Made to order? Finding the right custom target-date set

To fulfill their fiduciary responsibilities, defined contribution (DC) retirement plan sponsors and their advisors can spend considerable time and energy screening, selecting, and monitoring the investments in their plan lineups. Yet for years, particularly in the past decade, when it came to designating a qualified default investment alternative (QDIA), sponsors often took the path of least resistance. They simply relied on the provider’s proprietary target-date fund series.

Recently, things have changed. Because the QDIA can often become the ultimate long-term home for the lion’s share of participant assets in a DC plan, today’s plan sponsors and advisors are more frequently choosing to create their own target-date QDIAs. When developing those custom target-date investments, they are also tending more often to turn to the funds in the plan lineup.

The rationale for custom target-date funds? They can give even the most unengaged participants access to some of the best-in-class funds that plan fiduciaries have already selected. In addition, custom allocations and glide paths have the potential to better serve the needs of a specific workforce.

Anatomy of a target-date series

With all the variation among available off-the-shelf target-date funds, finding the perfect fit for any given participant population can be a challenge. Target-date funds can be constructed in many different ways. Their asset allocations can be relatively conservative, aggressive, or anywhere in between. Glide paths, which are the asset allocation formula of a target-date investment, can be designed to flatten out at an assumed retirement age (known as a “to” retirement fund), or they can continue to drift downward well into the retirement years (“through” retirement).

That’s why in 2013 the Department of Labor (DOL) called for plan sponsors to carefully assess the characteristics of their target-date investments in light of their workforce demographics, any additional retirement benefits offered, and other salient factors. Further, the DOL suggested that because sponsors and advisors put so much effort into developing investment policies and carefully selecting and monitoring funds for their plan lineups, it might make sense to use those same funds as a foundation for a custom target-date series.

Indicators that may favor a custom solution

Custom target-date portfolios may not be required for all plans. But when certain characteristics of a workforce or benefits package are present, it may be worth evaluating what a custom target-date QDIA can offer. Here are a few factors to consider:

  • Average participant age and salary levels. Workforces that skew either young and highly paid or older and more modestly paid, for example, may call for very different approaches to glide path design. Participants’ savings and investing habits matter too. For example, are young, highly paid participants actively investing in stocks through a brokerage window? If so, it may make sense to offer a target-date series with a more conservative glide path. On the other hand, for older workers who still need to build up savings, it may be prudent to consider a glide path that maintains a growth component designed to help them close the gap.
  • Average retirement age. A population of employees who tend to retire either earlier or later than average may not be well served by a standard target-date fund that assumes a retirement age of 65. In these cases, employers can work with their advisors to develop a custom glide path based on the actual average retirement ages for their workforce.
  • Access to other retirement benefits. DC plan participants who also have access to a defined benefit (DB) pension plan are likely to have asset allocation needs that differ from employees who rely solely on a 401(k)-style plan. Because a DB plan provides a predictable, conservative component within their overall portfolios, these employees often are able to take greater risk in their DC investments. Potentially, they may be better served by a target-date option with a more aggressive glide path.

    Conversely, employees who participate in an Employee Stock Option Plan (ESOP) and hold significant shares of company stock may be taking higher risk levels in their overall retirement portfolios. In this case, a target-date option with a relatively conservative glide path may be in order.
  • Tendency of retirees to leave money in the plan. Organizations with employees who tend to leave their money in the plan after they retire, may want to review their target-date fund’s glide path to make sure it accommodates this pattern. To meet the needs of these participants, plan sponsors may need to develop a glide path that maintains a greater growth component longer into the retirement years. On the other hand, employees who cash out or rollover their balances immediately may be better served by a glide path that reaches its most conservative level at the average retirement age.
  • Industry dynamics. Some industries are especially subject to the ups and downs of the economy and the markets, putting their workers at higher risk of layoffs or pay fluctuations. Employers in these sectors may want to consider offering a more conservative glide path and potentially including a risk-managed component to help tamp down volatility within their target-date series. Plan sponsors may even want to design an investment mix that helps minimize exposure to their own sector to promote overall diversification.

Will a custom target-date solution break the bank?

When custom solutions first were introduced, they were almost solely the purview of mega plans. The extra time and effort it took to create and maintain them meant that plan sponsors needed economies of scale.

Since then, many providers have built platforms that can handle custom target-date series with ease, making them much more accessible to mid- and large-sized plans. Plus, by directing assets through the custom target-date portfolios into the underlying core funds of the plan — the same funds that are carefully selected and monitored by the plan fiduciaries — plan sponsors can often qualify for lower investment costs across the board.

About target-date funds

Target-date funds, which are among the most common QDIAs, generally involve selecting an investment by the target year closest to the anticipated year of retirement (such as a “2040 Fund”). As the investor nears the target date, the fund would gradually shift from more aggressive to more conservative investments along what is known as a glide path. Although the intent is to reduce risk, an investment in target-date funds is not guaranteed at any time, including on or after the target date.

The views expressed represent the Manager's assessment of the market environment as of August 2017, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and summary prospectuses, which may be obtained by visiting or calling 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Diversification may not protect against market risk.

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