← Educational Alpha
Educational Alpha
S3: Conversation with Aaron Filbeck, Managing Director, Global Content Strategy, CAIA Association
00:40:56
Loading summary
Transcript27 lines
- [00:05]
A
Welcome to Educational Alpha. I'm Bill Kelly, your host, bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator, and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com.
- [01:01]
B
In this episode, host Bill Kelly welcomes Aaron Philbeck of the Kaya association for a wide ranging discussion on the growing momentum behind expanding access to private market investments within retirement plans. They explore the implications of a recent executive order focused on 401 access, the structural differences between DB and DC plans, and the potential benefits and risks of democratizing private market exposure. The conversation probes the importance of fiduciary responsibility, the role of innovation in target date funds, and the evolving narrative around long term investing and investor protection.
- [01:43]
A
Aaron Filback welcome to Educational Alpha.
- [01:46]
C
Great to be back Bill.
- [01:48]
A
A very interesting conversation ahead. We're going to be talking about democratized access and I used a past tense for democratized and I think it is a genie, the set of the bottle and we're going to cover that in a moment. But to get right to the heart of the matter, I often ask guests to give a little bit of the background in street cred. But you're probably a third of my age with 10 times the credentials and so many accomplishments, it's bad form to embarrass the host. So I'm going to skip over the details Aaron, but maybe just allow you to introduce yourself to the audience.
- [02:22]
C
I think that's a perfect introduction. We can leave it right there. In all seriousness, just to keep it brief, I started my career in the wealth management space, managed client portfolios for a number of years and then joined KAYA just over six years ago. And I've bounced around a lot of different roles within the association, sat on our curriculum team for a number of years, led our Unified by Kaya learning platform that we developed four or five years ago. And now I sit in a position where I lead a team that is focused on how we present ourselves on the marketplace. So marketing, brand thought, leadership, community and so on, and really engaging with the broader industry across all of those different medium and Also a podcast host myself. So it's a podcast about a podcast. Excited to be here.
- [03:08]
A
Excellent. Well, success has many parents failures and often as the saying goes. But I'm going to take the credit for having hired you in the first place. And it was one of the very best investment decisions I've made because a big part of Kaya's remit is to try to put the client first, something that you absolutely wear on your sleeve, Aaron. So thanks for bringing that intelligence to.
- [03:31]
C
Kaya, and I'm eternally thankful for you hiring me, Bill. And it's amazing the power of social media, how it can bring people together. And we probably never would have crossed paths 20 years ago, but today it's totally accessible. So I'm very appreciative.
- [03:45]
A
Yeah, absolutely. So we'll move out of the category of mutual love affair and onto the business at hand. So it's interesting with this executive order that is now, as of two days ago, it's only 30 days old and it was entitled Democratizing Access to alternative assets for 401k investors. And I have a couple of maybe opening bids about what it purported to do and what it is going to do. And maybe I'll start with that and get some of your reaction. And when you think about an executive order, you think about this weighty document. I put it into a word count and a word cloud. It's only a thousand pages long, about the same length as a blog post you or I would write. And I think the premise up front is one I've heard From so many GPs in this industry that this could almost have been written by a lobbyist. And maybe it was. But the opening premise is so grossly flawed and it brings up the tired argument that why should the firefighter and the police officer in Texas have access to alts and the poor accountant doesn't? Because the poor accountant is dealing with their 401k plan. And if somebody said you had to answer that question, fair or unfair, with no caveats to it, I think most people would be forced to say it's unfair. But there is a massive but attached to that, which is the firefighter and the police officer has a fiduciary standing behind them. They have a contractual relationship with that fiduciary where there's 100 cents on the dollar in their mailbox every two weeks from date of retirement to date of death and maybe even on a second to die basis for spousal sharing of those benefits, we as individuals in the 401 plan do not have that we don't have a fiduciary. We have a fiduciary that's deciding what the offerings are, and that's a lot of what this executive order is offering. But to think that that puts us on parallel footing with the DB plan is just outrageous. But that's how this discussion began. And I just think that there's danger associated with that. But we could talk more about what it is and where it's going in a moment. But maybe I'll just pause there to get your visceral reaction to either what I said or your opening bit about what this executive order is purporting to do.
- [06:01]
C
Yeah, I don't know that I disagree at all with you, Bill, in that assessment. And in fact, I think that the argument is somewhat flipped in terms of where we're at today. And by that I mean we've started very much with what we're putting in these plans and the products that are in these plans, rather than talking about the plans themselves. And I almost think that we're having the wrong argument to some degree where we have had this move from DB to dc. And to your point, the DB plans still have that level of sophistication and fiduciary management that's attached to that, whereas the DC plan, it's a very wide dispersion of sophistication of plan sponsors and participants, and you don't have that centralized fiduciary management. And I think that's a more interesting conversation for us to be having. We might end up in the same place, which is better access to product and a wider tool set that's available to plan participants. But I think we've got to flip that conversation a little bit and talk more about the structure of retirement and what that actually means for participants in the 21st century.
- [07:07]
A
I absolutely agree with that. And it's not only talk about the structure, but the wrappers as well, because these all do matter, and not that would ever happen. But if Trump rang me up, as opposed to the local lobbyist, and asked me to write the executive order, I think the guidance, and it's important to use the word guidance, he can't mandate anything. An executive order cannot create laws. So he's asking the dol, in maybe concert with the sec, to look at and come back with advice, guidance, et cetera. But he's not trying to codify law. But had he asked me to write it, I think I could have reached the same conclusion to some degree. But it has to be brought along in language. And terms, maybe, Aaron, that you just alluded to. And I think about where innovation is happening, where the economy's going, what is driving that economy, a lot of it is moving more and more to the private markets. How and when that ends, I don't know. But there is so much liquidity in, well, maybe less than there was, but there is a fair amount of liquidity in the private markets that companies are not going public anymore. And I think there are some benefits to that construct. And I do point, and I've mentioned this in other podcasts, you look at anybody that's built a substantial amount of wealth, I would say nine times out of ten, put aside the ones who have inherited it. Being born on third base is always an awesome place to be. But the vast majority of them have started and sold a private company so it can be in the right hands, a wealth builder. And if I could find an agent that could act on my behalf to go and sort through this morass of opportunities and get me into the very right investment solutions in the right wrapper. It's a home run. And last point, and I'll pause to get your input. Some of the things I've done in my retirement years and I'm trying to redefine what exactly that means. I joined Star Mountain Capital as a senior advisor because I really do like the space and I'm getting to know Brett and his team. But I went back before we spoke today to remind myself of this lower middle market, which is defined by companies in the 5 to $50 million revenue range. It's a substantial percent of GDP, a substantial percent of jobs in the USA. And if you go down the sidewalk in any small town usa, get past the Starbucks and the bank, but every one of those businesses is a small business owned by an entrepreneur. And who is the majority owner? The baby boomer. And the baby boomer is now 60 to 90 plus. But I saw a stat where almost 90 plus percent of them have no succession plan. There is a tremendous opportunity in the real economy to allocate capital and I think that is the story, not so much. Well, postman can do this, but you can't. Ridiculous.
- [09:59]
C
To your point, this isn't an enforceable law by any means, but I do think that the framing around this is important. Again, we might arrive at the same conclusion at the end of the day and maybe the law ends up being the same at the end of the day. But I think the spirit in which it's laid out, and I agree with you in terms of how we Frame it. It's access to broader parts of the economy, whether that's private companies, whether it's loans that you can't get access to through the banks or through the public markets. That is a much more compelling conversation to be having of. Look, we've got participants who are employed by these companies. They should also be able to invest in these companies. But the way it's been framed at the moment is very much a product thing, which is good for the industry. But I'm not quite sure that it's the right framing for participants who aren't really thinking about product. At the end of the day, they're thinking about can I retire? Am I going to have enough money to last me the rest of my life? And that's a very different conversation to be having. Not clamoring for this PE fund versus this private credit fund. I don't think that's on the hearts and minds of the rest of America, if you will.
- [11:11]
A
And I can absolutely relate to what you just said, Aaron. As a newly minted semi retiree, I think there's a lot of compelling reasons to invest wisely, start early, diversify your portfolio. But outcome oriented solutions, how do you spend down from that balance sheet without feeling guilty? Maybe it's latent lapsed Catholic guilt on my behalf that you're afraid to touch principle for any reason. And I think there should be more emphasis and outcome oriented products too. That might be a very good home for some of these private market options. Jumping back to the starting point with the executive order, I think one observation could be this too shall pass. And again, I'm going to be writing a blog post on this. And not to turn into a civics lesson, but going all the way back to George Washington who issued one during his time in office, one executive order. There've been over 14,000 of these issued. And Trump and the Trump administration, well, I guess it's Trump because he issues them. He's on a bit of a tear. He did 220 in his first four years in office. He's already over 200 this time around. And he's issued close to 20 since this executive order on the 401k plan. And maybe even more interesting is that I believe that I had these numbers directionally correct that when Biden came In between the two Trump administrations in his first hundred days, he reversed 60 of Trump's executive orders. And then Trump sort of back at you, reversed 80 of Biden's in his first a hundred days in office. So I think one attitude could be well it's not law and somebody's going to reverse this somewhere down the line. And I think you and I have similar thoughts in this. But I'll park the question and you can respond. I would say anybody that says this is going to be reversed somewhere down the line, I would say not so fast to very unlikely. The guidance to the DOL is 180 days, six months, well before the midterm elections. And the moment this gets put in place and there's a lot of lobbyist dollars that are going to really be pushing for this to happen. This being democratized access, I would put it in the category of impossible to get that genie back in the Bottle Once the 401k participant, the poor accountant is now allocated to private Equity in their 401 plan is and we've set up rules around limiting litigation risk to the plan fiduciary. I think it's going to be near impossible to turn the hands of time back.
- [13:41]
C
So a couple of threads there that I'll pick up on. So one is the idea of 180 days. Trump in particular hasn't been very successful with actually getting things done in the timeframes that he originally lays out. So we'll see. That could be something that gets pushed back. TikTok's a really good example of that. There's been a couple of others that we kind of punt tariffs. We kind of punt down in time. The other point which I think is really important is this reversal when you get a new administration that comes into office and they say I'm not going to do what the last guy did and reverse this through an executive order. And I think that that is why the legal part of this is so important. And bipartisan support is also so important in order to do this. And you can paint that brush the defined contribution space. He's also been very adamant on the crypto space as well. And so all these initiatives, despite maybe some are well intentioned, maybe some are not, until you get bipartisan support and laws that are passed in Congress to do something to move this forward in a more sustainable measure, it's going to be very confusing both for the participant but also for the broader industry and might actually hold back some of that momentum and animal spirits that we've seen on some of these different announcements. The third thing I'll say, and I'll pause here is again back to the sentiment and the way things are framed is important because there's been a lot of ideas in the past that maybe didn't make it into law. Maybe it's part of a platform on either side of the aisle or it's a presidential platform, but they start to kind of become normalized in the way that we talk about certain issues. So on the left, it could be minimum wage, it could be Medicare for all these things were radical things 15, 20 years ago. And it's become part of the normal conversation today and obviously hasn't made a lot of movement from a legal perspective. But I would say the same thing on things like crypto and defined contribution plans. We've started the conversation. And so back to your point, you can't put it back in the bottle. It's going to morph and change over time. And until we get some kind of legal precedent around it, I'm not quite sure where that goes.
- [15:50]
A
If you look at, I mentioned the reversal in the subsequent administration for these CEOs, even Trump's 200 plus, a fair percentage of those are currently being challenged in the courts or have active litigation in front of them. But I look at the power and velocity of capital and capitalism and it is a very, very powerful force. And we're talking about trillions of dollars in motion here and a lobbyist group that are just salivating to get access. And if this gets fast tracked, there will be litigation, no doubt. And ultimately, if it ends up in the appeals circuit in the 5th district in New Orleans, we've already seen what happens there. It eventually work its way to the Supreme Court. And I think most of these justices already have a nice DB plan themselves. And if they fall in love with Trump's opening argument, which I think is easy to do, yeah, they should have access, let them have it. So that's why I think that there will be challenges. Things move at a pace. And there is reasons that this may slow down, but I just think it's going to accelerate. And one area that I find interesting and maybe as an opportunity we could talk maybe more a little bit about potential solutions and you might have some thoughts. And I wrote in this subject a little bit recently too, but it seems to be a consensus of what I'm reading is the collective trust vehicle inside of a non depository trust company has resonance already. It doesn't have any limitations on illiquid holdings. And I think that there is a big push to think about these commingled vehicles inside a non depository trust company. And a lot of the law firms that advise the management industry, it seems like it's moving in that direction. So I don't know if you've seen any tidal shifts in the near term or other solutions you might have on your mind. But these collective investment Trusts known as CITs, I think we're going to start to see every asset manager and their sister and brother having those as part of their offering.
- [17:50]
C
And this kind of goes back to what I was doing before joining Kaya. But you sit in front of plan sponsors and you walk through the fund menu and participant data and who's contributing, who's not contributing, what's the average contribution. And you can kind of break the 401k participant space into two major groups. One is the do it yourselfers. Those are the ones that are actively contributing and investing and picking their funds and building their own portfolios. And then there's the non do it yourselfers, the ones that require more of a parental element to their experience in the 401k space. I would say that the do it yourselfers are a minority and that is becoming increasingly the case over time. And I would say even not just on the investment side, but as an industry we have evolved how the 401k space experience changes from participation rates, auto enrollment, default investment options. Most people just don't pay it any mind and any attention all the way from participant levels and auto escalations, moving your contribution up from 5 to 6 to 7% every year so you just don't notice. Pay yourself first without actually paying yourself first. It shows you the mindset and the mentality of most 401k participants, which isn't a bad thing. And so when I think about the investment solution that makes the most sense if we're going to do this, it is to put it in whether it's a CIT or it ends up being in a 40 act fund, some kind of multi asset diversified solution that could be risk based, it could be age based like Target Date fund solutions, but it's managed for you on behalf of you by investment professionals who have the access, the scale and the capability to access a lot of these different asset classes. I know you've taken an alternative solution which I'll let you talk about, which I think is also a very good solution for the do it yourselfers. But if you're trying to get the most amount of people invested in this space without doing any more work in order to do so, that would be the parental solution that I would advise. But Bill, I won't steal your thunder. I'd love to hear your thoughts as well.
- [20:02]
A
There's a lot there. And try to limit myself to 40 minutes or less with my answer. But it's interesting. The ultimate I could do it myself statement is these self directed brokerage accounts which are inside of many 401ks. I think surveys show most, shouldn't say most, but good majority, 40 plus percent surveyed offer it. The number could be high or low, but it's a substantial percentage. The actual investors picking that up and utilizing it, less than 1%. But maybe in terms of your other point about investors recognizing they need help, the default option in many, many cases is the target date fund, the tdf. And investors recognize that that's providing some level of asset diversification for them that's aged appropriately. And I think we have to go back and look at that because in the good old days moving more toward fixed income at 65 when you could live another 30 years is kind of crazy. So I think we've got to maybe rejigger the thought process in the TDF space as well. Maybe just as a quick side note, part of the industry siren song, it was not necessarily specifically stated in Trump's executive order, but maybe by inference, and I've heard many very senior recognized GPS say this, this 6040 is dead to me and it should be dead to you as well. I think it's a foolish statement, not helpful to the end investor and it's a scary statement. We're basically saying to them the approach that you've taken for investments and your parents have taken toward investing is now wrong and dead. And how do I react to that? Well, they're a lot smarter than I am. They have much greater access to where the risk premia is. I'm very scared and I think I have to listen to them. And I brought this up before that 2022 aside, the 6040 is a very, very hard index to beat. Pick any 10 year window and it's averaged 7% pick any 10 year window. It's never ever, ever been negative. So I think that we've got to say to most investors that will be okay. And it might be the right position for you because there's risk adjusted returns. But you have to look at each individual investor and see how risk seeking or risk adverse that they are. And individually, even people like you and I, Aaron and I would put us in the more sophisticated camp. We don't have all the answers but if we can have convening power with the other Aarons and Bills and collectively create a sovereign wealth fund and I've got now one of the most gifted managers who needs to be appointed and hired and I think that should be part of the DOL and SEC charge to say, well, we should try to recognize the convening power of these individuals. Very similar to what TIF has done. Very similar to what the Common Fund has done where they say universities, endowments that are too small don't have the staff and the sophistication, the ability to do due diligence. Same thing with TIFF in the foundation space. Why can't we do that with us as individuals? And if you reverse engineer these assets that everybody is salivating over, by Most estimates the 401k DC space is $9 trillion. Self directed IRA gets it up to 15 trillion. Compare that to the size of the Abu Dhabi Investment Authority or Yale's endowment or Norway's sovereign wealth fund. Multiples of that. So if we could have the convening power of collectively pooling this together, hiring professional managers, they could find the best investments. They could beat the other side up and get it on a very best fee basis on a most favored nation. And I would allocate to a fund like that yesterday. But is that what the industry wants? No. And I think if we come up with a solution and the industry is not at least mildly squawking about it, it's not the right solution. It should be something that is very uncomfortable for them. And what is very comfortable for them is a land grab of the target date fund space. There's this big fat pitch that is holding 40, 50% of the defined contribution assets. Let's just allow no more limitations. Right now there's a 15% illiquid limitation in the Rick space for target date funds. Let's just open it up and make it unlimited. Foolish, I would say is maybe a headline. Foolish. Why? Because the very best long only equity manager is not very good at picking the best private equity manager. Why does Kaya exist? Because the dividend discount model does not work for the cfa. So it's a very different investment approach and it requires a very, very different skill set. And to think that, well, the lead manager will hire Kaya or an analyst and offer. It doesn't work that way. Even if it does, if it's a fund that's even a couple of billion dollars, are they really going to be able to get the right deal when performance dispersion is so, so wide you could drive a massive truck through it? So a solution like that should have resonance. And whether it does or not, I don't know. I likely think that we'll get no pickup and we're going to end up with opening up the target date fund. But maybe some of your thoughts.
- [25:11]
C
Yeah, well, again, a lot there to respond to. But I think your last point goes back to how we open the conversation, which is is this the right argument that we're having right now? Should we be talking about getting private markets into DC plans or should we be talking about how do we revolutionize the D.C. market? Whether it's some of the examples that you threw out. You know, Australian super is a really good example of defined contribution market, but sophisticated management of the assets for different participants within the country. I think that is an interesting discussion that we should be having. I'd love to see some kind of executive order or bipartisan support for how do we rethink what retirement looks like. That may be a bit pie in the sky in our current situation, but I think worthwhile. So that's response number one. Response number two, I like the idea of a self directed fund window. You know, I remember when we would build these plan menus, the fun window was kind of out of the jurisdiction of the fiduciary. So that's always a risk for the participant. But people knew that going in and if they wanted to choose a really aggressive leverage sector fund on the fund lineup, go nuts. But it wasn't part of the core menu. And I think that goes back to the fact that many of these plan sponsors are not actively managing the fund menu. They are maybe on an annual basis reviewing the options. It's a very kind of long term, low turnover type of business. And so you don't have the manager selection teams that you have and a pension that is constantly getting new information and making decisions and buying and selling secondary market transactions and so on. So I think that is an interesting solution as well. I would also love to see and again, this I guess is me ideating of what it could look like. But the target date fund space, again I think is a very good solution for a problem that is very clear. People don't want to pick their own investments. They just want to set it and forget it. It's a low turnover part of the 401k space. So for all those reasons it makes a lot of sense. But wouldn't it be great if we could innovate the target date fund space so that we're making decisions that are more unique and specific to the participant. So to your point, it could be an allocation decision. I don't want private markets or I'm not appropriate for private markets. It could be the lifestyle decision. So to your earlier point on the decumulation phase after you've retired. There's been some research and Michael Kitces has done some of this. On the planning side of there's the old to versus through target date fund solutions where the two is winding down to the least risky allocation at the time of retirement, whereas through it continues to de risk through your retirement and you reach that at a later point. Michael Kitces has talked about the V shaped target day fund solution where you get down to the least risky point and then you start to increase your risk because you need to spend more, your healthcare costs go up, you've got money that you're trying to hand off to the next generation. So that is an example of one. But being able to build a customized solution that may or may not have these different investment options available to you could be another solution because 6040 might work just fine for some participants.
- [28:31]
A
I absolutely agree with that last statement and most of what you just said. And I do want to talk about the wrapper because I think that matters a lot too. And in this blog post I've alluded to that I wrote a couple of weeks ago, I made the point, and I absolutely agree with it myself, that if the late David Swensen was given unlimited ability to invest in any target date fund with access to alternatives at zero fee, would he opt for that over equity or private equity allocations for the Yale Endowment? And I would absolutely think no way. He wouldn't do it for any fee because he's not getting the exposure he's seeking in the first place. And I think these wrappers do matter a lot. Investing is for the long term, and if we create access to illiquid investments in very leaky liquid buckets, it's going to be a disaster. And I absolutely agree with the point you made earlier, Aaron, about these target date funds. I believe when you look at staying power for the average investor or shareholder in the tdf, it is extraordinarily high in that space, which is a very, very good thing. So I would not completely dismiss that as a good opening spot to be thinking about. But if we start offering greater liquidity windows and emphasizing liquidity as a feature of these products, simply not going to work. Because if the underlying is illiquid, we cannot have these liquid leaks on an ongoing basis. And I don't think it's very hard to say to an investor, we have to talk about asset allocation so many ways. But let's talk about rings of liquidity. And unless you have an outer ring of money that you absolutely are not going to touch for a decade or a sleeve that's going to be passed on to the next generation or help support the educational aspirations of to be born grandchildren. You should be talking about it in the first place. So I think there's a mismatch of goals for the end investor versus this aura that hey, if the firefighter's doing it, you should be doing it too.
- [30:33]
C
Yeah. Back to the point on TDFS being a good opening salvo. I don't think anything changes when you introduce these products into a target date fund because you've already got investors that their captive audience already. And so from that perspective, I think that's great. Creating some kind of a wrapper that fits well into that space. I don't know if it's some kind of hybrid between a traditional drawdown fund, evergreen structure, but fits within maybe more of a registered type of vehicle. I don't know what that solution looks like, but the fact that these savings vehicles are long term in nature and you've got long term investors in target date funds that aren't selling when the market goes down, I think all of that is positive for introducing these different products into TDFs. Maybe the challenge becomes if you start to incorporate this onto the core menu and people have the ability to choose from a lineup of different options and that's where you might get some skittishness around market drawdowns or whatever. Final thing I'll say and I'll turn back to you. Obviously a lot of the liquidity events that happen in the 401k space are due to life events. You lose your job, you retire, that's a huge event and you might roll something out of the retirement plan into something more self directed. So there's gotta be some kind of mechanism around that to support life events. But by and large again the non do it yourselfers are there for the long haul. And so to your point, why introduce products and wrappers that go against that? You should be fully invested and try to get the full experience of private markets if you're going to do it in the first place.
- [32:09]
A
There's a couple of regulatory risks too and no good deed should go unpunished. I think regardless of what comes out of this executive order, I think action is going to be one and we will see greater access is my informed prediction. But there are going to be consequences unforeseen and just as one example, one thing I've learned is that when I left Kaya, I took my small little 401k plan and rolled it into an existing rollover account from other employers, which fortunately, as accredited investor, allows me greater access to a lot of potential opportunities. But I talked to my financial advisor about certain things I've already done in my 401k with illiquid assets. And he's saying there's something called the required mandatory minimum distribution. I might not have the acronym right, but the listeners know what I'm talking about, where the IRS wants to tax that money. And when I get to 70 or 70 and a half, the required minimum distributions I must take, and there's a math formula to it. I'm not going to get into it because I don't understand the inner workings of it. It might be about 4%, but if I've got a whole bunch of illiquid holdings in there, one, how do I sell these damn things? But if I'm holding liquidity to get out, how do I know what 4% is when all of these other things are hard to value? And if hindsight tells me I've got it wrong, then there's no court of appeals to go to. So I mentioned just one small window. And if we're trying to jam this through this democratization before the next midterm elections, I just think there's going to be a lot of consequences we're going to have to deal with. And you can comment on that in a second. But I want to park one other thing, Aaron, which is litigation risk in this space. We live in a very, very litigious country and there's a whole army of lawyers that have this concept of class action lawsuits. And they can get one or two people that are aggrieved, that lost a handful of dollars and make people's lives miserable in terms of creating these class action lawsuits. And some of them might fall into the nuisance category and you'll settle. But the moment one of these is mildly successful, these litigators are going to be circling the wagons. And Trump is no dummy on this. This executive order addresses the litigation risk and how you solve for that less. Sure. And if the answer is, well, if you're a target date fund allocated to alts, you can't be sued, full stop. I don't know how you codify that, but even if you can, is that investor friendly? No. And that's why I get back to my elegant solution that the SEC has a blue ribbon panel of the world's very best asset allocators who are appointing just a handful of managers for these big, big commingle funds. You can inoculate that group from litigation as well. If somebody wants to go outside of them, all bets are off. So that's my solution. You don't have to comment on that one way or the other. But the litigation risk standing behind this, regardless of what happens with this eo, ain't going away anytime soon. And a fiduciary has responsibilities for what they're selecting on those plan options. And I think that remains a very difficult issue to solve for in 180 days.
- [35:19]
C
Yeah, well, not to create a whole nother podcast episode out of this Bill, but I think the RMD thing is another structural liquidity event that I was talking about. But maybe that's where the tokenization conversation comes into play. And how do you create a liquid event with illiquid assets? And maybe it's innovation around technology. But I'll stop there because I know we could talk for half an hour on that particular topic. But yeah, I think on the litigation front, and my colleague Claire Sawyer and I wrote a piece late last year on the pros and cons of private markets and DC plans. And she wrote this section on litigation and the history, not even in alternatives, but in the long only space. And it's there scattered across multiple decades of class action lawsuits. It's around things like fees and it's around performance and performance dispersion, which are all relevant characteristics of private markets. And so I think that's why it's so important from a legal perspective whenever this does come up, that it's bipartisan and it's very clear on the support that the participants will have and what the sponsors will have and the fiduciaries will have around all this, because no one knows where markets are going. But you have to put in the homework and structure things well within those plans. If you don't have that, then you just open yourself up to lawsuits being sued by your constituents and participants, which means that it's not going to happen. People just don't want to move forward with that. And you've seen that move in the 401k space so far. Where active management is very small, it tends to be low cost index providers, which is fine. I mean, it's a very good solution for many investors, but you're kind of going backwards to where it was before. And if you don't have that support is not going to be successful.
- [37:01]
A
I get back again to the convening power of you and I as individuals. And when the doors to anterooms close over these next 100 days and decisions are being thrown around and openly made. Where is our lobbyist who's representing us in that inner sanctum? I just don't know if they're there. And I think it's worth repeating this because I did go back to the mission statement of both the DOL and the SEC as part of this blog post I wrote. And Department of Labor's responsibility is to foster, promote and develop the welfare of wage earners, job seekers and retirees of the United States. And the sec, in quotes, are dedicated public servants who care deeply about protecting the investing public. Those are very weighty words and words that I take at face value. There's a tremendous responsibility that goes along with that. But if we're talking about naming conventions, and I did this on purpose and now is my window to mention, Aaron, if we're talking about renaming departments, I think we've got to be talking about US Department of Lobbyists, the security and any exchange you want will do commission and the gulf and our underscore gulf of fiduciary duty. And that is the reality. Somebody has got to be protecting my interests. When that door is closed and when the white smoke comes out of the Sistine Chapel of the dol, it's gotta be bellowing something that is in my best interest. Last point, and I'd love to get your reaction to all of that is I'm not talking about, like, Elizabeth Warren, one of the senators in the Commonwealth of Massachusetts, which is over my dead body, and millionaires and trillionaires, and they're going to benefit from this. This is a very, very difficult thing to solve. And I'll come all the way back to where this conversation began. Is access a good or a bad thing? No buts, Good or a bad thing. It is a good thing. But how we do it, how we do it responsibly, how we do it, the interests of the end investor, first and foremost at heart, which is the ultimate definition of a future duty. I'm less sure, but it's going to require creative decisions, a lot of thought process, and I think the capital instincts of the GP have to be parked at the front door.
- [39:15]
C
Yeah, I 100% agree and can't believe you waited 40 minutes to give me those new department names. That's gold. Well done.
- [39:22]
A
You're sitting here right in front of me and I said I'm going to find the opening and thank you for allowing it to come in. So, Aaron, this is a rapidly developing picture. Very appreciative that you and the CHI association remain on top of this. Something that we need to pay a lot of attention to. Kaya is a big voice but small amount of capital and I think the opinions and what is advocating for the protection of the end investor is spot on. We just need to have more people jumping on this to not say yes or no to either side, but find the consensus in the middle where it's going to make sense for everybody involved. And oftentimes those types of more elegant solutions take more than 180 days and it takes consensus from both sides and they can't be winners and losers. There's compromises that protect us at the end of the day. So thank you for all the great work that you do. There might be a reason to do a follow up conversation on this because there's gonna be a solution in place or at least a pathway toward one in now less than four months. And I think it's worth continuing to bang in this drum.
- [40:30]
C
Absolutely. Well, thanks for having me on again, Bill. Always a pleasure.
- [40:34]
A
Thanks Aaron. Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Chaya association and subscribe to the show@caia.org that's C A I A dot org. See you next time.