WEBVTT 00:00:00.000 --> 00:00:03.439 Welcome back to the Deep Dive. Today we are taking 00:00:03.439 --> 00:00:06.860 a deep breath and plunging into probably one 00:00:06.860 --> 00:00:10.820 of the most important yet often least understood 00:00:10.820 --> 00:00:13.460 investment tools in modern retirement planning. 00:00:13.699 --> 00:00:16.800 It really is. Our mission is to decode the investment 00:00:16.800 --> 00:00:20.059 vehicle that truly promises that ultimate set 00:00:20.059 --> 00:00:22.699 it and forget it retirement strategy. We're going 00:00:22.699 --> 00:00:25.260 to try and navigate the sheer complexities of 00:00:25.260 --> 00:00:28.940 long -term savings without you know, the crushing 00:00:28.940 --> 00:00:31.079 burden of information overload. And get right 00:00:31.079 --> 00:00:33.719 to the core of it. Exactly. And that quiet giant 00:00:33.719 --> 00:00:35.579 we're talking about is the Target Date Fund or 00:00:35.579 --> 00:00:38.899 TDF. And this is such a crucial deep dive because 00:00:38.899 --> 00:00:41.439 we aren't talking about some niche product. No. 00:00:41.479 --> 00:00:43.979 We're analyzing a specific type of collective 00:00:43.979 --> 00:00:47.100 investment scheme that has quietly managed trillions 00:00:47.100 --> 00:00:49.520 of dollars globally. It's become the bedrock 00:00:49.520 --> 00:00:51.780 of retirement planning for millions of people. 00:00:51.939 --> 00:00:54.240 It's basically the default option for an entire 00:00:54.240 --> 00:00:57.159 generation of savers. Default investment strategy. 00:00:57.450 --> 00:00:59.429 at scale. That's the perfect way to put it. Okay, 00:00:59.490 --> 00:01:01.210 let's unpack this immediately. Before we get 00:01:01.210 --> 00:01:03.229 into the history and all that, we need a really 00:01:03.229 --> 00:01:06.269 clear functional definition. What exactly is 00:01:06.269 --> 00:01:08.909 a target date fund based on the sources we've 00:01:08.909 --> 00:01:11.689 looked at? So fundamentally, a target date fund 00:01:11.689 --> 00:01:14.170 is a mutual fund or it could be a collective 00:01:14.170 --> 00:01:17.170 trust fund that contains a single automatic and 00:01:17.170 --> 00:01:21.329 strategic mechanism. OK. It's asset allocation 00:01:21.329 --> 00:01:25.549 mix. It has to become systematically and automatically 00:01:25.549 --> 00:01:28.409 more conservative as a predetermined target date 00:01:28.409 --> 00:01:31.790 gets closer. So that date, say 2045 or 2050, 00:01:32.010 --> 00:01:33.810 that's my retirement year. Almost always. Yeah. 00:01:33.829 --> 00:01:36.370 It corresponds to the investor's planned retirement 00:01:36.370 --> 00:01:39.819 year. So the fund itself has a kind of. a maturity 00:01:39.819 --> 00:01:43.099 date and its whole risk profile is tied to that 00:01:43.099 --> 00:01:44.859 one number that's why you hear all these other 00:01:44.859 --> 00:01:46.939 names for them all those synonyms yeah life cycle 00:01:46.939 --> 00:01:49.500 funds dynamic risk funds or age -based funds 00:01:49.500 --> 00:01:52.859 the core appeal the massive selling point is 00:01:52.859 --> 00:01:55.799 that the tdf offers this lifelong managed strategy 00:01:55.799 --> 00:01:59.079 that in theory stays perfectly appropriate for 00:01:59.079 --> 00:02:01.519 you even if you never log in again Even if you 00:02:01.519 --> 00:02:04.200 never rebalance, never review your portfolio 00:02:04.200 --> 00:02:08.300 after that first day. Exactly. That ability to 00:02:08.300 --> 00:02:12.180 provide this outcome oriented fiduciary conscious 00:02:12.180 --> 00:02:16.580 strategy through one single fund choice is what 00:02:16.580 --> 00:02:19.300 makes them so profoundly effective. Especially 00:02:19.300 --> 00:02:21.680 as a default option. Especially as a default. 00:02:21.860 --> 00:02:25.400 They solve the paradox of choice. So if TDFs 00:02:25.400 --> 00:02:28.349 are such a dominant force today. Managing trillions. 00:02:28.370 --> 00:02:30.129 Let's go back. Let's establish the timeline. 00:02:30.409 --> 00:02:32.169 This wasn't something that a government just 00:02:32.169 --> 00:02:34.990 mandated out of thin air. It was an invention. 00:02:35.210 --> 00:02:37.310 Who was behind it? Yeah, that credit goes to 00:02:37.310 --> 00:02:39.590 two individuals, Donald Luskin and Larry Tint. 00:02:39.689 --> 00:02:41.750 They were at Wells Fargo Investment Advisors 00:02:41.750 --> 00:02:44.310 back in the early 1990s. The early 90s. Right. 00:02:44.389 --> 00:02:46.289 And that entity later became Barclays Global 00:02:46.289 --> 00:02:49.310 Investors or BGI. And it was BGI that first actually 00:02:49.310 --> 00:02:51.169 introduced these funds to the market. That shows 00:02:51.169 --> 00:02:53.159 some serious foresight. I mean, they were creating 00:02:53.159 --> 00:02:55.520 this thing way before the laws were in place 00:02:55.520 --> 00:02:57.680 that would make it a blockbuster. They absolutely 00:02:57.680 --> 00:03:00.240 were. They created the structure before the market 00:03:00.240 --> 00:03:02.300 demand was really formalized. But, you know, 00:03:02.319 --> 00:03:04.699 while they invented the product itself, the core 00:03:04.699 --> 00:03:07.900 principle, the idea that your age should determine 00:03:07.900 --> 00:03:10.919 your investment risk, that was kind of in the 00:03:10.919 --> 00:03:13.060 air, wasn't it? Was there a precedent for it? 00:03:13.219 --> 00:03:15.620 There absolutely was. The TDF structure was new, 00:03:15.719 --> 00:03:18.080 but this idea of age -based asset allocation. 00:03:18.909 --> 00:03:21.409 It was gaining traction on its own. A guy named 00:03:21.409 --> 00:03:23.969 Mark Kantrowitz, for instance, he proposed a 00:03:23.969 --> 00:03:27.090 very similar approach in the mid -1990s. Okay, 00:03:27.150 --> 00:03:29.129 and where did that pop up? What's fascinating 00:03:29.129 --> 00:03:31.789 is how quickly his concept was validated and 00:03:31.789 --> 00:03:34.189 institutionalized in a completely different area, 00:03:34.370 --> 00:03:37.689 college savings plans. The 529 plans. Exactly. 00:03:38.250 --> 00:03:40.009 Kantrowitz's strategy was almost immediately 00:03:40.009 --> 00:03:43.569 adopted across the board by all 529 plans. Wow, 00:03:43.689 --> 00:03:46.849 so that's a huge... Aha moment right there. By 00:03:46.849 --> 00:03:48.930 the mid 90s, the financial world had already 00:03:48.930 --> 00:03:51.229 accepted that a portfolio should get safer as 00:03:51.229 --> 00:03:53.090 you get closer to a goal, whether that's paying 00:03:53.090 --> 00:03:55.770 for college or, you know, retiring. Precisely. 00:03:55.830 --> 00:03:58.150 That widespread acceptance in college savings 00:03:58.150 --> 00:04:00.889 proved the model was sound. It just it set the 00:04:00.889 --> 00:04:02.810 stage perfectly for the U .S. retirement boom. 00:04:02.870 --> 00:04:05.009 And that boom, as all the sources make clear, 00:04:05.129 --> 00:04:07.669 it really points to one single critical piece 00:04:07.669 --> 00:04:10.750 of American legislation. The one that took TDFs 00:04:10.750 --> 00:04:13.409 from a clever idea. To an industry standard. 00:04:13.550 --> 00:04:16.649 The one that lit the fuse. Which was? The Pension 00:04:16.649 --> 00:04:19.689 Protection Act of 2006. This is the absolute 00:04:19.689 --> 00:04:22.730 inflection point in the story. It was a legislative 00:04:22.730 --> 00:04:24.829 game changer because it fundamentally shifted 00:04:24.829 --> 00:04:28.689 the burden and the liability for employer sponsor 00:04:28.689 --> 00:04:32.009 401k plans. Especially with auto enrollment becoming 00:04:32.009 --> 00:04:34.649 so common. Exactly. Let's drill into that a little. 00:04:34.750 --> 00:04:36.750 Auto enrollment sounds great. You're automatically 00:04:36.750 --> 00:04:40.610 signed up to save. Yeah. But. if I get enrolled 00:04:40.610 --> 00:04:42.949 and I don't choose an investment, my employer 00:04:42.949 --> 00:04:45.129 as the fiduciary is on the hook for whatever 00:04:45.129 --> 00:04:47.269 they put my money into. Right. That seems like 00:04:47.269 --> 00:04:49.689 a huge legal risk. It is a massive risk. And 00:04:49.689 --> 00:04:52.310 the PPA of 2006 solved this by creating a legal 00:04:52.310 --> 00:04:54.490 category for something called Qualifying Default 00:04:54.490 --> 00:04:57.709 Investment Alternatives, or QDIAs. QDIAs. And 00:04:57.709 --> 00:04:59.850 this new category offered what's called a safe 00:04:59.850 --> 00:05:02.449 harbor protection for the employer for the 401k 00:05:02.449 --> 00:05:05.470 plan sponsor. So if the employer puts my unallocated 00:05:05.470 --> 00:05:09.139 funds into a QDIA. they're legally protected 00:05:09.139 --> 00:05:11.339 if I complain later that it didn't perform well. 00:05:11.439 --> 00:05:13.620 That's it. They're shielded from that fiduciary 00:05:13.620 --> 00:05:16.139 liability. So the real driver for the explosion 00:05:16.139 --> 00:05:18.680 of TDFs wasn't just that they're convenient for 00:05:18.680 --> 00:05:21.019 me, the investor. It was fiduciary protection 00:05:21.019 --> 00:05:23.720 for the companies. That is the critical insight. 00:05:23.779 --> 00:05:28.459 Yes, TDFs fit the QDIA criteria perfectly. They 00:05:28.459 --> 00:05:30.889 were designed to be prudent. diversified, and 00:05:30.889 --> 00:05:33.230 most importantly, risk appropriate based on a 00:05:33.230 --> 00:05:35.870 time horizon, all without needing any active 00:05:35.870 --> 00:05:38.089 decision from the employee. They were a necessary 00:05:38.089 --> 00:05:40.850 legal shield. For the entire defined contribution 00:05:40.850 --> 00:05:44.769 system. Before 2006, TDFs were an option. After 00:05:44.769 --> 00:05:47.509 2006, for any risk -averse plan sponsor, they 00:05:47.509 --> 00:05:50.129 were a necessity. And that regulatory safe harbor, 00:05:50.310 --> 00:05:53.009 that's what turned the growth from, you know, 00:05:53.009 --> 00:05:55.509 a straight line into an exponential curve. But 00:05:55.509 --> 00:05:57.290 this whole movement wasn't just a U .S. thing, 00:05:57.410 --> 00:05:59.670 was it? We saw a similar shift happening across 00:05:59.670 --> 00:06:01.910 the Atlantic. Absolutely. The U .K. followed 00:06:01.910 --> 00:06:04.790 a very similar path, which just reinforces how 00:06:04.790 --> 00:06:07.410 universal this solution is. When the U .K. enacted 00:06:07.410 --> 00:06:09.709 its own auto enrollment legislation in 2012, 00:06:10.250 --> 00:06:12.610 TDFs immediately became central to their retirement 00:06:12.610 --> 00:06:14.430 system, too. Just like in the U .S. Just like 00:06:14.430 --> 00:06:16.269 in the U .S. The sources confirm their design 00:06:16.269 --> 00:06:18.110 satisfied the Department for Work and Pensions' 00:06:18.189 --> 00:06:20.290 strict criteria for an eligible default fund. 00:06:20.470 --> 00:06:23.269 I'm curious, were there any big differences in 00:06:23.269 --> 00:06:26.649 how TDFs had to adapt for the U .K. market versus 00:06:26.649 --> 00:06:28.689 the U .S.? I mean, the U .K. system is often 00:06:28.689 --> 00:06:30.850 much stricter on fees and charges. That's a great 00:06:30.850 --> 00:06:33.569 point. And yes, the U .S. market is often built 00:06:33.569 --> 00:06:35.569 around mutual funds that can have relatively 00:06:35.569 --> 00:06:39.170 higher expense ratios. In the U .K., the focus 00:06:39.170 --> 00:06:41.889 on value and efficiency is intense. Especially 00:06:41.889 --> 00:06:44.050 in those big national schemes. Right. Particularly 00:06:44.050 --> 00:06:46.310 in the mass market schemes like the National 00:06:46.310 --> 00:06:50.449 Employment Savings Trust or NEST. NEST uses TDFs 00:06:50.449 --> 00:06:52.449 and their design had to stick to really strict 00:06:52.449 --> 00:06:55.470 regulatory guidelines, including a strong focus 00:06:55.470 --> 00:06:57.990 on limiting annual fees. So what did that do 00:06:57.990 --> 00:07:00.819 to the funds themselves? forced providers to 00:07:00.819 --> 00:07:03.639 use lower cost index funds more often and to 00:07:03.639 --> 00:07:05.680 really refine their operations to meet those 00:07:05.680 --> 00:07:08.839 mandated fee caps. So structurally, TDFs in the 00:07:08.839 --> 00:07:11.360 UK are often cheaper and more index heavy than 00:07:11.360 --> 00:07:13.439 a lot of their US counterparts. It really shows 00:07:13.439 --> 00:07:16.019 the flexibility of the concept. So it adapts 00:07:16.019 --> 00:07:18.560 to the local rules, but keeps the same core objective. 00:07:18.959 --> 00:07:21.720 Exactly. So whether it's the US PPA or the UK 00:07:21.720 --> 00:07:24.899 auto enrollment regime, the legal necessity for 00:07:24.899 --> 00:07:28.060 simple, automatically adjusting default investment. 00:07:28.560 --> 00:07:31.930 That's the key to their global adoption an invention 00:07:31.930 --> 00:07:35.370 in the 90s a legal mandate in the 2000s and then 00:07:35.370 --> 00:07:38.970 global adoption the foundation is set okay now 00:07:38.970 --> 00:07:41.269 let's get to the core mechanism the actual physics 00:07:41.269 --> 00:07:44.269 of how these funds operate the concept sounds 00:07:44.269 --> 00:07:47.050 almost too simple risk goes down as time passes 00:07:47.050 --> 00:07:49.709 but let's unpack the design philosophy that makes 00:07:49.709 --> 00:07:52.579 this a fiduciary standard The underlying philosophy 00:07:52.579 --> 00:07:55.459 is, like you said, intensely pragmatic, but it's 00:07:55.459 --> 00:07:58.639 also backed up by a lot of academic rigor. Research 00:07:58.639 --> 00:08:01.319 consistently shows that age and your time horizon 00:08:01.319 --> 00:08:03.800 are the single most important factors in setting 00:08:03.800 --> 00:08:06.459 a long term investment strategy. So TDFs are 00:08:06.459 --> 00:08:08.439 built around the arc of a human life. The typical 00:08:08.439 --> 00:08:10.240 earnings curve and the moment you're going to 00:08:10.240 --> 00:08:12.620 need that retirement income. Yes. OK, let's follow 00:08:12.620 --> 00:08:14.800 the money through that arc. Describe the allocation 00:08:14.800 --> 00:08:17.199 shift for me from the day a 25 year old opens 00:08:17.199 --> 00:08:19.720 their account to the day they hit 65. So in the 00:08:19.720 --> 00:08:22.259 early years, when you're young, you have maximum 00:08:22.259 --> 00:08:25.399 time and critically a very high capacity for 00:08:25.399 --> 00:08:28.720 risk. A market downturn is just a temporary hiccup. 00:08:28.779 --> 00:08:31.699 You have decades to recover from a buying opportunity. 00:08:31.899 --> 00:08:34.159 Even you could see it that way. So the funds 00:08:34.159 --> 00:08:37.039 allocation is heavily focused on return seeking 00:08:37.039 --> 00:08:40.279 assets. We're talking primarily equities or stocks 00:08:40.279 --> 00:08:43.700 which offer the highest expected long term returns. 00:08:43.960 --> 00:08:47.059 It's an aggressive accumulation phase. And as 00:08:47.059 --> 00:08:50.120 time progresses. and this shift is very strategic 00:08:50.120 --> 00:08:52.460 and gradual, the fund systematically reduces 00:08:52.460 --> 00:08:55.220 its exposure to those equities. It moves year 00:08:55.220 --> 00:08:57.759 after year towards capital preservation assets. 00:08:58.000 --> 00:09:00.759 So bonds. Generally high quality bonds, yes. 00:09:00.919 --> 00:09:03.179 Things like government bonds and index linked 00:09:03.179 --> 00:09:05.080 bonds. These are lower risk, lower volatility, 00:09:05.299 --> 00:09:07.200 and they're designed not for maximum growth, 00:09:07.340 --> 00:09:09.100 but to protect the wealth you've already built. 00:09:09.240 --> 00:09:12.360 And this systematic shift has a very catchy industry 00:09:12.360 --> 00:09:14.919 name for it and a great analogy. It does. The 00:09:14.919 --> 00:09:17.259 technical term is the glide path. The glide path. 00:09:17.460 --> 00:09:19.879 And the analogy is highly visual and really effective. 00:09:20.179 --> 00:09:22.740 It's the path of an airplane coming in for a 00:09:22.740 --> 00:09:25.570 landing. Oh, I like that. The airplane, which 00:09:25.570 --> 00:09:28.649 represents the fund, starts high, high risk, 00:09:28.769 --> 00:09:32.870 high return assets, and then it smoothly, incrementally 00:09:32.870 --> 00:09:36.269 descends. The landing is that moment the fund 00:09:36.269 --> 00:09:39.330 arrives at the target date with the maximum exposure 00:09:39.330 --> 00:09:42.429 to the low risk assets you need to protect your 00:09:42.429 --> 00:09:44.509 capital. The glide path analogy is brilliant 00:09:44.509 --> 00:09:46.549 for explaining the what, but we need to go a 00:09:46.549 --> 00:09:48.129 little deeper into the theoretical foundation 00:09:48.129 --> 00:09:50.570 that justifies the why. You mentioned it's more 00:09:50.570 --> 00:09:52.570 than just simple rules about time. Oh, absolutely. 00:09:52.850 --> 00:09:55.240 The sophistication. comes from combining two 00:09:55.240 --> 00:09:58.759 major financial theories. First, you have modern 00:09:58.759 --> 00:10:02.200 portfolio theory, MPT, which is the classic framework 00:10:02.200 --> 00:10:04.580 for optimizing risk and return through diversification. 00:10:05.220 --> 00:10:07.399 But second, and this is more important for the 00:10:07.399 --> 00:10:09.500 shape of the glide path, is the theory of human 00:10:09.500 --> 00:10:11.799 capital. Okay, we have to define human capital 00:10:11.799 --> 00:10:14.539 precisely in this context. It feels key to understanding 00:10:14.539 --> 00:10:16.860 why a 25 -year -old should be 90 % in stocks. 00:10:17.120 --> 00:10:19.600 It's absolutely key. So in the context of retirement 00:10:19.600 --> 00:10:22.000 planning, human capital is defined as the present 00:10:22.000 --> 00:10:24.340 value of all of your expected future earnings. 00:10:24.419 --> 00:10:26.299 Well, paychecks I haven't earned yet. Exactly. 00:10:26.580 --> 00:10:28.899 Think about it. When a 25 -year -old starts their 00:10:28.899 --> 00:10:31.440 career, they're expecting maybe 40 years of regular 00:10:31.440 --> 00:10:34.679 paychecks. If you calculate the net present value 00:10:34.679 --> 00:10:38.539 of that huge, steady stream of income, it functions 00:10:38.539 --> 00:10:41.720 exactly like a massive, stable, bond -like asset 00:10:41.720 --> 00:10:44.159 that's sitting outside your 401k. So my total 00:10:44.159 --> 00:10:46.519 wealth isn't just my portfolio balance. It's 00:10:46.519 --> 00:10:48.600 the portfolio plus all the money I'm going to 00:10:48.600 --> 00:10:50.700 make in the future. Precisely. And because that 00:10:50.700 --> 00:10:52.940 future salary stream, your human capital, is 00:10:52.940 --> 00:10:55.259 inherently stable, it acts as this huge bond 00:10:55.259 --> 00:10:58.059 allocation on your total economic balance sheet. 00:10:58.200 --> 00:11:01.419 This tremendous built -in stability is what frees 00:11:01.419 --> 00:11:04.620 you, the investor, to take maximum risk with 00:11:04.620 --> 00:11:06.919 your relatively small financial portfolio. I'm 00:11:06.919 --> 00:11:09.399 effectively diversified by my job. You are. But 00:11:09.399 --> 00:11:12.460 here's the crucial point. As you age and approach 00:11:12.460 --> 00:11:15.279 retirement, your remaining human capital, the 00:11:15.279 --> 00:11:18.019 number of future paychecks you have left, shrinks 00:11:18.019 --> 00:11:20.600 towards zero. I see. So as that big, invisible 00:11:20.600 --> 00:11:23.860 bond -like asset disappears, my financial portfolio 00:11:23.860 --> 00:11:25.919 itself have to take over the job of providing 00:11:25.919 --> 00:11:28.879 stability. That explains the relentless shift 00:11:28.879 --> 00:11:32.200 into actual physical bonds in the TDF. That is 00:11:32.200 --> 00:11:34.679 the core justification for the glide path. The 00:11:34.679 --> 00:11:37.299 shift isn't just arbitrary. It's mathematically 00:11:37.299 --> 00:11:40.240 replacing a decreasing asset, your human capital, 00:11:40.419 --> 00:11:43.919 with an increasing one, financial bonds, to keep 00:11:43.919 --> 00:11:46.559 your overall risk profile consistent throughout 00:11:46.559 --> 00:11:49.679 your life. That makes profound sense. It connects 00:11:49.679 --> 00:11:52.100 your life stage economics directly to your investment 00:11:52.100 --> 00:11:54.759 strategy. But this brings up a crucial technical 00:11:54.759 --> 00:11:58.240 nuance, one that separates modern TDFs from older 00:11:58.240 --> 00:12:00.419 strategies. We need to explain the difference 00:12:00.419 --> 00:12:03.360 between TDFs and the old concept of lifestyling. 00:12:03.440 --> 00:12:06.100 A very important distinction. It all lies in 00:12:06.100 --> 00:12:08.860 the process of de -risking. Earlier lifestyling 00:12:08.860 --> 00:12:10.960 techniques relied on what we'd call an automated 00:12:10.960 --> 00:12:13.720 or deterministic approach. Deterministic meaning 00:12:13.720 --> 00:12:16.840 preset. Exactly. The investment plan was set 00:12:16.840 --> 00:12:19.299 in stone from day one. It used a rigid schedule 00:12:19.299 --> 00:12:22.340 like reducing equity exposure by exactly 1 .5 00:12:22.340 --> 00:12:25.279 % every single January 1st. No matter what the 00:12:25.279 --> 00:12:27.159 markets were doing, it was purely mechanical. 00:12:27.399 --> 00:12:30.200 And TDFs today use a superior method. The professionally 00:12:30.200 --> 00:12:32.460 managed ones, yes. They use what's called a managed 00:12:32.460 --> 00:12:35.039 or stochastic approach. Stochastic implies that 00:12:35.039 --> 00:12:37.519 random variables, market movements are incorporated 00:12:37.519 --> 00:12:40.330 into the process. So it's dynamic. It's dynamic. 00:12:40.450 --> 00:12:43.169 A managed approach means the fund manager is 00:12:43.169 --> 00:12:46.090 actively monitoring the reallocation. They might 00:12:46.090 --> 00:12:48.470 make discretionary adjustments based on volatility 00:12:48.470 --> 00:12:52.370 or interest rates or complex risk modeling. They're 00:12:52.370 --> 00:12:54.490 trying to optimize the path, not just blindly 00:12:54.490 --> 00:12:57.470 follow a preset timeline. Let's use a real world 00:12:57.470 --> 00:12:59.889 example of that difference. Say there's a sudden 00:12:59.889 --> 00:13:02.529 unexpected spike in interest rates, which crushes 00:13:02.529 --> 00:13:05.190 bond values. Yeah. How would a deterministic 00:13:05.190 --> 00:13:08.460 fund react versus a stochastic one? Great question. 00:13:08.639 --> 00:13:11.299 A deterministic fund has no choice. It has to 00:13:11.299 --> 00:13:13.899 follow the program. If January 1st rolls around, 00:13:14.059 --> 00:13:16.200 it sells the preset amount of stocks and buys 00:13:16.200 --> 00:13:18.820 the preset amount bonds, even if that means buying 00:13:18.820 --> 00:13:21.039 bonds at a terrible price right after a crash. 00:13:21.259 --> 00:13:23.460 Locking in losses or poor yields. It's rigid. 00:13:23.620 --> 00:13:27.200 It's rigid and risk blind. In contrast, a stochastic 00:13:27.200 --> 00:13:30.000 or managed TDF exercising its fiduciary care 00:13:30.000 --> 00:13:33.080 might pause that shift. The manager might temporarily 00:13:33.080 --> 00:13:36.340 hold more cash or shift to higher quality, shorter 00:13:36.340 --> 00:13:39.019 duration bonds. to ride out the rate spike and 00:13:39.019 --> 00:13:41.159 wait for the market to stabilize before continuing 00:13:41.159 --> 00:13:43.940 to de -risk. So the stochastic model understands 00:13:43.940 --> 00:13:47.039 that the pace of the descent should adapt to 00:13:47.039 --> 00:13:49.919 the wind speed of the market. To ensure a smoother, 00:13:49.940 --> 00:13:52.320 more optimized landing, that's the perfect analogy. 00:13:52.539 --> 00:13:54.820 It's a difference between an autopilot that is 00:13:54.820 --> 00:13:58.139 set once and never adjusts versus a seasoned 00:13:58.139 --> 00:14:01.240 pilot constantly making micro adjustments based 00:14:01.240 --> 00:14:04.019 on turbulence and wind shear. A critical distinction. 00:14:04.340 --> 00:14:06.500 Yeah. That's what provides the higher level of 00:14:06.500 --> 00:14:09.720 fiduciary care. Absolutely. That ability to dynamically 00:14:09.720 --> 00:14:12.899 adapt is why TDFs are considered a structural 00:14:12.899 --> 00:14:15.259 improvement over their deterministic predecessors. 00:14:15.460 --> 00:14:17.539 They acknowledge the future is uncertain and 00:14:17.539 --> 00:14:19.820 needs to be managed. Now that we've established 00:14:19.820 --> 00:14:22.620 the engine, let's talk psychology. TDF search 00:14:22.620 --> 00:14:25.200 is inherently linked to behavioral science. They 00:14:25.200 --> 00:14:27.600 feel like the ultimate example of a public policy 00:14:27.600 --> 00:14:30.200 nudge. Oh, they absolutely are. The core behavioral 00:14:30.200 --> 00:14:32.279 benefit is that they address choice paralysis. 00:14:32.700 --> 00:14:35.379 When you're auto enrolled and you face a menu 00:14:35.379 --> 00:14:38.220 of 20 different large cap, mid cap, small cap 00:14:38.220 --> 00:14:41.830 international funds. People freeze. They do nothing. 00:14:41.909 --> 00:14:44.029 They either choose nothing or they put everything 00:14:44.029 --> 00:14:47.009 in the lowest risk, lowest return cash option 00:14:47.009 --> 00:14:49.789 just out of fear. And that leads to what we call 00:14:49.789 --> 00:14:52.909 inferior outcomes. So the nudge simplifies that 00:14:52.909 --> 00:14:56.110 whole complex menu down to a single easy question. 00:14:56.769 --> 00:14:59.620 When do you plan to retire? That's it. And beyond 00:14:59.620 --> 00:15:02.700 that initial selection, TDFs mitigate active 00:15:02.700 --> 00:15:06.460 behavioral risks for your entire life. They neutralize 00:15:06.460 --> 00:15:08.379 your worst instincts. Like trying to time the 00:15:08.379 --> 00:15:10.659 market. Or panic selling during a downturn, which 00:15:10.659 --> 00:15:12.820 is the most destructive thing you can do. By 00:15:12.820 --> 00:15:15.419 locking you onto that automatic glide path, the 00:15:15.419 --> 00:15:18.000 TDF forces you into a disciplined, rational, 00:15:18.320 --> 00:15:21.320 long -term strategy. It prevents those emotional, 00:15:21.419 --> 00:15:23.759 short -term mistakes that can just decimate decades 00:15:23.759 --> 00:15:26.100 of savings. It's forced discipline, which is 00:15:26.100 --> 00:15:28.379 invaluable. But let's pivot to a fascinating, 00:15:28.620 --> 00:15:31.299 more modern intersection, the link between TDFs 00:15:31.299 --> 00:15:34.320 and personal values, specifically socially responsible 00:15:34.320 --> 00:15:37.379 investing, or SRI, and what younger investors 00:15:37.379 --> 00:15:40.389 are demanding. This is where we see the TDF structure 00:15:40.389 --> 00:15:43.250 really adapting to the market. The Solst material 00:15:43.250 --> 00:15:46.070 highlights some strong research showing a clear 00:15:46.070 --> 00:15:49.809 demographic shift. A 2016 study found that 74 00:15:49.809 --> 00:15:53.169 % of retirement plan participants said they'd 00:15:53.169 --> 00:15:55.370 like to see more socially responsible investments 00:15:55.370 --> 00:16:00.009 in their offerings. 74%. That's a huge majority 00:16:00.009 --> 00:16:02.529 wanting their savings to align with their values. 00:16:02.710 --> 00:16:05.490 That's a powerful mandate for change. And the 00:16:05.490 --> 00:16:08.370 reasoning is clear. 78 % in that same study said 00:16:08.370 --> 00:16:09.870 they believe it's important to make the world 00:16:09.870 --> 00:16:12.169 better while also growing their personal assets. 00:16:12.490 --> 00:16:15.210 It's a desire for congruence between finance 00:16:15.210 --> 00:16:18.070 and societal good. And when you filter that down 00:16:18.070 --> 00:16:20.269 specifically to the fastest growing group of 00:16:20.269 --> 00:16:22.600 Savers Millennials, The data gets even sharper, 00:16:22.720 --> 00:16:25.059 doesn't it? It really does. A 2016 survey of 00:16:25.059 --> 00:16:27.340 defined contribution plan participants had some 00:16:27.340 --> 00:16:31.039 compelling numbers. A staggering 71 % of millennial 00:16:31.039 --> 00:16:33.179 age investors said they would be more willing 00:16:33.179 --> 00:16:34.960 to contribute to their retirement plan if they 00:16:34.960 --> 00:16:36.580 knew their investments were doing social good. 00:16:36.759 --> 00:16:40.240 Wow. That is a direct line from values to actual 00:16:40.240 --> 00:16:43.460 savings rates. If plan sponsors want more engagement, 00:16:43.620 --> 00:16:46.200 they have to integrate these values. And it doesn't 00:16:46.200 --> 00:16:49.409 stop there. The survey also found 84 % of millennials 00:16:49.409 --> 00:16:51.730 want their investments to reflect their personal 00:16:51.730 --> 00:16:55.330 values, and 77 % want more socially responsible 00:16:55.330 --> 00:16:58.149 options available in their plans generally. These 00:16:58.149 --> 00:17:00.370 aren't just abstract desires, they're driving 00:17:00.370 --> 00:17:03.009 forces in investment selection. Okay, let me 00:17:03.009 --> 00:17:05.410 play devil's advocate here for a second. While 00:17:05.410 --> 00:17:08.470 the TDF is great for simplicity, doesn't adding 00:17:08.470 --> 00:17:12.180 SRI criteria introduce new risks? I mean, if 00:17:12.180 --> 00:17:14.599 you screen out entire profitable sectors like 00:17:14.599 --> 00:17:17.180 oil and gas, for example, aren't you potentially 00:17:17.180 --> 00:17:19.920 sacrificing the broad diversification that MPT 00:17:19.920 --> 00:17:22.279 demands and maybe even hurting overall returns? 00:17:22.559 --> 00:17:24.579 That is the essential tension, and it's a very 00:17:24.579 --> 00:17:27.140 valid critical point. The counterargument is 00:17:27.140 --> 00:17:29.920 that TDF managers, as fiduciaries, have to balance 00:17:29.920 --> 00:17:32.099 this. They have to weigh the desire for values 00:17:32.099 --> 00:17:34.380 -based investing with their primary duty, which 00:17:34.380 --> 00:17:36.420 is providing a reasonable retirement outcome. 00:17:36.700 --> 00:17:38.500 So how do they do that? They typically handle 00:17:38.500 --> 00:17:40.579 it in a couple of ways. First, they don't necessarily 00:17:40.579 --> 00:17:43.339 exclude entire industries, but they might screen 00:17:43.339 --> 00:17:45.980 companies based on ESG environmental, social, 00:17:46.160 --> 00:17:48.200 governance criteria within those industries, 00:17:48.380 --> 00:17:50.839 picking the best -in -class performers. Okay, 00:17:50.880 --> 00:17:52.819 so not throwing the baby out with the bathwater. 00:17:53.079 --> 00:17:56.359 Right. And second, many fund families now offer 00:17:56.359 --> 00:17:59.559 two versions of their TDFs, a standard one and 00:17:59.559 --> 00:18:03.279 an SRI or ESG focused one. This lets the investor 00:18:03.279 --> 00:18:05.259 make the choice. You can still pick a simple 00:18:05.259 --> 00:18:07.940 TDF, but you have the option to trade maximum 00:18:07.940 --> 00:18:10.519 theoretical diversification for that value alignment 00:18:10.519 --> 00:18:13.339 if you want. So the TDF structure by being a 00:18:13.339 --> 00:18:16.240 single curated fund is the perfect vehicle for 00:18:16.240 --> 00:18:18.910 that. You still only have to pick one fund. the 00:18:18.910 --> 00:18:22.029 2050 SRI fund, instead of building an entire 00:18:22.029 --> 00:18:24.529 ethically screened portfolio yourself. Exactly. 00:18:24.630 --> 00:18:26.930 It leverages the nudge without forcing every 00:18:26.930 --> 00:18:29.150 single investor to compromise. It just shows 00:18:29.150 --> 00:18:32.009 how dynamic this financial tool really is. We've 00:18:32.009 --> 00:18:34.029 done the origins, the mechanics, the psychology. 00:18:34.410 --> 00:18:37.250 Now let's chart the sheer, almost unimaginable 00:18:37.250 --> 00:18:39.670 scale this product has achieved. Target date 00:18:39.670 --> 00:18:41.390 funds aren't just an option anymore. They're 00:18:41.390 --> 00:18:43.509 a dominant market structure managing an astonishing 00:18:43.509 --> 00:18:46.420 amount of money. The sources show a truly explosive 00:18:46.420 --> 00:18:49.299 trajectory, almost all of it driven by that 2006 00:18:49.299 --> 00:18:52.059 legislation. Since the Pension Protection Act, 00:18:52.240 --> 00:18:55.220 TDF assets under management, or AUM, have grown 00:18:55.220 --> 00:18:57.980 by more than 10 times. That level of institutional 00:18:57.980 --> 00:19:01.440 adoption driven by regulation is almost unprecedented 00:19:01.440 --> 00:19:03.880 in modern finance. Let's run through the numbers 00:19:03.880 --> 00:19:05.720 slowly because the scale is really hard to wrap 00:19:05.720 --> 00:19:08.450 your head around. Okay. So we saw assets climb 00:19:08.450 --> 00:19:12.450 steadily, hitting $763 billion by the end of 00:19:12.450 --> 00:19:16.619 2015. But the acceleration just kept going. By 00:19:16.619 --> 00:19:19.440 March of 2020, total assets in target date mutual 00:19:19.440 --> 00:19:22.380 funds and collective investment trusts, or CITs, 00:19:22.400 --> 00:19:25.519 totaled approximately $1 .9 trillion. Almost 00:19:25.519 --> 00:19:28.059 $2 trillion. That represents the foundational 00:19:28.059 --> 00:19:30.420 savings of a huge part of the American workforce. 00:19:30.839 --> 00:19:34.000 That number alone makes TDF performance a matter 00:19:34.000 --> 00:19:36.380 of national economic importance. And if we look 00:19:36.380 --> 00:19:38.400 at the breakdown by the end of 2020, you see 00:19:38.400 --> 00:19:41.960 a shift. Assets and CITs reached $1 .18 trillion, 00:19:42.200 --> 00:19:45.700 while traditional mutual funds held $1 .57. trillion. 00:19:45.880 --> 00:19:48.400 The combined total is just massive and it keeps 00:19:48.400 --> 00:19:51.079 growing. And behind these trillions are the titans 00:19:51.079 --> 00:19:53.480 of asset management. Who are the key players 00:19:53.480 --> 00:19:55.420 driving this in the U .S.? It's basically a who's 00:19:55.420 --> 00:19:57.740 who of global finance. You have Fidelity, Vanguard, 00:19:58.099 --> 00:20:00.180 T. Rowe Price, Principal Funds, Wells Fargo, 00:20:00.240 --> 00:20:02.839 American Century, Northern Trust. And one really 00:20:02.839 --> 00:20:05.640 big one. And of course, BlackRock. It's crucial 00:20:05.640 --> 00:20:08.880 to mention them. They manage the life cycle funds, 00:20:09.180 --> 00:20:11.920 which are the TDFs for the U .S. government's 00:20:11.920 --> 00:20:14.720 thrift savings plan. That gives them a massive 00:20:14.720 --> 00:20:18.220 stable pool of federal employee retirement money. 00:20:18.440 --> 00:20:21.160 An incredibly important role. But you mentioned 00:20:21.160 --> 00:20:23.440 a technical detail earlier about the difference 00:20:23.440 --> 00:20:25.960 between mutual funds and those collective investment 00:20:25.960 --> 00:20:29.640 trusts or CTFs. You said makes tracking the true 00:20:29.640 --> 00:20:32.619 scale of all this complicated. Can you explain 00:20:32.619 --> 00:20:35.839 why CTFs create a bit of opacity? This is a critical 00:20:35.839 --> 00:20:37.839 point for anyone trying to understand the market 00:20:37.839 --> 00:20:41.099 data. The actual size of a manager's TDF assets 00:20:41.099 --> 00:20:43.339 is often really difficult to estimate accurately 00:20:43.339 --> 00:20:45.660 because a lot of the largest plans, especially 00:20:45.660 --> 00:20:48.480 institutional 401ks, use collective trust funds 00:20:48.480 --> 00:20:50.579 instead of publicly registered mutual funds. 00:20:50.680 --> 00:20:52.680 What's the difference operationally? So CPFs 00:20:52.680 --> 00:20:54.519 are similar to mutual funds, but they aren't 00:20:54.519 --> 00:20:56.400 registered under the Investment Company Act of 00:20:56.400 --> 00:20:58.900 1940. They're regulated differently, often by 00:20:58.900 --> 00:21:01.279 the OCC, and they're typically only available 00:21:01.279 --> 00:21:04.140 to qualified institutional investors like big... 00:21:04.400 --> 00:21:06.599 And because they aren't publicly registered? 00:21:06.819 --> 00:21:09.299 They don't show up in the common, widely published 00:21:09.299 --> 00:21:12.799 AUM estimates from places like Morningstar or 00:21:12.799 --> 00:21:15.599 Bloomberg, which mostly focus on retail mutual 00:21:15.599 --> 00:21:18.259 funds. So when we see a headline that TDF assets 00:21:18.259 --> 00:21:22.259 are $1 .9 trillion, that number is likely an 00:21:22.259 --> 00:21:25.589 understatement. The assets in these opaque institutional 00:21:25.589 --> 00:21:28.329 CTFs, like the ones used heavily by Northern 00:21:28.329 --> 00:21:31.730 Trust, are often just not in that figure. Precisely. 00:21:31.809 --> 00:21:34.630 The true institutional scale is likely much larger. 00:21:34.710 --> 00:21:38.049 The opacity of CTFs is a major factor in market 00:21:38.049 --> 00:21:40.430 analysis, and it just confirms that the TDF strategy 00:21:40.430 --> 00:21:42.769 is even more dominant than the retail reporting 00:21:42.769 --> 00:21:45.009 suggests. And as we said, this isn't just a U 00:21:45.009 --> 00:21:47.569 .S. story. Let's revisit the U .K. market. It's 00:21:47.569 --> 00:21:50.549 smaller in absolute terms, but it's just as reliant 00:21:50.549 --> 00:21:53.299 on TDFs structurally. The U .K. market is playing 00:21:53.299 --> 00:21:55.799 catch up. Yeah. Their first TDF launched in 2003. 00:21:56.000 --> 00:22:00.059 Current AUM is around 4 .0 billion pounds. But 00:22:00.059 --> 00:22:02.220 that figure is expected to accelerate significantly 00:22:02.220 --> 00:22:04.640 because of their ongoing auto enrollment legislation. 00:22:04.960 --> 00:22:06.759 And who are the early adopters there? It's the 00:22:06.759 --> 00:22:08.740 ones striving to change. It's the multi -employer 00:22:08.740 --> 00:22:10.900 pension schemes, what they call master trusts. 00:22:11.200 --> 00:22:13.660 So they're acting just like the U .S. 401k sponsors 00:22:13.660 --> 00:22:18.059 did after 2006. They need a safe default structure. 00:22:18.480 --> 00:22:20.779 Exactly. You see examples like the BlackRock 00:22:20.779 --> 00:22:23.500 Master Trust using BlackRock's TDFs and the Cary 00:22:23.500 --> 00:22:26.400 Workplace Pension Trust using Birthstar's TDFs. 00:22:26.400 --> 00:22:28.759 It just clearly shows that the institutional 00:22:28.759 --> 00:22:31.119 default investment architecture in the U .K. 00:22:31.200 --> 00:22:34.059 is mirroring the TDF reliance we saw in the U 00:22:34.059 --> 00:22:36.900 .S. Given that TDFs are built on these twin pillars 00:22:36.900 --> 00:22:40.980 of modern portfolio theory and fiduciary conservatism, 00:22:41.119 --> 00:22:43.920 you would assume they'd be free of major controversy. 00:22:43.980 --> 00:22:46.470 They promise a smooth landing. That's the promise. 00:22:46.710 --> 00:22:48.809 But as the 2008 financial crisis showed, when 00:22:48.809 --> 00:22:50.589 you have trillions of dollars involved, the execution 00:22:50.589 --> 00:22:53.710 can expose some serious systemic flaws. What 00:22:53.710 --> 00:22:55.690 was the critical wake -up call for TDF critics? 00:22:56.130 --> 00:22:59.089 The critical moment was absolutely the 2008 global 00:22:59.089 --> 00:23:01.529 financial crisis. Suddenly, critics were raising 00:23:01.529 --> 00:23:04.029 major concerns about the unexpected and, frankly, 00:23:04.089 --> 00:23:06.390 significant volatility that some near -dated 00:23:06.390 --> 00:23:08.829 TDFs showed during that period. And this is the 00:23:08.829 --> 00:23:11.450 core puzzle, right? Volatility is expected when 00:23:11.450 --> 00:23:14.109 you're young. And the fund is 90 % in stocks. 00:23:15.279 --> 00:23:18.980 But funds with a target of, say, 2010 or 2015, 00:23:19.299 --> 00:23:22.799 they should have been near the bond -heavy capital 00:23:22.799 --> 00:23:25.279 preservation stage. That's why it was so shocking. 00:23:25.889 --> 00:23:28.430 Volatility was completely unexpected in funds 00:23:28.430 --> 00:23:30.930 nearing their target date, the stage we all associate 00:23:30.930 --> 00:23:33.130 with safety, with money market funds and bonds. 00:23:33.470 --> 00:23:36.369 The losses in some cases were severe enough that 00:23:36.369 --> 00:23:38.089 people who thought they were five years from 00:23:38.089 --> 00:23:40.869 retirement suddenly saw double digit losses on 00:23:40.869 --> 00:23:42.869 their protected capital. Which suggests some 00:23:42.869 --> 00:23:45.029 of those near dated funds were just not positioned 00:23:45.029 --> 00:23:46.930 as conservatively as their name would imply. 00:23:47.190 --> 00:23:48.930 How did that happen? Were they just holding too 00:23:48.930 --> 00:23:51.700 much stock? That was part of it. Yes. Some managers 00:23:51.700 --> 00:23:54.160 had a much stickier equity allocation, meaning 00:23:54.160 --> 00:23:56.859 they might have kept 20 percent or even 30 percent 00:23:56.859 --> 00:23:59.619 in stocks right up to the target date. But it 00:23:59.619 --> 00:24:01.339 wasn't just equities. What else was in there? 00:24:01.420 --> 00:24:03.400 The sources suggest that some of these near dated 00:24:03.400 --> 00:24:05.859 funds were also holding higher risk bond instruments, 00:24:06.220 --> 00:24:08.900 things like lower rated corporate bonds or even 00:24:08.900 --> 00:24:11.640 mortgage backed securities to try and get a higher 00:24:11.640 --> 00:24:14.440 yield. And those assets performed terribly during 00:24:14.440 --> 00:24:17.319 the liquidity crunch of 2008. So if the plane 00:24:17.319 --> 00:24:19.519 that's supposed to be landing smoothly suddenly 00:24:19.519 --> 00:24:22.480 drops altitude violently, the regulators are 00:24:22.480 --> 00:24:24.619 going to step in. What was the government response 00:24:24.619 --> 00:24:27.339 to this crisis of confidence? It was immediate 00:24:27.339 --> 00:24:31.000 and serious. The SEC, the Securities and Exchange 00:24:31.000 --> 00:24:33.480 Commission, and the Department of Labor, the 00:24:33.480 --> 00:24:36.299 DOLE, they hosted a joint hearing on examining 00:24:36.299 --> 00:24:39.839 target date funds in June of 2009. The whole 00:24:39.839 --> 00:24:42.240 focus was to understand why seemingly identical 00:24:42.240 --> 00:24:44.240 products behave so differently under stress. 00:24:44.799 --> 00:24:46.559 Did they conclude that TDFs were fundamentally 00:24:46.559 --> 00:24:49.099 flawed, or was it more a problem of execution? 00:24:49.559 --> 00:24:52.039 They concluded it was a problem of non -standardized 00:24:52.039 --> 00:24:54.299 execution and, more importantly, insufficient 00:24:54.299 --> 00:24:58.019 disclosure. TDFs as a concept were deemed a welcome 00:24:58.019 --> 00:25:00.539 innovation. They solved a major problem. However, 00:25:00.779 --> 00:25:02.960 the regulatory consensus was that disclosure 00:25:02.960 --> 00:25:05.619 about the specific asset mix had to be significantly 00:25:05.619 --> 00:25:08.579 improved. So the core issue was a lack of clarity 00:25:08.579 --> 00:25:12.329 on the glide path. If I, the investor, choose 00:25:12.329 --> 00:25:16.130 a 2025 fund and my colleague chooses a 2025 fund 00:25:16.130 --> 00:25:18.430 from another company, we just assumed we were 00:25:18.430 --> 00:25:21.670 buying the same risk profile. 2008 proved that 00:25:21.670 --> 00:25:24.089 was absolutely not the case. That is the crux 00:25:24.089 --> 00:25:26.170 of the issue. The investigation revealed that 00:25:26.170 --> 00:25:28.410 glide paths can differ dramatically from one 00:25:28.410 --> 00:25:31.309 manager to the next. Some glide paths are to 00:25:31.309 --> 00:25:33.869 retirement, meaning they hit their most conservative 00:25:33.869 --> 00:25:36.849 mix right at the target date. But others are... 00:25:36.990 --> 00:25:38.990 through retirement. Through retirement. What 00:25:38.990 --> 00:25:41.430 does that mean? It means they stay somewhat aggressive 00:25:41.430 --> 00:25:43.670 at the target date, assuming the investor will 00:25:43.670 --> 00:25:46.009 continue to spend that money over 20 or 30 years 00:25:46.009 --> 00:25:48.589 in retirement. They only reach their most conservative 00:25:48.589 --> 00:25:50.990 point several years after the target date. Ah, 00:25:51.190 --> 00:25:53.210 the difference between a to glide path and a 00:25:53.210 --> 00:25:55.549 through glide path. That's a massive difference 00:25:55.549 --> 00:25:57.730 in risk exposure right at that critical moment. 00:25:57.869 --> 00:26:00.269 It is. And the lack of standardization meant 00:26:00.269 --> 00:26:02.609 investors couldn't easily compare the level of 00:26:02.609 --> 00:26:04.930 equity exposure being held near that landing 00:26:04.930 --> 00:26:07.740 date. That lack of comparability was identified 00:26:07.740 --> 00:26:10.559 as the key source of the confusion and the disappointment. 00:26:10.819 --> 00:26:13.730 So what was the result? Did the SEC impose a 00:26:13.730 --> 00:26:16.390 standardized glide path? No. They published new 00:26:16.390 --> 00:26:18.789 rules on disclosures for target date funds in 00:26:18.789 --> 00:26:21.750 2010. They didn't mandate that all 2025 funds 00:26:21.750 --> 00:26:23.910 must hold the exact same percentage of bonds, 00:26:24.150 --> 00:26:27.230 but they did mandate unprecedented transparency. 00:26:27.730 --> 00:26:29.710 So they forced them to show their work. Exactly. 00:26:29.930 --> 00:26:32.490 Fund managers were forced to clearly articulate 00:26:32.490 --> 00:26:35.170 and advertise their specific glide path, especially 00:26:35.170 --> 00:26:38.329 emphasizing the fund's asset allocation, specifically 00:26:38.329 --> 00:26:41.069 the equity percentage, at the target date itself. 00:26:41.609 --> 00:26:44.450 This finally allowed investors and plan sponsors 00:26:44.450 --> 00:26:47.369 to compare the true risk profiles of competing 00:26:47.369 --> 00:26:49.809 funds. So the ultimate takeaway for you, the 00:26:49.809 --> 00:26:52.509 listener, isn't that TDFs are inherently risky, 00:26:52.630 --> 00:26:55.529 but that the concept, while simple, is executed 00:26:55.529 --> 00:26:58.130 in very diverse ways. Precisely. The goal was 00:26:58.130 --> 00:27:00.369 to bridge the gap between that simple promise 00:27:00.369 --> 00:27:02.890 safety near retirement and the complex reality 00:27:02.890 --> 00:27:05.650 of varying strategies. If you're invested in 00:27:05.650 --> 00:27:07.650 one, you have to look up that fund's specific 00:27:07.650 --> 00:27:10.289 glide path and verify its equity exposure at 00:27:10.289 --> 00:27:12.680 the target date. The regulations now exist to 00:27:12.680 --> 00:27:14.799 make sure you can find that crucial number. Okay, 00:27:14.839 --> 00:27:16.380 let's bring this all together. This has been 00:27:16.380 --> 00:27:19.559 a true deep dive into an investment vehicle that 00:27:19.559 --> 00:27:22.960 really defines modern savings. We started with 00:27:22.960 --> 00:27:25.519 the invention by Luskin and Tint, and we followed 00:27:25.519 --> 00:27:27.559 the massive structural change from the Pension 00:27:27.559 --> 00:27:30.940 Protection Act of 2006. Which created that fiduciary 00:27:30.940 --> 00:27:34.220 protecting QDIA category. Right. And then we 00:27:34.220 --> 00:27:37.430 broke down the core engine, the glide path. that 00:27:37.430 --> 00:27:39.710 systematic model that shifts from aggressive 00:27:39.710 --> 00:27:42.609 stocks to conservative bonds. And we learned 00:27:42.609 --> 00:27:45.109 that strategy is rooted in sophisticated theory, 00:27:45.250 --> 00:27:47.970 the combination of modern portfolio theory with 00:27:47.970 --> 00:27:50.309 the concept of human capital, where your future 00:27:50.309 --> 00:27:53.109 earnings act as this massive initial bond allocation. 00:27:53.490 --> 00:27:56.190 We also recognize the powerful role of TDFs in 00:27:56.190 --> 00:27:58.670 behavioral economics. They act as a critical 00:27:58.670 --> 00:28:01.089 nudge to simplify choice and stop us from making 00:28:01.089 --> 00:28:04.269 bad emotional decisions. And we saw how the structure 00:28:04.269 --> 00:28:06.369 is flexible enough to integrate the growing demand 00:28:06.440 --> 00:28:09.220 for socially responsible investing. Especially 00:28:09.220 --> 00:28:11.619 among millennial investors who are tying their 00:28:11.619 --> 00:28:14.500 contributions directly to their values. And finally, 00:28:14.579 --> 00:28:16.920 we mapped the explosive scale reaching approximately 00:28:16.920 --> 00:28:20.779 $1 .9 trillion in U .S. assets and addressed 00:28:20.779 --> 00:28:23.700 that necessary regulatory response after 2008, 00:28:23.940 --> 00:28:27.269 which mandated clear disclosure about... those 00:28:27.269 --> 00:28:31.109 different to and through glide paths. Ensuring 00:28:31.109 --> 00:28:33.210 investors could finally understand the specific 00:28:33.210 --> 00:28:35.970 landing trajectory of their funds. It's a powerful 00:28:35.970 --> 00:28:38.710 tool. built on complex theory but marketed on 00:28:38.710 --> 00:28:41.450 simple convenience. But if we look ahead, we 00:28:41.450 --> 00:28:43.589 need to consider how those theoretical underpinnings 00:28:43.589 --> 00:28:46.529 might need to evolve. I agree completely. The 00:28:46.529 --> 00:28:48.410 entire architecture of the glide path relies 00:28:48.410 --> 00:28:50.569 so heavily on that foundational assumption of 00:28:50.569 --> 00:28:52.569 human capital, the present value of your expected 00:28:52.569 --> 00:28:54.849 future earnings, and a predictable working life. 00:28:55.069 --> 00:28:57.329 The current model assumes your human capital 00:28:57.329 --> 00:29:00.230 systematically declines to zero around age 65. 00:29:00.589 --> 00:29:02.950 Which necessitates that fully conservative shift 00:29:02.950 --> 00:29:05.430 in the portfolio. Right. But the world of work 00:29:05.430 --> 00:29:22.150 and life expectancy That's a really good point. 00:29:22.269 --> 00:29:24.529 So here is a final provocative thought for you 00:29:24.529 --> 00:29:27.309 to consider. Building on that human capital concept, 00:29:27.549 --> 00:29:30.970 if we assume that people might retire later or 00:29:30.970 --> 00:29:33.490 they might have these intermittent periods of 00:29:33.490 --> 00:29:35.400 late life retraining that temporarily rarely 00:29:35.400 --> 00:29:37.619 regenerates their earning capacity, their human 00:29:37.619 --> 00:29:41.480 capital, how might that force a fundamental evolution 00:29:41.480 --> 00:29:44.640 of the standard TDF glide path? If that invisible 00:29:44.640 --> 00:29:47.200 human capital asset doesn't disappear cleanly 00:29:47.200 --> 00:29:50.660 at age 65, then the current airplane landing 00:29:50.660 --> 00:29:53.279 glide path, which is designed for that very disappearance, 00:29:53.599 --> 00:29:56.380 might not be optimal anymore. It raises some 00:29:56.380 --> 00:29:58.539 fascinating questions. Do glide paths need to 00:29:58.539 --> 00:30:02.200 become flatter? Maybe stay 10 % or 15 % in equities 00:30:02.200 --> 00:30:05.140 for years longer? Or in the future, might we 00:30:05.140 --> 00:30:07.740 see stepped glide paths that have new temporary 00:30:07.740 --> 00:30:10.079 periods of aggressive investing later in life 00:30:10.079 --> 00:30:12.839 to account for these late career shifts? If the 00:30:12.839 --> 00:30:14.859 assumption of a straight line to the end changes, 00:30:15.059 --> 00:30:17.380 the path itself must change. Food for thought, 00:30:17.440 --> 00:30:19.819 indeed. The target date might not just be a date 00:30:19.819 --> 00:30:21.920 on a calendar, but a much more flexible concept 00:30:21.920 --> 00:30:24.680 tied to our own economic output. Thank you for 00:30:24.680 --> 00:30:26.839 guiding us through this essential deep dive into 00:30:26.839 --> 00:30:29.200 target date funds. It was my pleasure. We'll 00:30:29.200 --> 00:30:31.440 catch you next time for the next Deep Dive.