so low is they are not disclosing the cost for the underlying funds. I know that's not true for mutual funds. So when you look at the all in fee, they're not for mutual funds are definitely not hiding what they're paying themselves because most of them are proprietary. But it does bring up sort of an issue that, you know, here, here they're charging that you a fee to hire themselves, which is sort of. You wonder how that all works. And I do want to throw out something here before I forget it. The Government Accountability Office was charged last year by two congressional chairs to do a study of target date funds. [21:42] JD: Right. [21:42] Ron: With a specific mandate to explain why the risk is what it is. And I spoke to them two weeks ago and I know no part of what they're looking at. Is fees and the notion that, you know, when, when they're all proprietary, aren't they charging double fees? And that's, that's probably something that's true. But I will say this, I don't think there's hidden fees for sure in mutual funds. There might be hidden fees maybe in some collective investment trusts. Now let's throw that out as a possibility. But I do and have written about this promotion. Never mind, I never wrote about this. I think when the notion of target date funds got out there beyond originally for college savings plans, then they got popular when the Pension Protection act made them popular. I think fund companies [22:35] JD: just listening, no, just listening to the chat bar. It's a little delayed. Finish your thought and then take your penalty drink. [22:40] Ron: Okay. Pension Protection act put target date funds on the map. And I think the fund companies use it a way to bundle a product and the best way to make profit is to have expensive product near the target date because that's where the assets are. So more equities gets more fees. Long term bonds is more fees and cash. So I think the economic incentives are there for the 85% risky assets at the target date. So that the, the safe group. No, it's not doing that. [23:16] JD: Well done, well done. Todd, earlier in your opening statements you made comments about how the fees and managed accounts have been coming down and down and down. So shed some more light on that and let us know why you think managed accounts are actually a safe, fair place as it relates to fees as opposed to something we should be concerned about. [23:36] Todd: So first of all, yes, they've come down, I think out of necessity because as I said at the beginning, in order to get broad managed account adoption, it needs to be the default on the plan. And if you're going to make it the default, it better be priced reasonably and it better be customized to the benefit of the participants. So with the data points that managed account providers can get automatically through the record keeper feeds, plus fees going from, you know, again north of 1%, I see some now that are still at maybe 65 basis points. We're down as I mentioned, around 20 in some cases 10 depending on the product solution, you can build a managed account under the price of an actively managed target date fund using funds from the plan lineup that have been selected by hopefully a professional fiduciary according to their investment policy statement. And so you've got quality underlying diverse holdings with a reasonable management fee on top of that, with data points that enable a fully customized or a mostly customized solution. And I Think JD when you say fair, you gotta. That's an interesting word. Right. And to me fair means is there value in the solution? Is there perceived value? Is there real value? There are many studies that do show there are very quantitative benefits of managed accounts. Assets are stickier, people stay in them longer versus target date funds. Higher deferral rates are tied to managed accounts. 8 and a half percent on managed accounts versus 6.1% on target date funds. Managed account users have 23% more wealth in retirement according to a study by Vanguard, who is a massive target date fund franchise. Are, are singing the praises of managed accounts. So there's tremendous value. It's got to be priced right. And it has to not require significant participant engagement. All of that when you're running a managed account has to be disclosed very transparently because it is run by an independent registered investment advisor who has disclosure requirements. So. So we disclose it through plan sponsor agreements, participant agreements. It's very clear and transparent. It's the advisor, plan sponsor and participant that has to determine if they see value in that solution. If they just want cheap, they should go in a low cost passive target date fund. If they want true value at a reasonable cost, they should consider managed accounts. [26:14] JD: Fair enough. This is kind of related and Todd, we're going to go right back to you to start and then Ron, you'll, you'll rebuke. Have you rebuttal, Rebut, rebut. [26:25] Todd: I think. [26:25] JD: Yeah, don't listen, yeah, don't listen to surfers on vocabulary. Negative 30 points for me. Look, proprietary issues, we've talked about these with target date funds forever, right? And they still exist today. I mean less so than they did 15, 20 years ago, but it's still a thing. There are still record keepers pushing their own proprietary target date funds. Well, proprietary is also an issue with managed accounts. We see a lot of people who are critical of managed accounts look at these large national aggregators and see them with, you know, thousands and thousands of plan sponsors and kind of selling to them their own managed account service solutions. The same true of large national broker dealers. So as it relates to proprietary things and the evil that can exist in that, which of these solutions is set up better to deal with that? I'm starting with you, Todd. Manage accounts and the proprietary nature of some of these national firms shoving their own stuff in front of their clients. [27:35] Todd: The great question. So you're talking about the advisor managed account trend which is growing. We support a number of those offerings, so we're very familiar how it works and they're all built in a little bit of a different way. I can tell you. These firms that, that we all know, these are the elite retirement plan advisors that I'll sign on as fiduciaries. These are, these are leaders in our industry. And I think most of them are building these solutions in a very responsible, transparent way. The majority of them are not using that to push their own investment product. There are some that utilize their own collective investment trusts which, where they don't build in revenue for themselves. You could argue maybe that there, there's a challenge of a potential conflict there. Most of them do set up these solutions as a separate agreement with the plan sponsor and participant. They don't necessarily advise per se to use it. They say, here's another service in addition to our plan level services. Here's the value we think it brings. Invest in it or don't invest in it. But I think you're touching on a product structure that's new and it will evolve over time as, as the, you know, those products continue to get utilization and continue to progress. [28:55] JD: It's not my job to, to jump in on Ron's side here, but as someone who's on the ground level with this stuff like that was a very politically correct answer. But I know in certain boardrooms and I know that there are advisors that are motivated to go out and sell the company manage account service for a variety of reasons. So it does exist. Okay, Ron, thank you. This proprietary target date funds. I mean, come on. Your, your side of the argument here has been getting hit with this stuff forever. And it's still an issue. It's still an issue to this day. We have record keepers shoving their own proprietary target date funds down our throats. What's your take on this? Why will this change? What's not bad about it and give me your take. [29:44] Ron: All right, so probably the key thing. There is no plan sponsors have spoken. They've chosen target date funds. Three and a half trillion dollars. That's the voice of client. But the really troubling thing is just three firms managed 65% of that three and a half trillion dollars. [30:06] JD: Fidelity, Vanguard and T Row and Americans probably. I never heard of them. [30:13] Ron: Yeah, they were always going to be on the show. That's an old doctor. That's that. I don't know, but I'll take it. [30:24] JD: Talking on Turo, I really get Woody. [30:28] Ron: But they're, they're an oligopoly. And you say so what happened there? Well, they're the world's biggest bundle of service Providers and the plan sponsors. Basically, the surveys say the consultants are choosing. Not the plan sponsors. The consultants look and they say, hey, look, you got Fidelity. They got Target Date Fund. They're good. You should use them. So that's, I think, where the real problem is in target date funds is disease 3 entrenched. Very fine firms are offering products that are way too risky at the target date. And that, that needs to change. I know at the end here we're going to talk about ways to make it better. [31:05] JD: But [31:08] Ron: anyway, that's my thoughts on proprietary. [31:10] Todd: Can I respond on one thing there You. [31:12] JD: Absolutely. It's your turn. And you. And he just made you 10 points for proving your point. But go on, Todd. Now's your rebuttal. [31:20] Todd: Yeah, I was going to say, Ron, you made a comment about. Plan sponsors have spoken and they've chosen target date funds. I would, I would push back on that a little bit. I used to run an advisory firm and I can tell you none of my plan sponsors knew anything about a retirement plan. They're running their plumbing business, their, their consulting shop. These were sold and they're not bought. Sponsors and participants do not understand how these things work. Right. They're simply. They've been pushed. And again, I'm not saying historically there hasn't been some value there, but I don't think 99.9% of plan sponsors actually made an educated decision to. [31:58] Ron: I said consultants. Yeah. [32:01] JD: I was about to throw a penalty flag on you, Todd. I was like, no, no, no, I like what he said. It has proven that they've been accepted. But you're right, it's. It's the industry that accepted it and then shoved it on their plan sponsor. [32:14] Todd: Plan sponsors have spoken. That was. [32:16] JD: Yeah, right. [32:17] Ron: Because I should be. Rephrase that and say the consultants have spoken. [32:21] JD: Yeah. [32:22] Ron: And I can share anecdotally with, you know, my own efforts to, you know, get accounts I am typically pushed back with. You're not like Vanguard. And I say that's good. Vanguard's a fine firm, but they're taking a hell of a lot of risk at the target. [32:40] JD: Ron, let me shift it to one that's pretty related here. Adoption rates and. And being understood, which of these strategies do you think is more easily understood by advisors, sponsors, participants, and therefore can have a bigger impact? Todd just made a great point. That's the best thing I've heard today is. I would have agreed that. No, no. We've proven that plan sponsors love Target Day funds because of the such high adoption rates. But Todd's opened my eyes to like no, it wasn't their choice, it was the industry's choice to give it to them. So, so, so which is better, a managed account service or a target date? When you think about a human resources person, a, a business owner, a participant trying to make a decision which one of these solutions will make more sense to them and be an easier choice for them. Starting with you, Ron. [33:34] Ron: All right, so part of the popularity, and again I think it's the consultants, not the plan sponsors is that the target date thing is so easy to understand. You know, it's a one decision choice. It's really easy. It's all taken care of. The participants if told their employer they don't want to be making decisions, they don't want to fill out a questionnaire, they don't want to do any of that stuff. So it's easy. But I want to throw in here something I think pretty important for this discussion. The $3.5 trillion in target date funds is mostly from defaulted people. But a trillion of that 3.5 trillion is from non defaulted people. I can tell you that what they've really said in essence is they like the notion of a target date fund. They like somebody that's going to put them on cruise control and modify their risk through time but they almost always are limited to the one target date fund that's on their platform and that, that, that needs to change. So again I'm putting off a lot of my comments to the entry when we talk about yeah, it's okay going forward but there's a problem, Todd, he, [34:46] JD: he brings up the filling out of risk tolerance questionnaire. My assumption is that you're going to tell me that that doesn't have to happen in a modern day manage account services rule, but is I think most critics and I need you to talk to them. I think the people at the chat bar, a lot of them said like of course it's going to be target date fund is the easier, more understood approach. Tell us why maybe that's not true. [35:13] Todd: So I would argue with the premise that target date funds are understood or easily understood. Let me just tell you a quick story if I may. So as I mentioned, I used to have an advisory firm, we focused on 401k plans only fee only consulting and we did hundreds of participant meetings one on one. And I agree with Ron, that's probably the best way to build a portfolio for participants. Sitting with that person one on one building a portfolio. So I was sitting in an office, a participant came in and he kind of had his arms crossed and he looked at the list of funds and we had the Vanguard Target retirement funds offered. And he crossed his arms and he said, it looks like you have a lot of funds that invest in Target. Do you have any that invest in Walmart? And I at that moment, first of all I laughed and then I realized he was serious. So I had to sort of unlaugh. And I recognized at that point your average person has no idea what a target retirement date fund is. In fact, just a few stats. 59 of people say they know nothing about a target date fund. According to aon, these two are scary. 38% of people think a target date fund will never go down. [36:23] Ron: Right? That's a problem. [36:24] Todd: 48% think a target date fund is guaranteed. These are big time studies done by big firms that to me and my real life experience and based on the studies, people don't understand it. And it's, it's. I think some of that misunderstanding is actually kind of scary based on, based on the stats I just quoted. So I think we need to be, be a little careful with assuming that simplistic product structure means better understanding to get to your real question of what you asked and then I'll turn it to you, Ron. But in terms of the questionnaires, participants don't engage. We know that. I've been doing this 25 years. Ron's been doing it for, for I'm sure a long time. People don't engage. If they, if you can sit with them and force engagement, they will. You have to build these solutions so that they add significant value in the absence of engagement. And if you could do that again at a reasonable price, there's a very compelling argument that is much more beneficial for participants than, than a target date fund. [37:27] JD: Ron, you, you had a quick thought go. [37:29] Ron: Yeah, I'd like to. So participants don't know what they're getting and the defaulted people don't want to know. They want to trust. So after the 2008 debacle, the SEC and DOL had joint hearings in June of 2009. Oh, [37:45] JD: thank you. [37:46] Ron: Sorry. [37:48] JD: Also the, the chapter, Ron has tried to remind you that your tall can must be finished by the end of the show. So just, just an FYI. [37:56] Todd: Thanks. [37:57] Ron: I might not do that. Take 10 points away. So thanks. It was easy. What happened in those hearings was illuminating. So the fund companies testified in the morning and they said participants don't understand this thing. But we told them, we told them it was risk. We told them this. We Told them that. Then the attorneys came in the afternoon and they said this not the participants aren't choosing these things, the fiduciaries are and they should know. So, yeah, all the reports say the participants don't know. They certainly don't know for target date funds. They don't know for if they're defaulted in managed accounts. No, they're not going to participate. But that is a problem. But it's the real thing to be addressed here. [38:43] JD: I'll add that a little bit. I've spent my time with plan sponsors that have a managed account service in place. And I've met with some of those participants in my career. And they also have unreal expectations, Todd, where when they're in a managed account, they somehow feel like they're going to beat the markets every year. You know, that they've hired these like wizards that are going to do things that are magical. And so I've had a lot of those types of meetings that were stressful for me as someone going in there and consulting with them where they're like, wait, I should be doing so well because chose these professionals to make all these great decisions on my behalf. And sometimes those managed accounts have bad years where their strategy or methodology doesn't pan out. You know, that's my take at least. Let's talk about the future. We've had target date funds. They've evolved. We've had managed account services, they've evolved. A lot of people even reached out to me and said, jd, why do you have to pit one against the other? Like they could work well together. I've heard people online talk about, how about a hybrid? How about a managed account within a target date fund? If you really think about it, and I'm not trying to have a Kumbaya moment here, but these two solutions aren't really that foreign. They're kind of like cousins to each other in a way. They're both just trying to get proper asset allocation to line up with someone's risk tolerance. Let's talk about the future target date. I'm going to start with you, Todd. Target date fund or manage account? Which solution is better suited to innovate and evolve and come up with the next best version of this? [40:25] Todd: Well, I think a managed account is better suited to innovate, more flexible. But I would say if we want to have a little bit of a Kumbaya moment, that doesn't have to be one without the other. There is the dynamic qualified default investment alternative solution out there, which basically defaults younger participants into Some version of a target date fund. And then when they hit a certain age, 45, 50, something like that, they roll into a managed account. There's a compelling argument to be made that that actually makes some sense. I think the future though JD is retirement income. Personalized retirement income solutions that bolt on to the back end of a managed account. So if you think about this continuum, you could have, you could have a very simple low cost, even target date fund solution for younger people rolls into an auto personalized, reasonably priced managed account solution at a certain age and then begins merging into a reasonably priced personalized. To the extent it can be retirement income solution, then you would have the full continuum for participants. And retirement income is tricky. It's not perfect, it's hard to, it's hard to do in sort of an automated fashion. But we could, there's certainly ways to do that. And I think that's the future. I think that's where we are headed and you need technology to facilitate that. So I don't think it has to be only managed accounts can be modified or be built to achieve this futuristic state. I think you could, you could utilize both and I think it would be great for participants. [42:01] JD: Ron, he talks about guaranteed income and some other things. Why couldn't those fit in? A target date doesn't have all those things you talked about happening in a managed account. Could be the 3.0 version of a target date fund. You've got some of your own specific ideas about how target date funds could be improved. And I don't mind you sharing some of those, but also just tell me, you know, close your eyes and imagine the future of a target data. Could it be good stuff ahead of us? [42:28] Ron: Yeah. So investing is personal. That's actually a friend of mine said that and that's, that's a good model. It really is personal. So, and I'm, I see the future as customized personalized target data counts. And you may say, so how does that work? Well, I've got software that does that now. It's called Soteria and there's the commercial. Soteria by the way, is the Greek goddess of deliverance from harm. So the emphasis, the emphasis of Soteria is to use my patented glide path and it's very safe at the target date and then offer other glide paths to non defaulted participants and give them guidance. There's, there's actually something similar to this that's been around for a long time. It's Prudentials goalmaker product and that's that I'm not plugging that. But I can tell you I've lived with goalmaker for five years. I see its shortcomings. I know it can be better. So Soteria basically is software as a service that can be used by record keepers, it can be used by investment managers, it can be used by plant, by consultants. It's not picking a niche and trying to say hire me to run your money because it's basically a discipline for people to use for defaulted people to get what they said they want, safety at the target date. But for that trillion dollars in target date funds who seems to to like target date funds but have no choice, they can move from one glide path to the other. They can change their target date. By the way, it's not limited to every five years or every 10 years. It's very specific. You say I want to retire on January 10th of 2065 and that's all built in there. So I think the personalization there is there especially for people who don't default, who want to be active. For the defaulted people, I think it's got what they've told us they want. So I think it's got something in there for everybody and certainly aspects of a managed account. But rolled into a target they fund discipline that recognizes that there is a risk zone the five to 10 years before and after you retire. No researchers have documented that if you're unfortunate enough to lose money in that time frame, it could spoil the rest of your life. So that's soteria. [44:51] Todd: You're muted. J.D. got a drink? [44:59] JD: Ron obsesses over rightfully. So this, this safety factor within target day funds. And, and we all know that participants weren't expecting a 17 loss this year when they're in those very safe, you know, retirement type income type target date funds. But couldn't target date funds too become more than just your date of birth. Right. They could factor in other data, your compensation, your physical address, your how much you defer your other types of investments. Like we are going to move towards this data driven age and I'm for sure manage accounts are going to take advantage of it. Right? Like you're not going to force people to fill out questionnaires to understand who they are. You're going to understand who they are the same way Apple understands who they are and Google understands who they are and Facebook understands who they are and therefore put them in something that's, that's lined up with them that's modern and different than the way we've been doing it last 10 years. But yeah, I'm, I'm curious. It does the future too end up being some hybrid of these two, these two concepts together? And Todd, I appreciate you bringing up the income side of things because that's important too. This is the finale, okay. And after we're done here, you out there in the audience, you're going to get to do a big vote. And I can tell you enough about the points that your points will determine the winner of this debate. So even though ron's behind by 50 right now, with all his self plugging and things, he still has a chance to win if, if you, the audience, vote for him to be the winner. But before you vote, I would like to give each of them, you know, a quick, you know, two, two and a half minutes to make their final kind of summary pitch to y', all, why they should be the champion of today's tall can talks. And Todd, you can go first. [46:55] Todd: Well, for you. What'd you say? [46:59] JD: Why should we vote for you? [47:01] Todd: Well, less about why I should be the champion, I think it's more about, you know, what is. We're all in it to try to benefit participants. Obviously there's a commercial aspect to what we do. Everyone wants to make money, but at the end of the day, we're trying to help participants retire with dignity. And what's the best way to do that? We know they need help. We know that the solutions that are dominating the marketplace are too simplified. I think Ron is sort of agreeing with that in a way. We all, I think, agree that personalization is better than one size fits all. How do you deliver that? How do you do it at a very reasonable price? And how do you do it at scale? I think you can get lost in. Well, the perfect solution would be this. Well, that's cool. But how do you deliver it? Deliver it to 10 million people? It's got to be scalable. And the only way to scale things is technology. And with technology and with the cooperation of record keepers and with and the cooperation of advisors, you can deliver really nice solutions to the market. We're just moving too slowly. The industry is moving too slowly. We need to be more nimble, we need to move faster and we need to get in a place where we can truly help participants. And I believe that managed accounts do that today, better than target date funds, generally speaking. And I think managed accounts are the versions that are out there today, are the baseline for future solutions that are better, faster, cheaper, more personalized and as I said, help, you know, on the spend down side. So I hope you vote for me. I hope those points make sense. And that's all for me. Thanks. [48:39] JD: Well done. Well done. Ron. Come on. We love Target Day funds. [48:43] Ron: I need 60 points. How am I going to get that? [48:45] JD: We'd love to. Oh, you can get it from the audience right here. Yeah. [48:48] Ron: All right. [48:48] JD: We love Target Day funds. [48:51] Ron: I hate losing, but here we go. We're so much on the same page. It's, it's maybe not much of a debate anymore, but certainly we want what's best for the participant. And retirement researchers tell us that what's best is to not lose your money. So the glide paths are really, I think the key thing and I think the managed accounts would, would, would try to do that for you. But there's two kinds of participants. The ones who default and they have told us over and over again they want to be taken care of, they don't want to be violated. Questionnaires, they, you know, the, the executives will be happy to work with a consultant. The firm will pay for that. But that's, that's not the, the typical participant. The typical participant is going to get, you know, some automated thing because that's all you can afford. And they, they're not, they have a history of not really cooperating. If they do cooperate, go to a financial engine or a guided choice, they have no clue what they're doing. They're going to fill out that questionnaire. If the markets are up, they're going to want risk. Markets are down, they're not going to want risk. So that, that group of people, I think is a challenge to serve. But you need something that realizes that even if you try really hard to find out more about them, the rest of their assets, all that stuff. That's right. Currently not doable, you're just not going to know. But for the non defaulted people who like the notion of cruise control and risk, risk on, you know, an automated glide path, I think we can help those people. And that kind of help is going to be more in the area of something along the lines of the target date fund, but certainly something where they, they want, want to actively participate and participate in those choices. And there I think some marriage between target date funds and managed accounts is right on. Dead on. [50:44] JD: All right, fair enough, fair enough. Everybody out there, this is your chance. This could very well determine the future of our industry. Your vote here today, I'll try not [50:58] Ron: to take it too personal. [51:01] JD: You will place one vote. It'll be either for Ron and target dates or it'll be for Todd and manage accounts. And then proportionally, we'll divide up 200 points on a percentage of your votes. So, Brandon, throw it up there and let's hear from the audience on who won this debate or which of these solutions you're voting for. Tighter than you think, Ron. Tighter than you think, huh? Get your votes in. Get your votes in. Okay. [51:51] Ron: Oh, boy. [51:52] JD: Christ. Are you serious? All right, so it's pretty much. Oh, it's 60. Doing math. 120. 120 plus 90. Let's just, you know, [52:06] Ron: Congratulations, Todd. [52:10] Todd: Well done. [52:11] JD: And the winner is Todd Lacy and manage accounts for today. For today, guys, real quickly, your vote for champ bar chat bar champion. Give me one quick. Todd. [52:26] Todd: I would say Josh Rundle. [52:31] JD: Josh Rundle. And Ron, your vote. Is it still your sister? [52:36] Ron: I didn't see her. I don't think she's on this call. Tony Davis. [52:39] JD: Tony Davis. Tony Davis was very active. Apparently Tony woke up on the wrong side of the bed this morning. You pessimistic little motherfucker. All right, Tony Davis against, what was it? Josh Rundle. Is that right? [52:52] Todd: Yeah. [52:53] JD: Brandon, throw that up for the audience to choose the chat bar champion. And then Josh and Tony get ready to tell me your charity of choice. Brandon, can you. Sorry, buddy. Josh or Tony is the deal I'm looking for. Here comes the vote. Well, the vote's coming in on chapter champion. I want to let y' all know I feel like I'm hearing a voice from y'. All. And I was sick last week, so I didn't drink. And I got a lot of hate email and hate messages from people that said I was much better on the show when I was drunk and wasted in the past. And so I appreciate you all supporting my non sobriety and wanting me to get back to being drunk on Thursday nights. That means a lot to me. Ooh, tight race. And Tony Davis, you are chat bar champion for today. Congratulations. Let us know in the chat bar what charity, or you can even private message me. Tony, if you want, you would like to promote. And the retirehooks will throw in 150 bucks and then we will promote it out on the Internet, see how much money we can raise this December for these random charities. Back to my drunken story. Yes, Today was supposed to be a more professional show, people. I was going to limit my obscenities. We were not going to get canned drunk. We were going to have some serious conversations. But I saw a lot of pitchforks and fires in the chat bar of wanting some more inebriation so we'll take notes. We'll take notes. People like, they like it more drunk, less sober. You guys are, are inversely aligned with Tiro Price. I don't know if it was the beer that sent Hero away. Might have just been my beard. Who knows. Thank you to Ron joining us and filling in. We really appreciate it and continued success on your your mission to make a better target date fund. And Todd, thanks for being here. We really appreciate it and good luck with Smart and stadium and everything that they're doing. I mentioned to you pre show but I want to say out loud to everyone out there, I give PEPS a lot of shit and I know Smart's doing more things than just Peps, but. But I will say that I do not mean Smart when I, when I rip on peps. And I'm not just saying this because you're here. I'm saying it's because it appears to me that Smart actually wants to solve the coverage gap and is willing to use PEPS to help the little guy create plans, which I think a lot of the industry's not doing. So kudos to Smart USA Co. Maybe we should work on that name. It doesn't roll off the tongue. [55:37] Todd: Yeah, I agree. [55:39] JD: You call it smart. Do we just call it smart? Smart, not your business J.D. so shut up. And thanks to the audience for tuning in. We really appreciate it. There is no show tonight. This was the show today but we are back next week at the regular time, 7:30 Eastern, 4:30 Pacific. We have got Stefan Johnson. God, tell me I'm getting that right with investnet will be our guest on the show. I hope I didn't botch his name right there. That'll be next Thursday night and we got a lot of fun shows planned for December. We'll continue the charity dealio. And thanks for tuning in to Tall can talks and who doesn't like day drinking. I know Ron and Pops. So. Oh boy. [56:24] Todd: Thanks Jenny. Thank you. [56:26] JD: Thanks everybody. [56:27] Todd: Thanks everybody. [56:28] JD: See you later. Yeah. 401k free.