Debunking myths about custom TDFs

Advisors and sponsors continue to have misconceptions about custom target-date funds (TDFs), even though the Department of Labor (DOL) encourages plan fiduciaries to consider a custom solution.1 Let’s clear up some things. 

Myth #1: Custom TDFs mean increased fiduciary risk

Offering low-cost, passive TDFs doesn’t mean a lower litigation risk — it can actually be the opposite. Making decisions primarily to protect itself may constitute a breach of the plan’s fiduciary obligation. The DOL states that evaluating the glide path and risk profile of the funds in a TDF series and determining a TDF’s suitability for a specific participant base are key fiduciary responsibilities.2

That’s why offering custom TDFs may be a more suitable choice. Your client gains the fiduciary protection of offering a QDIA tailored to its participant population, and a third party can provide 3(38) support so you don’t have to. If a plan uses funds from its core lineup in the custom target-date fund, the fiduciary doesn’t take on additional funds to monitor. 

Myth #2: Custom TDFs are too expensive

The top factor in selecting target-date products is lower fees. Fees are cited as crucial or very important by 79% of plan sponsors and 76% of advisors.3  That’s where custom TDFs can distinguish your client’s investment options; you can regulate the overall expense ratio with a custom mix of underlying funds. Plus, investment performance can counter the lure of low cost. You can set yourself apart from the pack by providing a tailored solution at a lower cost rather than an off-the-shelf product. 

Myth #3: Custom TDFs are too complex

It’s not as complicated as you may think. Many sponsors with custom TDFs leverage the core investment options, which they already monitor, in their custom solutions. As a result, custom TDFs are now viable for smaller asset sizes, as well as for plan sponsors with less of an appetite for complexity.

Many providers make it easy to implement portfolios for your clients and offer education services to help participants make informed investment decisions. That means plan sponsors can still gain the advantages of offering an attractive, competitive benefit with minimal administrative involvement on their parts.

Provide value with custom TDFs

Custom target-date funds provide an opportunity to provide more value to plans with solutions tailored to participants. Instead of forcing participants into a one-size-fits-all option, offer custom solutions to find the right fit.
  

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Find the right fit

YourPath® portfolios offer target-date solutions that can be tailored to participant needs. Answer a few simple questions to see which option may be right for your clients.

Use the selection tool.

1 Department of Labor, Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries, February 2013.

2 Ibid.

3 The Cerulli Report: U.S. Retirement Markets, 2018

Through a single investment option, YourPath® portfolios allow retirement plan participants to invest in a mix of mutual funds and other investments that correspond to a specific risk profile and investment time horizon that includes the year (target date) in which the participant expects to retire. As the target date approaches, the mix or asset allocation of funds or other investments making up the portfolio (and owned by the participant) will change, becoming less growth-oriented and more conservative.

The investment options within the portfolio involve risk and will not always be profitable. There is no guarantee that negative returns can or will be avoided. 

There is no guarantee that the portfolio will provide adequate income at and through your participants’ retirement. An investment made in an investment option may differ substantially from its historical performance and as a result, your plan participant may incur a loss. Past performance is no guarantee of future results.