Plan Sponsors Need Truth, not Jargon

Often, investment jargon is designed to market and not to inform, says Segal Rogerscasey’s CIO Tim Barron.

There is lots of buzz in the retirement industry about smart beta, risk parity and responsible investing, but what do these terms actually mean?

In an Investment Brief, Segal Rogerscasey’s CIO Tim Barron points out that the investment industry often wraps complicated constructs into simplistic jargon, which doesn’t benefit asset holders, including retirement plan sponsors. “Some concepts are complicated, and they need to understand them,” he tells PLANADVISER. “The industry uses jargon in the guise of simplification when the goal should be understanding.”

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Even simple terms have been twisted to sound more appealing. For example, Barron notes that “drawdown” is becoming a more commonly used term to describe losses. Plan sponsors probably hear “drawdown” and think of taking a distribution from an account for spending. Or, Barron, notes, “it sounds like drawing down a lake, which will fill back up again.” While the term may be used to reflect the intention of an asset manager to somehow get that money back at some point, plan sponsors should know if their investment experiences a drawdown of 10%, that is a loss.

It has also become taboo to call a firm a product provider, so “solutions provider” is becoming the more acceptable jargon. “Would you rather me sell you a product or work with you to find a solution?” Barron queries to demonstrate why this sounds better to investors. But, the fact is, whether a client needs high-quality, large-cap value asset management or a customized approach to suit its specific needs, it will be sold a product.

NEXT: Providing meaning


“Plan sponsors need to separate themselves from the attractiveness of jargon and focus on meaning and importance,” Barron states.

He points out that investors in hedge funds were so disappointed by the losses they experienced last quarter. Many said, “I thought I was hedged.” Rather than using the term hedge fund or making a simple statement about what the fund hedges against, product providers should define what their role or objective is. “For example, say this is a fund that seeks absolute returns and is uncorrelated to global equity markets, or this is a long-short equity program that seeks to outperform the S&P 500 with less volatility,” Barron suggests. “Then the plan sponsor would say, ‘Ok, now I know what this is.’”

“Risk” is another term that needs a definition, because “risk is in the eye of the beholder; there are many ways to define risk,” Barron says. He also notes that “non-traditional” investments aren’t really non-traditional anymore. In the investment brief, he notes that a number of funds began investments in absolute return strategies, private capital, real estate, infrastructure, and oil and gas in the early 1980s—more than 30 years ago. “The industry really needs to come up with a different descriptor. How about absolute return strategies, private capital, real estate, infrastructure, and oil and gas?” Barron wrote.

“Responsible investing,” or “ESG investing,” or as the Department of Labor recently dubbed it, “economically targeted investing,” should also have descriptors, Barron argues. “Say this is a portfolio that uses environmental, social and governance factors as described by the UN Principles for Responsible Investing.”

"Smart beta” and “risk parity” are old concepts, Barron notes. “We used to call it factor-tilting. But, if a plan sponsor is asked whether they want to talk about factor-tilting, they may not. But, smart beta sounds exciting.”

Barron concludes that simplifying is designed to sell, not to inform. Full disclosure creates level expectations.