Chris Tobe, CFA, CAIA of the Hackett Group tackles one of the most important (and misunderstood) issues in retirement plan investing: whether investment performance is truly comparable—and what retirement plan stakeholders should demand before making decisions. In this episode, Chris walks through how measurement standards, reporting approaches, and incentives can affect what “returns” really represent when you dig beneath the headline numbers.
Jeffrey Snyder, Broadcast Retirement Network
Well, we’re going to welcome back to the program, excuse me, Chris Tobe. Chris, it’s great to see you. Thanks for joining us on the program this morning.
Great, great to be here. Well, I love talking to you because you have worn many hats. Number 1, you’re a CFA charter holder.
We’ll get into that in a few minutes. You’ve sat on, as a board member, on public pensions. You have a lot of defined benefit expertise.
You’ve worked as a consultant to the legal community to help them understand 401k fees. So you bring a lot of depth and breadth. So good morning to you, Chris.
Thanks again for making some time.
Chris Tobe, CFA, CAIA, Hackett Group
Thank you for having me.
Jeffrey Snyder, Broadcast Retirement Network
I want to start off the conversation about performance standards. Every retirement plan, whether it’s a defined benefit plan or a defined contribution plan, has an investment policy, and they apply, typically, fiduciaries apply that investment policy statement to the oversight of investments. But according to you and others, there’s actually more that goes into evaluating investments.
Chris Tobe, CFA, CAIA, Hackett Group
Yeah, performance measurement is, you know, one of the key cores, but it’s under the hood a little bit. We have so much superficial, even consultants and plans are so looking at every investment from such a superficial, they never look under the hood, look under the numbers and the performance numbers, how they’re calculated is so, so important. So the best standard of investment performance has been the SEC’s mutual fund performance standards.
And so those are one of the few standards that I trust out there in the marketplace, especially when we’re dealing with litigation, or if you’re doing it as a fiduciary, my trust level in SEC registered mutual fund performance is, you know, 10 times higher than it is for most of the other products that I’m seeing, not only in public plans, but in 401k’s. And so that’s been the case as well. And what is what the real issue is a lot of this of moving away from SEC mutual funds is to move away from performance standards.
So you can manipulate performance and hide fees. And that’s one of my basic trends here. It’s all goes down to performance standards, but performance standards are also based on accounting standards.
And, you know, the SEC has certain standards before you can put something in an SEC mutual fund. You can’t put instruments that people make up the value, they have to have real values that can be certified. So in general, private equities not allowed in SEC mutual funds, private debts, not allowed in SEC registered mutual funds, annuities are not allowed in SEC registered mutual funds, nor is crypto, because there is not the accounting standards.
There’s no accounting basis that you can make a performance measurement underneath those assets. So all this is kind of rolling in together into all a lot of these issues you’re talking about. And no one wants to look under the hood of if we’re going to put all these assets in, how do we even know the performance is real?
Do we care? How do we measure it? How do we do our job as a fiduciary?
Jeffrey Snyder, Broadcast Retirement Network
Really good setup there. Thank you for that. What makes let me go back to a comment you made about the SEC.
What makes those performance? I don’t know the others. I mean, you’re a CFA charter holder.
So I think there are some gifts and other standards that have been created. But what makes the SEC standards? The above everyone else in your in your opinion?
Chris Tobe, CFA, CAIA, Hackett Group
Because they have a set of rules that everyone has to follow. And they enforce the rules. And you’re not allowed to make up performance numbers in an SEC registered mutual fund.
I mean, there’s a little fudging here and there. They’re not 100% perfect, but they’re by far the most perfect thing we have. With the other ones, CFA gifts, global investment performance standards are what we call CFA gifts were developed maybe 40 years ago.
And they work very well with traditional stock and bond. portfolios. But they just have, again, because of the underlying accounting, they have a hard time with any of the alternatives, as well.
And CFA does not enforce its standards. It just kind of it kind of gives you out a rule book of good rules in general to follow in performance measurement and performance standards. But there’s no one, there’s no one actually enforcing it, no one doing the underlying and by evaluations of it, so that it is a generally a rule.
But the rules are good. They show a lot of fee disclosure. Now, the private equity industry didn’t even want to give the amount of transparency that the CFA gifts required.
So they created some their own standards called ILPA. I forget what it stands for. But it’s another type of standards.
And then even some many of the private equity funds don’t even want to comply with ILPA. So you’ve got a, you’ve got entire asset classes led by private equity and the other alternatives have issues as well. That refused to meet any performance standards.
So you know, how do we trust those performance numbers? And again, you know, I’m handling that on a lot of different levels of litigation as a consultant for all these different asset classes. And so what we’ve seen is a big move away from SEC mutual funds into poorly state regulated collective investment trust, because they don’t have the performance standards.
So you can sneak, you know, private equity, private credit, crypto annuities into these poorly state regulated CITs to get around that into, in my opinion, had a lot of fees for the industry.
Jeffrey Snyder, Broadcast Retirement Network
So let’s talk to the consultant, what you and I would, you know, we’re old school. So we used to call what we do, we call it we do consultants, but now they’re retirement plan advisors, there’s all different names. So let’s let’s talk about what retirement plan advisors should do.
So they got their investment policy statement, right? And the investment policy statement is kind of a loose structure framework that you use to evaluate asset classes in a plan. And, you know, each consulting firm or retirement plan advisory firm has their own research team, what should they be looking for?
And those research teams, by the way, get performance loaded, they look at the different 135 versus the universe, right? So that’s, that’s all out there. But what what more should they be doing?
Or can they?
Chris Tobe, CFA, CAIA, Hackett Group
It’s, it’s a, it’s a philosophical issue. I mean, we’re getting us dealing with most, most of the consulting firms are now owned by private equity or partnerships with private equity, and have a vested conflict of interest in using their more, you know, liberal performance assets. So there’s such a conflict of interest out there at so many levels, that as a fiduciary, I think that the important thing is this SEC mutual funds can be trusted.
Once we get out of there, we have to have more scrutiny and more due diligence on any asset that is not an SEC registered mutual fund. That’s kind of, that’s really the basic theme that I’d like to get through here is that people can trust the performance on their SEC mutual funds, but we get beyond that, my level of trust is going down, you know, persistently.
Jeffrey Snyder, Broadcast Retirement Network
So, are there are there things that policymakers and regulators can do to beef up the state ranks? Because you’re talking about collect investment trusts, insurance products, all regulated at the at the state level. So are there efforts in underway to maybe beef up their standards?
Because look, investment products change over time, we know, we know that you and I both know that the audience knows that, right? So you have to adjust your standards, and the way you do business over time.
Chris Tobe, CFA, CAIA, Hackett Group
Well, again, you know, I’m too much in the, you know, looking at the political process, all the money wants you to loosen the standards, crypto is throwing all kinds of money in Washington, insurance industry always has private equity has. So every pressure has been to loosen the standards. And again, that’s what’s happening, I think, at the DLL.
Now they’re loosening the standards to allow more private things into the 401k plans. So I think the all the momentum is toward loosening standards. But again, I think that a lot of that’s going to end up showing up in litigation.
The problem is, is that litigation only covers like the top 1% of plans. The rest of the plans all pretty much are on their own. I mean, I just did a piece on that where they’re like 700,000 401k plans out there.
There are only 87,001% or over 100 million, which is kind of what the ones that would be litigated. That’s still a lot to be litigated have not been litigated yet. But we’re working our way, you know, maybe the top 700 of them 7,000 have been litigated.
But the rest of the universe is kind of just up in the air, relying on regulators and the regulators have pretty much ignored performance standards. I don’t even know if anyone DLL even knows what a performance standard is. That’s how low the level of expertise is at our at that agency.
Well, the SEC does have a historic norm, they know what, you know, they know how performance measurement works, how to they’ve they’ve they have a system that’s been put together for 40 years that works. And everybody wants to get out of that system because it because it does work. And so that’s kind of, you know, get back to the theme is that it’s it’s really the SEC registered mutual fund is a much more important product and valuable product than anyone realizes, because it does have real performance standards.
Jeffrey Snyder, Broadcast Retirement Network
So, so Chris, it sounds like everything falls again to the fiduciary, the plan sponsor. They’re the ones that pick the attorney, they pick the investment advisor. And ultimately, Chris, they’re the ones responsible for the plan.
So, you know, is there something that needs to be changed in terms of the vetting process for some of your partners, you know, that sit around the table as a fiduciary?
Chris Tobe, CFA, CAIA, Hackett Group
Yeah, I mean, I think that you just have to realize you need 10 times the scrutiny in a non SEC registered mutual fund product than you do for an SEC registered mutual fund. And investment policies, the whole industry is not catching up on that. And that’s, that’s the gap.
And, you know, so for a fiduciary, it’s much easier just to use an SEC registered mutual fund, you take your level of fiduciary risk is going down. You know, one 10th, when you use SEC registered mutual funds, when you start using the other things, your risk just goes off the charts. And the only people making the money are, you know, there’s are the industry.
So that’s kind of if you’re a advisor, same thing. I mean, why not? Why?
Why get away from from from mutual funds when they’re the they’re a proven, easy thing to do. And if you know, you’re going to get litigated, we know in a mutual fund, the litigation risk was, you’d had a higher share class, I think, if you’re in the, with a mutual fund, all you have to do is be in the lowest share class you can be. And you’re pretty much litigation proof.
I mean, I won’t say proof. I mean, people are still there’s some dumb litigation out there around performance and target date funds, especially. But in general, that is the the, the way the way to go is to stick with SEC registered mutual funds.
Jeffrey Snyder, Broadcast Retirement Network
Well, I guess we’re gonna have to see kind of where this shakes out. I mean, I guess TBD, right? Because this is an ongoing, you know, as a consultant, my job was always to get underneath the hood, peel back the onion, whatever analogy you wanted to use, Chris, to explain to the client, all the differences between the products that they were considering.
That takes time. That takes a lot of effort. And it takes a lot of expertise and experience.
I guess we’re gonna have to see if the firm step up to do that.
Chris Tobe, CFA, CAIA, Hackett Group
Well, they have every incentive not to, I mean, you could have four different consultants do an analysis of the performance of the same private equity partnership, and come up with four very different returns. Ludo Fallupa, who’s a professor at Oxford, just came out with a piece where he showed that the big four private equity companies, Apollo, KKR, Blackstone, the performance he calculated was one half of the of the performance that they advertised, and the consultants were using with their clients. So that is a pretty big risk out there to take, because of poor performance measurements.
So again, but again, private equity has got itself many consultants are now owned by private equity firms, or they have their own private equity products that they’re making money off of. So there’s so much conflicts of interest out there. There’s not a, there’s the conflicting things going on there.
But as a fiduciary session on a plan, be very careful, anytime you’re getting outside the norm, you know, if it’s a mutual fund, SEC registered mutual fund, if you’re in a big public pension plan, you kind of maybe a GIPS certified investment performance, see if a GIPS is the appropriate performance measurement for you.
Jeffrey Snyder, Broadcast Retirement Network
Well said, you know, maybe a little bit this, this conversation, Chris, probably a little bit too more, more detailed than many are probably used to. But hey, look, you know, if you’re in a retirement plan, a pension plan, or you just, you know, want to understand the basics, you got to come to BRN. Chris, great to see you as always.
Thanks for joining us. Great writing. Great, great advocacy.
And we look forward to having you back on the program again very soon, sir.
Chris Tobe, CFA, CAIA, Hackett Group
Thank you. Thank you very much.