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00:00Can you just give us some size and scope, like how much they've grown over the last few years and
00:04how much money continues to come in?
00:06Sure. So going back 10 years now, when I joined the team, I think we're at about $150 billion, and
00:13we're now over $700 billion.
00:15And what you're seeing is this trend moving to defined contribution. So more money is coming in to defined contribution.
00:20This is how Americans are going to retire. So the demand is higher. Corporates are now engaging more.
00:25So think of auto enrollment, company matches. So it's driving a significant amount of flow into Target Date Fund's life
00:32path specifically.
00:33In a sense, though, I would imagine it's gotten a little more complicated. Also, we chatted about this on our
00:37planning call.
00:38The fact that, you know, I'll never forget my first job. It was like, throw the 401k into the Target
00:44Date Retirement Fund, and then you just forget about it.
00:47And the asset mix changes as you get closer and closer to retirement.
00:51But then, you know, over the last 12, 15 years, equities have just been on fire.
00:58Yeah.
00:59And had you overinvested or had been overexposed to bonds, you've really missed out.
01:05I'm curious how you think differently about the asset mix as people get closer to retirement versus maybe 10 or
01:1115 years ago. Has that changed?
01:13Definitely it's changed. The change in thinking we have is around what we describe as personal pensions.
01:18So what we've done very well with the industry, and this is exactly what you've seen, is that we've gotten
01:22people into the plans better.
01:24So this is auto enrollment. Auto escalation means that we're going to increase the savings rate over time.
01:29You have corporate matches, and they're invested in Target Date Funds.
01:31They're invested. These are professionally managed, diversified portfolios. It takes the guesswork out of it.
01:35So you do have lots of equities when you're young. The products that we oversee is 99% equities for
01:41young investors.
01:42You have a very long time horizon to compound.
01:44What we're seeing now, though, is that people that are approaching retirement need something more than stock and bond portfolios.
01:50And this is where personal pensions come in.
01:52So think of the DB plans. DB plans had a wider source of assets to choose from, whether it's private
01:57markets, different types of active management, and importantly, guaranteed income.
02:01That's the change that we're starting to see.
02:03So strategies we have, like Life Path Paycheck, this is going to embed guaranteed income into the portfolio, so somebody
02:09has an option of taking guaranteed income in retirement.
02:12If you give an individual money, a large lump sum of money, and say, hey, you've got a large asset
02:18balance at 65, good luck.
02:21That's what we're doing right now in the industry.
02:23We've professionalized accumulation, but we need to take that money and show them how to convert it into spending in
02:29retirement.
02:31But nothing is a given, though, and nothing is guaranteed.
02:34And we have certainly, if you think about the last, I don't know, go back to the great financial crisis.
02:39Like, we have seen things in our lifetime where markets really come undone.
02:43And, you know, all of us who were around during the GFC, I just remember thinking, okay, our financial system
02:48is going down.
02:49And there was a lot of moves to make sure that it did not.
02:52And that's the gold standard.
02:53We had COVID, the shutdown of the economy.
02:56Now, listen, we've bounced back tremendously.
02:58But how do you guys factor, like, how do you, like I said, nothing's a guarantee.
03:03So how do you figure that out?
03:06Diversification, simplest answer is, so this is where the bonds have come in.
03:09Bonds did very well during that time period.
03:11You're actually seeing a change now.
03:12This is one of the keys that we talk quite a bit about.
03:14Bonds have evolved to where they're not providing the level of diversification in the last couple of years that we've
03:20seen really since the 1980s, the early 1980s.
03:23They've not offered the same level of portfolio protection to equities.
03:26So we all owned fixed income because they offset your equity volatility.
03:30We're getting a lot more demand now across our book for alternatives.
03:34And this is where we talk about guaranteed income, private markets.
03:37And one thing we don't talk enough about are things like liquid alternatives.
03:40These are liquid funds.
03:43Not everybody thinks alternatives in a retirement portfolio are a good idea, especially in the context of the challenges that
03:49we've seen in the private credit world of late.
03:52We've even had folks sitting right where you are saying, it's a terrible idea to include this in retirement.
03:57These are products meant for sophisticated investors who understand what they're buying.
04:00And there's the concern that the stuff that will end up as an option isn't the best stuff.
04:07How would you respond to that?
04:09There's a couple of parts.
04:10First of all, it's the structuring is the issue.
04:12It's not the access point.
04:13You can access private markets specifically in 401k plans today.
04:17But it's about how do you structure them.
04:19Anyone can do it or just accredited investors?
04:22There's some stipulations of how it works, whether it's in the core menu or whether it's in the brokerage window.
04:27We're talking about those within the target date fund.
04:29We are professional investors.
04:31We are BlackRock.
04:32We have Aladdin tools.
04:33We have the tools to build the right structures.
04:36What we've looked at, though, is leveling the playing field between what's offered in defined benefit plans and in target
04:42date funds.
04:43So defined benefit plans are running about 20% private markets today.
04:47This is a traditional pension for the few people who still have traditional pensions.
04:52So they have those assets.
04:53So if you're in a pension plan, you have probably 20% of your portfolio in private markets.
04:59These are sophisticated portfolios.
05:01What we're advocating for is we want to be able to access those same investments.
05:05Now, we're not going to go from 0% to 20% overnight, but we need to expand the horizon
05:10of what we can do.
05:11Really, to your question about how do we evolve these portfolios differently, and this is the idea, again, of a
05:15personal pension.
05:16How do we take those vehicles, put them into a target date fund?
05:20But this is the most important point, and I think this is missed.
05:22We have a benchmark.
05:24We have to manage to a benchmark.
05:26It's not a gross-of-fee benchmark.
05:27It's a net-of-fee benchmark that we have to hit.
05:29So we can't just bolt on private markets and hope things work out.
05:33It has to be about the outcome, and that's the change that you've seen in the markets now.
05:37We're much more focused on what is the outcome, and the outcome is getting to be more how do I
05:41have certainty in retirement.
05:42I mean, if it doesn't work, people aren't going to put money in there.
05:44Absolutely.
05:45Essentially, right?
05:45It's as simple as that.
05:48What is the retirement scene?
05:51The good, the bad, and the ugly.
05:54That people are being confident about it but not really being ready for it.
05:57What is that point?
05:59So the point we're making is the confidence is quite high.
06:02It's one of the highest we've seen in confidence.
06:04One of the reasons for this is markets are going up.
06:07So when markets are going up and people's confidence is going to be directly linked to their account balance.
06:11So if I look at my account balance, if it's higher today than when I looked at it last time,
06:14my confidence is probably higher.
06:16Guilty as charged.
06:18Anyway, go ahead.
06:18That's why you just never look.
06:19That's the trick.
06:20There are times I don't look.
06:21But the hope is with the Target Date Fund, with professional management, we will rebalance this.
06:25We will adjust the portfolio.
06:26So if there is a drawdown, we can make changes.
06:29But the question about the retirement readiness, what we're really charting there is what's the gap between being confident today
06:37but being able to have enough money to have certainty in retirement.
06:40And that's the gap that we're seeing.
06:41It's not a huge gap, but it does exist.
06:44And we want to just continue to encourage people to save more money if they can.
06:48But importantly, go ahead.
06:49Sorry.
06:50No, no, finish, please.
06:51We want your money to work harder for you.
06:54And this is where we start talking about alternative investments.
06:57This is where we talk about guaranteed income.
06:59There's things that we can do to make these products more efficient.
07:01We've learned all this from the traditional pension plans.
07:04We want to be able to incorporate those in because telling somebody they need to save 5% more is
07:08not always a good conversation.
07:11What I wanted to ask you, and I think I was looking at some retirement stuff, is that increasingly, you're
07:17going to need to think about your health care coverage, right?
07:19Sure, there's government, but it could be a nightmare.
07:22Are you increasingly thinking about that in terms of what a person is going to need in retirement?
07:27How does that factor in?
07:28We refer to this phase as the retirement window.
07:31It's between the age of about 55 and 70.
07:33And this is when it really gets stressful for individuals.
07:36The numbers are pretty challenging.
07:39So about two-thirds of Americans say they want to work longer, and only about a third of them end
07:45up working longer.
07:46And when you dig into why, it's because of their health, their spouse's health, or they lose their job.
07:51So that window, that 15-year window, is critical to understanding what choices do they have.
07:56How do we think about Social Security?
07:57How do we think about guaranteed income?
07:59We've got to be able to position them in a way where they will have enough money in retirement.
08:03And what they're really looking for is that certainty.
08:04So it's all of it.
08:05How active are people, especially in times of volatility in markets, when it comes to the portfolios that they should,
08:10essentially all experts say, never touch it, don't change the allocation, set it and forget it, and just check on
08:16it every quarter?
08:17The recent data shows that people are not particularly active in target date funds.
08:22That's a good thing.
08:22It is a good thing.
08:23Because we get in our own way as humans.
08:25Right.
08:26Almost every study that we look at shows people in target date funds in general do better than people in
08:31the core menu, which is when they decide to do it themselves.
08:34The target date funds do the things that we know we're supposed to do.
08:36So diversification, asset allocation, rebalancing, that's what a target date fund does.
08:41Now, the one point that I would caution on, though, is that we've not seen a prolonged drawdown in the
08:45market for 16 or 17 years.
08:48And to me, it wasn't 08 that makes me nervous.
08:50It was we had 2000 to 2002.
08:52And then seven years later, we hit 08.
08:55If you have the Bloomberg terminal, just go look at the chart of the NASDAQ during that time, the S
09:01&P 500 during that time.
09:03There were a lot of years where things just went sideways.
09:05Well, do you feel like this AI era could be similar to that?
09:11This is a much longer conversation than just whether the AI era is similar to that.
09:16I think it is very different than that.
09:18I think what AI is doing is very different for a lot of different reasons.
09:21There's layers to the AI story.
09:23What is also different now is that we're investing differently today than we were 20-some years ago.
09:28So I started investing with my dad in the late 90s, buying IPOs on a pay phone from my high
09:34school.
09:35So thinking about that versus teaching my sons about target date funds and talking about Trump accounts, we've gotten to
09:42this diversification point.
09:43We've gotten to a point about people actually own bonds now.
09:46They own alternatives.
09:47So I think it's a different investment market.
09:48Okay.
09:49It is more diversified.
09:50It's also a market where people have to be in to plan for their retirement.
09:53We only have 30 seconds left, but you mentioned Trump accounts.
09:55How does that fit into the retirement picture?
09:58It's an access point.
09:59So it's about rewiring the entire retirement system.
10:02Trump accounts simply do what we all know is save earlier and let your money compound for longer.
10:07So if you can give somebody that is just born, somebody 5, 10 years old, more time to compound, you
10:13know the math as well as I do, that extra time of compounding is important.
10:17And I think the more Americans invest in capital markets, American capital markets, the better we're going to become.
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