Custom Target-Date Funds

Plan Sponsors Enjoy Innovations in the Fund Market
by Alexander Camargo, December 21, 2011
Industry Trends
North America

Abstract

Since the Pension Protection Act of 2006, target-date funds have seen tremendous growth within the defined contribution market. However, after the financial crisis, plan sponsors, participants, and even regulators began to look at target-date funds with greater skepticism. Custom target-date funds are the next step in providing better service for plan sponsors.

In a new report, Custom Target-Date Funds: Plan Sponsors Enjoy Innovations in the Fund Market, Celent examines the use of these new custom designs in the context of the retirement landscape in the United States.

A custom-designed target-date fund allows plan sponsors, especially large ones to select funds that are tailored to the company’s investment preferences, policy statement, benefits philosophy, and unique employee demographics. With a custom design, plan sponsors elect the underlying asset managers, obtain access to greater asset diversification, and create a glide path designed specifically for their employees’ unique demographic characteristics.

“Increasingly, plan sponsors (usually large corporations) are finding that standardized 'off the shelf' target-date funds do not adequately meet the needs of their plan participants, and they are creating custom target-date portfolios from their investment lineups,” says Alexander Camargo, Analyst and author of the report. “These custom funds can be developed with a single defined contribution plan in mind and can be more closely tailored to the company’s investment preferences, its investment policy statement, its benefits philosophy, and unique employee demographics.”

This report explains target-date funds and highlight the effects of the financial crisis on the target-date fund market. The study provides an explanation as to what a custom target-date fund is, what institutions are needed to create a custom design, and other operational considerations plan sponsors must make before adopting a custom design. The report also summarizes the major benefits of custom funds as compared to an off-the shelf target-date fund. The study ends with a sizing of the custom target-date market as it currently stands and provides a projection of the custom target-date fund market by 2015.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America (Boston)
Erica Ferguson
eferguson@celent.com
Tel.: +1 617 262 8225

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)208 870 7875

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81.3.3500.3023

Table of Contents

Executive Summary

3

Introduction

4

 

What Are Target-Date Funds?

4

 

The Pitfalls of Off-the-Shelf TDFs

4

Offering Custom Target-Date Funds

6

 

Constructing a Customized TDF Offering

6

 

Benefits of the Custom Target-Date Fund

7

 

Other Considerations for Plan Sponsors

8

Sizing the Custom Target-Date Fund Market

10

 

Methodology in Projecting Future Growth

10

 

Projecting Custom TDF Growth

13

Conclusions

15

Leveraging Celent’s Expertise

16

 

Support for Financial Institutions

16

 

Support for Vendors

16

Related Celent Research

17

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