The Boy Scouts of America proved to be a turning point in the life of Richard A. Davies. Midway through college, he was elected to a one-year term as national president of a Scouts' coeducational young adult program. That experience convinced him a career in business would be more interesting than a career in law.
“It was a really great leadership development experience for me,” said Mr. Davies, who became managing director for defined contribution, Americas Institutional, at Russell Investments on June 1. That year's work placed him on the Scouts' national executive board and put him in contact with corporate executives involved in scouting. “That's what really changed my sights from law to the business world.”
His business path started with a two-year stint as a brand assistant for cleaning products at Procter & Gamble Co., after which he earned an MBA at Harvard Business School. Then came six years as a consultant and manager at Boston Consulting Group Inc., and another six years at First Chicago Corp., where he rose to president of First Chicago Investment Services Inc.
From First Chicago, Mr. Davies joined what is now AllianceBernstein (AB) LP (AB), where he spent more than 15 years in jobs managing and marketing retirement products. He was senior managing director for defined contribution and subadvisory relationships at AllianceBernstein when Russell Investments asked him to take a newly created job in which he would be responsible for the business strategy and management of Russell's defined contribution business.
Scouting has had an enduring impact on Mr. Davies' life. He is Manhattan borough president, “which means I'm the top volunteer,” for scouting in Manhattan, and member of the Greater New York Councils of the Boy Scouts of America. Scouting also introduced him to his wife through the coeducational young adult program. He was the state youth chairman for Wisconsin; she was the state youth chairman for Illinois. “When I ran for national president, I asked her to be my campaign manager,” he said. “Somewhere along the way, the business relationship broke down.”
Do target-date funds have an undeserved reputation? I think the press criticism of target-date funds is pretty unfounded. I think there's a cottage industry that's developed from some individual consultants that are trying to make a business out of target-date funds. My view is that, especially if you look at 2008, they performed exactly as they were supposed to perform. Now, the fact that many people were disappointed in their performance is not surprising. ... I will tell you that the one thing that every (sponsor) committee looks at is the equity exposure approaching, and at, retirement. So for somebody to say we didn't understand — for a plan fiduciary to say they didn't understand what they were investing in — I don't believe it. And if that's really true, they weren't fulfilling their responsibilities.
What's the next phase of target-date investing? The next logical approach ... would go from using age alone to incorporating other factors into the decision-making. What else is on the record keeper's system that would be useful to the portfolio manager that would allow them to customize or tailor a portfolio? Contribution rate; the accumulated balance that someone already has; whether they are a highly compensated individual or a more modestly compensated individual. All of that is on the record-keeping system.
A product development effort that we have under way is evaluating how to go from age alone to incorporating those other factors to cost-effectively deliver an individual account in a default setting. It would be customized but would require no involvement from the individual. ... I think that's one of the fundamental problems with managed accounts today. No doubt for certain individuals, there is value in paying an additional 30 or 40 basis points. But it assumes that the individual loads in a lot of additional information. The truth is that less than 10% ever do. ... You have to create a better solution that doesn't require any involvement at all from the individual.
How big a role will index-based investments play in target-date funds? There's a camp out there that is just going straight off the shelf and relatively plain-vanilla index solutions. That has been unfortunately encouraged by a lot of consultants and ERISA attorneys who have just advised their clients to do it because it's the path of least resistance. In some cases, it's a holding action until you decide what you really want to do. It's disappointing because those decisions seem to be being made not on the investment merits. But that's not what you hear. You hear: “The attorneys say it's safe. We want to minimize the effort. It's easy.” Being cheap these days is absolutely defensible. But they're not making the case on investment merits.
What's the other approach? The other school will be those plans that have a more definitive point of view on the investment merits of the product (and) that are looking to build something better than just average. And I think those people are increasingly going the custom route. But even in custom, it's not just going active vs. passive. I would say almost all of the custom installations that I have seen over the last couple of years are blending active and passive management as part of their solutions.
What is Russell doing with target-date funds? We're working on a new set of target-date portfolios. These are not custom, but we would offer them to middle-market clients as a blend of active and passive management. It would be an off-the-shelf product. ... Until you have maybe $100 million to $200 million in target-date fund assets specifically, the economics of creating custom portfolios just don't work for you.
What role will real assets play in target-date funds? One of my colleagues says a real asset is an investment that if you dropped it on your foot, it would hurt. The real asset that most plans have already adopted are real estate investment trusts. The next one would be some exposure to commodities, through futures or, potentially, equities that are very commodity oriented. We are doing a commitment to infrastructure. It is not an asset class that is widely understood or embraced. ... Infrastructure (investments) are publicly traded companies. They are listed equities that happen to be focused exclusively on infrastructure.
What are the impediments to inserting a lifetime income option into a DC plan? The biggest impediment is plan sponsors looking for company. The question, when you're proposing something that appears to be a little bit provocative, is “Who else has done this?” Where it's happened is in the smaller plan side of the market place. The other issue, for a very large plan, diversifying risk of different insurers is important because any large corporation uses multiple insurers on anything. Those are the conceptual hurdles.
There is also, within the insurance community, a fair amount of debate what the right product design is, what is the right pricing. The product designs have become more conservative in terms of the benefit for price paid.