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Custom Target-Date Funds

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21 December 2011
Alexander Camargo

Plan Sponsors Enjoy Innovations in the Fund Market

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.

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