Are Custom TDFs a ‘More Appropriate Option’?

Custom target date funds (TDFs) are growing in popularity, but are they a better option?

For a plan fiduciary seeking greater control and contextualization than what a prepackaged TDF offers, a custom TDF may be a more appropriate option, according to a new white paper from Columbia Threadneedle Investments.

Written by Benjamin Grosz, Esq., and Robin Solomon, Esq., of Ivins, Phillips & Barker, the authors suggest that custom TDFs “seem like an investment option whose time has come,” particularly given the increasing usage in 401(k) plans and support from the Department of Labor, as well as the limitations of traditional TDFs.

The authors explain that, while the selection of a custom TDF does not automatically satisfy a fiduciary’s duty of prudence under ERISA, “a custom TDF offers several specific advantages, which can enable the plan fiduciary to satisfy these ERISA obligations more effectively.”

Fiduciary Control

In particular, Grosz and Solomon emphasize that custom TDFs give a plan fiduciary control over the key fund elements, allowing the plan fiduciary to select the most appropriate asset allocation and best-in-class underlying fund offering in each asset class, as well as shape the glide path in a manner that is prudent for the unique characteristics of its workforce.

To that end, they note that traditional TDFs typically are offered as prepackaged investment products that do not allow plan fiduciaries to select underlying investments or customize the rebalancing formula.

The paper further suggests that custom TDFs also allow the fiduciary to select the best fund provider and manager for each asset class in the TDFs. Noting that it might be “theoretically possible” that one fund company has the best fund managers in every asset class, the paper notes that decisions made by plan fiduciaries suggests otherwise, as many select different fund managers for different asset classes in their plan’s core menu.

Citing a recent Callan Survey, the authors observe that more than 90% of plans using custom TDFs stated that the ability to “use best-in-class underlying funds” (and/or leverage core menu options) was an important reason for their decision to use custom TDFs.

Incorporating existing plan investments was also suggested by the authors as an important advantage of custom TDFs. Grosz and Solomon suggest that incorporating a plan’s existing investments within a custom TDF will make the TDF “easier for a plan fiduciary to understand, monitor and communicate to plan participants.” They explain that this is because the plan fiduciary presumably has already vetted the plan’s core funds based on their investment return, fee structure and fitness. In addition, these funds presumably have been carefully selected and monitored, and may be familiar to plan participants, they further note.

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