Benefits of custom target-date funds
Compared to traditional target-date funds, custom target-date funds may offer additional benefits to you, plan sponsors, and participants.
Why consider custom target-date funds?
Your clients look to you for plan lineup support. Almost one-third of plan sponsors say that investment due diligence is the most important service provided by their advisor or consultant.1 You could be like everyone else and suggest traditional, off-the-rack target-date funds. Or, you could set yourself apart by offering the personalization of custom target-date funds that meet your client’s unique needs.
Plan sponsors want customization
27% of plan sponsors who offer managed accounts do so because they believe target-date funds aren’t customized enough for their employees.2 While target-date funds tend to follow a one-size-fits-all approach, custom target-date funds allow you to customize portfolios to employee demographics. They also give your clients the flexibility to adjust investment choices as their workforces evolve.
Potential to reduce investment expense
Some target-date funds include costlier actively managed funds and add extra management fees on top of underlying fund fees. Custom target-date funds may allow your clients to choose low cost funds to save on overall management fees. In 2018, 54% of plan sponsors cited the ability to mix passive with active as their top reason for offering custom target-date funds (up from 41% in 2016).3
More diversification options
Traditional target-date funds typically include funds from only one provider and may not include some asset classes. Custom target-date funds allow plan sponsors to choose funds from multiple providers and securities from more asset classes to fill out their investment menus.
Custom glide paths
Plan sponsors who feel glide paths of existing target-date funds are too aggressive or conservative can customize portfolio risk levels over time. This includes choosing a “to” or “through” retirement glide path. While glide paths that become static at retirement may expose participants to more longevity risk, glide paths that continue through retirement may expose participants to more market risk. Of plan sponsors who chose a custom glide path, 56% said they did so to meet the needs of unique employee demographics.4
The principal value is not guaranteed at any time, including at the target date. An asset allocation strategy doesn’t guarantee performance or protect against investment losses.
Manage fiduciary risk
The Department of Labor’s (DOL’s) 2013 fiduciary guidance explicitly encouraged plans to explore open architecture. The use of custom target-date funds recognizes that plan sponsors are putting greater effort into seeing what’s inside their target-date funds and finding mixes that are more appropriate to their participants. In this sense, custom target-date funds can help manage fiduciary risk.
Custom target-date funds have the potential to better meet the needs of participants. Not all people the same age have the same risk tolerance. Custom target-date funds allow participants to choose their level of risk. Some participants may already be doing this with traditional target-date funds by choosing a fund date that is earlier or later than their estimated retirement date—showing their desire for this level of customization. Custom target-date funds may also offer them better diversification and potentially lower costs.
Consider taking advantage of the benefits custom target-date funds offer you, your clients, and their participants. Offer a customized solution today.
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