Custom target date funds: The what, why, and how

For many DC plans, custom target date funds are worth exploring as a potentially more attractive alternative to traditional target date funds.

The views expressed are those of the authors at the time of writing. Individual teams may hold different views. The value of your investment may become worth more or less than at the time of original investment.

Target date funds (TDFs) have revolutionized the defined contribution (DC) plan industry since their introduction more than two decades ago. Today, TDFs can be found on most plan menus and are consistently among the most popular investment options with plan participants.

As the DC plan landscape has evolved, however, many plan sponsors and participants have expressed interest in a more customized approach that better meets the needs of the plan’s population, while still retaining the key benefits of traditional TDFs.

That’s where a custom target date fund (cTDF) may come in. We believe that, for many plans, cTDFs are worth exploring as a potentially more attractive alternative to traditional TDFs (Figure 1).

Figure 1

Custom TDFs vs "off-the-shelf" TDFs

What?

  • A TDF created with underlying strategies selected by the plan sponsor – typically the same strategies as those used in the plan’s core menu, perhaps with some supplements
  • A TDF with a tailored glidepath that is developed specifically for the general risk/return profile and appropriate retirement income-replacement needs of the plan’s population

Why?

  • A custom approach may be more efficient:
  • The plan sponsor may be able to leverage relationships with managers in the core menu and/or in other plans (defined benefit) to gain scale and pricing benefits
  • The due diligence required to evaluate and select managers is greatly simplified by using the same managers across multiple investment pools
  • It is an enduring option in that the plan sponsor can make changes to underlying asset classes or managers without altering the overall product
  • A custom approach may allow for improved choice:
  • The glidepath can be adapted to the particular return objectives, risk parameters, and retirement income-replacement needs of the plan’s participants
  • The plan sponsor can incorporate both active and passive strategies based on their beliefs in the likelihood of active manager outperformance in different asset classes
  • The plan sponsor can utilize alternative strategies, such as private real estate or absolute return fixed income, that are not typically found in off-the-shelf TDFs

How?

  • Work with a consultant and/or a glidepath manager to analyze plan population data and develop a tailored glidepath for the plan
  • Work with a consultant and/or internal staff to decide on the asset classes where you would like to allocate to active vs passive strategies (and vice versa)
  • Work with a consultant and/or internal staff to conduct investment manager evaluations and make final manager selections
  • Work with a custodian or recordkeeper to determine cash-flow and rebalancing processes, as well as the calculation of expenses and net asset value
  • On an ongoing basis, monitor the results of the above decisions and participant satisfaction with the cTDF; make any adjustments as necessary

About Wellington Management
Tracing our history to 1928, Wellington Management is one of the largest independent investment management firms in the world. We are a private firm whose sole business is investment management, and we serve as investment adviser for institutional clients in over 60 countries. Our most distinctive strength is our commitment to rigorous, proprietary research — the foundation upon which our investment approaches are built. Our commitment to investment excellence is evidenced by our significant presence and long-term track records in nearly all sectors of the global securities markets. As a private partnership, our long-term views and interests align well with retirement plan sponsors’ fiduciary requirements.

Based on a lengthy history of managing retirement assets, we believe that diversification, downside risk mitigation, and active management at compelling fees are key drivers of retirement success. Accordingly, we offer DC plan sponsors a range of holistic solutions aimed at improving participant outcomes. These include custom target date funds and retirement income funds for qualified default investment alternatives (QDIAs); core-menu options; and niche strategies that can be sleeves of multi-manager, custom solutions. Vehicles for these approaches include collective investment trusts, separate accounts, and mutual funds.

For more information on Wellington Management, please visit: https://www.wellington.com/en/defined-contribution-plans/

For informational purposes only and should not be viewed as an offer to sell or the solicitation to buy securities or adopt any investment strategy. Views expressed reflect the current views of the authors at the time of writing, are based on available information, subject to change without notice, and should not be taken as a recommendation or advice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. The information presented in this material has been developed internally and/or obtained from sources believed to be reliable; however, Wellington Management does not guarantee the accuracy, adequacy, or completeness of such information. Forward-looking statements are current only as of the date they are made and are subject to a number of assumptions, risks, and uncertainties, many of which are beyond Wellington Management’s control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Diversification does not eliminate the risk of experiencing investment losses.

Please see the important disclosure page for more information.

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