Not Whining, But Working
July 21, 2010
Sorry, Olly, this time the SEC's on the case.
I know it's not as sexy as, say, chasing down Bernie Madoff, but harping on the SEC when it identifies an issue and comes up with a straightforward approach to solving the problem isn't advancing the dialogue here.
I was working for Wells Fargo Nikko marketing 401(k) plan investments back when the very first target-date funds launched—the LifePath mutual funds, created (and actually even patented) by Don Luskin for Wells Fargo Nikko in 1995. If my aging brain doesn't fail me, I think I even wrote some of the early marketing copy. The idea was as good then as it is now—give investors a "fire and forget" way to invest for retirement.
But it's important to understand the context that LifePath and its target-date followers were made for—defined contribution plans.
The DC plan (401k, 403b, 457, you name it) has been an incredible boon for a generation of investors, even despite the last 10 years of performance. For many, many employees around the country, their DC plan is effectively their only savings. And prior to the mid 1990s, an overwhelming majority of DC plan assets were mis-invested, by any modern, rational view of finance. Back in the day, we'd walk into a Fortune 500 company and look at plan allocations, and we'd find people 100 percent invested in company stock heading into retirement; folks who had accumulated half-million-dollar cash balances and never invested; and everything in between.
For those plan participants, target-date funds were a rational bucket to receive their monthly contributions, without having to worry about how bond pricing worked or whether 10 percent was too much international exposure.
But as almost always happens, brought out of context, target-date funds make less sense, and get more confusing. Target-date funds in a plan environment are guaranteed to be well-explained, because most plans invest heavily in explaining their investment options and providing employee education and tools. Target-date funds then serve not only as an investment choice, but as the poster child for academic finance 101. Even for participants who don't use target-date funds, the classic picture of the "glide path" remains one of the best ways to explain time horizon and portfolio allocation.
(From BlackRock's commentary to the SEC).
The problem comes when these types of products are sold outside the carefully managed communications environment of a DC plan—say, for instance, in an ETF.
The biggest problems for ETFs stem from their greatest strength—exchange tradability. Because they live as nothing more than a ticker and a name, there's even less of a way to ensure that an investor has read a single line of marketing material, much less a prospectus.
The real solution to the core ETF marketing problem is some sort of truth-in-labeling law, so that everyone's definition of large-cap or growth is the same. But that's not going to happen. What the SEC did here was simply say, "Hey, you have to at least treat your ETF investor with the same level of care that you'd treat a plan participant—explain how you make your frontier, and how you run that frontier down the glide path to retirement."
Their other two options were to do nothing—and help no one—or to overreact and mandate what these types of funds had to actually be, which would have stifled creativity and innovation.
You can go back to losing all your money, Olly. I'll be over here in a corner giving the regulators a little round of applause for getting this one right.