The Dropout: A True Story That Teaches A Lesson About Target Date Funds

If you haven’t watched it yet, I recommend The Dropout series on Hulu. It tells the story of Elizabeth Holmes’ rise to fame and her fall to disgrace.

The Elizabeth Holmes story has lessons we can learn about target date funds. Are you ready?

The Elizabeth Holmes – Theranos – Story

The “Dropout” title of the TV series is based on Elizabeth Holmes dropping out of Stanford at age 19 to follow her dream of becoming an entrepreneur. In 2003, she founded Theranos (the god of blood and phlebotomy in ancient Greek mythology) to develop breakthrough blood testing equipment that would run a range of tests on a small amount of blood, extracted with a pinprick rather than a needle.

As the TV series documents, the device was Elizabeth’s dream, a dream that might exist someday, but Elizabeth chose to “fake it until you make it.” While she faked it, she made a fortune but harmed many.

By 2014, Theranos became a $10 billion company, and Holmes became one of the richest young women ever. But the equipment didn’t work. It was a fraud. Once the fraud was exposed, lawsuits ensued that bankrupted Holmes and her company. It’s the story of a dreamer who got herself caught up in a lie that worked, until it didn’t.

The Target Date Fund Story

The TV series portrays Elizabeth Holmes as a dreamer who really wants to believe that the device she envisions can be developed. She hires scientists who share the dream, but warn her that it will take decades to develop. It becomes “chicken and egg”: her dream needs investors, but they won’t invest in a dream.

In many ways, target date funds (TDFs) follow The Dropout script, as shown in the following table.

Similarity	Theranos	Target Date Funds
Dream	A single drop of blood can provide a range of tests. No needles.	A glidepath can protect AND compensate for inadequate savings
Marketing & sales	The “story” hid the reality that the dream was just a dream	TDFs are sold, not bought
Success	$10 billion capitalization	$3.5 trillion in assets
10 years unquestioned	Backers like George Schultz & Walgreens could not admit a mistake to themselves & stakeholders	Plan sponsors rely on advisors and procedural prudence
Harm	Many received incorrect diagnoses	TDFs lost more than 30% in 2008. More could be on the horizon.
Failure	The press exposed the reality	2008 exposed the reality, but it needs a $3.5 trillion reminder, probably soon

It all hinges on “the dream.” TDFs are supposed to protect those near retirement, but the reality is that they are typically invested 85% in risky assets – 55% equities plus 30% long-term bonds. This exposure is justified by an objective to compensate for inadequate savings and longevity.

Fiduciaries are obsessed by the dream because they’ve bought into it.

A Different Dream

It’s time for the retirement industry to go back to “the needle” rather than the “pin prick.” Beneficiaries need and deserve good old-fashioned protection at the target date, as is provided by the world’s largest savings plan – the Federal Thrift Savings Plan (TSP). The TSP is only 30% risky at the target date, as is the OPEIU (Office and other Professional Employees International Union).

Conclusion

Plan fiduciaries can learn from The Dropout TV series. Just like blood analyses should be accurate, TDF beneficiaries should be protected at the target date, although they are not. Fiduciaries will be held accountable.