There is in American football something called the “pump fake” which is a quarterback’s way of distracting the opposing defence by shaping to throw but not releasing the ball
“where’s the ball?”
This is what I suppose Arun Muralidhar is getting at in a recent linked in rant. Fund managers shape to transfer our risk but never release the ball , we keep the risk, they keep our money they score a touchdown while we try to work out what the hell has happened.
Because I spent one easter holiday reading James Joyce’s Finnegan’s Wake, I am not intimidated by Arun’s cryptic posts and have done my best to make it a little more accessible (because I think he’s right),
MY RANT ON TDFs: (target date funds)The argument I was going to make “AGAINST TDFs as QDIA” until you-know-who refused to debate me, even though Henry Tapper kindly offered to moderate.So let me put up the argument, which my 20 year-old students at Georgetown University McDonough School of Business articulated within 10 minutes of my describing TDFs.In short, the participant signs off on a whole range of risks to the asset manager, without this much disclosure as far as I can tell, and bears the risk if the asset manager screws up (see table below from my book 50StatesofGrey and A SMART Approach to Portfolio Management)!
Also, look at how mismatched the product is relative to the goals of retirees as identified in a survey by Defined Contribution Institutional Investment Association (DCIIA)
The chapters were titled: “Off Target Date Funds”.
Not to mention (and this is timely because we just crossed Mothers Day), as far as I can tell, TDFs make no adjustment for the fact that women may have different risk tolerance, longer life expectancy, lower salaries…HMMMM.“Come On Man” as Charles Barkley would say.Coincidentally, Christopher Tobe, CFA, CAIA wrote a piece for Pensions & Investments today about TDF FiduciaryRisks.Key question: “As a fiduciary, are you relieved of your fiduciary risk if you default clients into a c-rappy product just because it is QDIA?” (Roxana Pierce?).
A little bit of help – Roxanna Pierce is an American litigation lawyer, QDIA is the safe harbour you can enjoy if you dress up the fake risk transfer as a PDF and I think Charles Barkley is a pro basket-ball player with an Alabama drawl. Christopher Tobe is a decent man who is trying to restore some integrity to pensions in Louisiana. You can read his arguments for why DC TDFs aren’t pensions from this link.
I hope you get the general drift. Pretending you’ve got rid of risk while keeping it behind your back is not a risk transfer, it’s a pump fake. TDFs leave the saver with the same problem as he/she started out with.
And Target Date Funds can get away with this in America because they are QDIA
What is a QDIA?
QDIA stands for Qualified Default Investment Alternative. QDIAs arose out of the Pension Protection Act (PPA) of 2006. The PPA allowed plan sponsors of defined contribution plans like a 401(k) to direct the contributions of participants who do not specify an investment section to certain default options while still meeting their fiduciary responsibilities.
The PPA specifies that plan sponsors can designate a target date fund, a managed account, a life cycle fund or a balanced fund as the QDIA. In the case of a target date fund, a life cycle fund or a managed account the QDIA for a given participant would be the fund choice appropriate to their age.
Why this matters to us in the UK.
You can dress a defined contribution up as a 401k , An Aussie-Super or a workplace pension but it comes back to the same thing- it is a fake risk transfer (with the “pump fake” hidden in the word “pension”).
We have our own QDIA in the UK , it’s the master trust assurance framework(MAF), which offer the funders of commercial master trusts the right to operate a workplace pension, without providing a pension – and not fall foul of their consumer duty. The trustees can similarly be immune from litigation for offering a pension scheme that doesn’t deliver a lifetime income. There’s not much integrity to such a promise , but it’s legitimised by the assurance framework.
The DC investment funds industry will happily hide behind concepts such as the MAF and the TDF , so they can keep the money while we keep the risk. So long as this dummy pass is just part of the game, we can enjoy the spectacle, but when it involves our money, our risk and our retirement, it pays to ask some rather more serious questions. That’s what Arun’s doing. I’m prepared to moderate, but will the opposition quarterback come to the table?
For those of us in the states who read your material, thanks for posting this. Not sure it qualifies as a “rant”.
Anyway, Professor Muralidhar misunderstands the purpose of the QDIA. It is NOT a function of Rretirement objectives, Asset allocation over time (including glide path), Rebalancing around the glide path, Detailed sub-asset allocation, Choice of funds and fees, Choice of benchmark passive indexes, Risk management, and Currency risk.
No, the QDIA serves one purpose – for participants young and old, new hires and long past service, making their first contribution or having already accumulated a seven-digit balance, otherwise participating in a pension plan or not, good health or bad, regardless of geographic location and taxation, regardless of the need/purpose of the accumulated assets along the way to retirement, throughout retirement and as a legacy, and regardless of the financial status of workers, their households, etc.
The single, sole purpose of the QDIA is to supply an investment election for those workers who participate (or fail to opt out) but who do not provide an investment election. That is, for every participant who doesn’t supply a fastener (nail, screw, rivet, etc.), the correct response is always the QDIA “hammer”.
Keep in mind that the QDIA applies regardless of the actual diversity of the participant population – until the participant makes an affirmative election.
The rest is all colored bubbles. The best QDIA option is seldom a Target Date Fund, opaque not transparent, always non-representative of the diverse worker and participant population (no, they do NOT match), typically offered in five-year cohorts resulting in a “0” bias where the individual selects the TDF, often permitting participants “mixed-use” – combining TDF and other plan investments, while assuming an age 65 benefit commencement.
However, paraphrasing Churchill, ‘… it has been said that the Target Date Fund is the worst form of QDIA except all those other forms that have been tried from time to time.’
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Yes I agree – a pointless ‘rant’ that is looking for a fight after too much academic ‘oxygen’.