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

Ron@TargetDateSolutions.com

(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

34

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.

28

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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