Drinker Biddle provides some concise guidance for advisors interested in using custom target date funds. While the use of packaged TDFs has skyrocketed, the use of custom TDFs is limited. The DOL guidance on TDFs seem to favor the custom approach because they can use a plan’s existing investment choices or Designated Investment Alternatives (DIAs), which are generally not all from one fund family. And they can be customized to fit the needs of the plan sponsor’s employees.
Custom TDFs may be used as a QDIA if the advisor acts as the 3(21) or 3(38) fiduciary — but they may not be used if the TDF is considered to be an asset allocation service, Drinker Biddle notes.
Custom TDFs are one way to show value. This is an important factor as some plan advisors struggle to maintain their price point in the wake of the industry’s overemphasis on fees caused by last year’s disclosure rules and media reports — as well as rating services using bad data and questionable methodologies. Not only is the advisor, not the TDF manager, monitoring and selecting the underlying DIAs in a custom TDF, but they can also customize it for the plan based on demographics, salary, turnover, deferral rates and withdrawal patterns of participants. There may even be differences among age bands that can lead to further customization not available in off-the-shelf TDFs.
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