It is safe to say that Ron Surz is passionate about retirement, particularly when it comes to target-date funds.
Surz, president and CEO of San Clemente, Calif.-based Target Date Solutions, believes that too much risk is placed in TDFs, which have become the go-to default investment in many employer-sponsored retirement plans.
He pointed out that Morningstar has become the top TDF rating authority, but much of their rating is based on investment performance. Not surprisingly, funds with high U.S. equity allocations receive high marks because U.S. stocks and real estate have skyrocketed in the past five years, leaving other asset classes in the dust.
Surz believes that performance shouldnt be the only indicator of what makes a good target-date fund because stocks are risky and eventually the U.S. equity markets will fall again. He is afraid of a repeat of 2008 when TDF investors, particularly those nearing or entering retirement, lost a huge percentage of their savings because of the glide path their TDF was following. Many were heavily invested in risky equities when, by all counts, their TDF investments should have become more conservative as they got closer to their target retirement date.
That high performance over the last five years is as much a signal of high risk as it is for high performance, Surz said. Target-date funds need to be viewed from a fiduciary perspective.
He added that 2008 was a test. Many people lost 25% or more of the assets invested in their target-date funds. For people nearing or entering retirement, that is hard to regain.
Because of the losses in TDFs it was expected the industry would get safer, but just the opposite happened over the past five years, said Surz. They got riskier.
Wait until the next correction and then use performance as your guide, he said. The next 2008 will bring class action lawsuits.
Surz took Morningstars performance-based data and applied some of his own criteria to determine which were the best and safer TDF options out there. For the most part, his list was the exact opposite of Morningstars.
His fiduciary rating system ranks TDFs by the number of asset classes they include, which is a measure of diversification, and the amount of equity exposure at the target date. It also looks at whether or not the fees are reasonable.
It is a very simple measure but it is there for everyone to see, Surz said.
He would like to partner with someone in the industry to come up with a rating system for TDFs that the industry as a whole will embrace.
Target-date funds are a $1 trillion industry and growing and most of that money is held by three large companies, he said.
The majority of fiduciaries are not considering the alternatives and are just going to their regular service provider, he said. That is just plain wrong. There are better choices.
Unfortunately, he said, the fiduciary perspective is that any QDIA (qualified default investment alternative) will do and you cant go wrong with the big names.
The opposite is true, he added. You cant not do due diligence in trying to find the best.
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