Are Customized Target-Date Funds Really That Good?

It’s hard to find unanimous agreement about anything these days — just look at Congress — but the retirement world seems to come close on the topic of customized target-date funds. Those are target-date funds that create a unique asset allocation, or glide path, based on the particular demographics of each plan sponsor’s work force.

Ninety percent of the 29 consulting firms in Pimco’s most recent annual survey say that any defined contribution plan that uses target-date funds should choose the customized version.

There’s also apparent unanimity that the trend has been growing rapidly since the product was created around six years ago. Pimco, Russell Investments, and Aon Hewitt all say that 20 to 30 percent of DC plans, mainly large ones, include these funds. According to Aon Hewitt, 18 percent more are “very likely” or “somewhat likely” to do so this year.

And who wouldn’t want to? The funds are custom-tailored and cost less than standard versions. They apparently do everything but cure the common cold.

Both customized and off-the-shelf target-date funds create a laddered series of funds dated in five- or ten-year intervals, with the glide path gradually becoming more risk-averse as each cohort’s participants move closer to the year they expect to retire. The difference is that the customized version, as the name implies, adjusts the glide path depending on the particulars of the employer’s work force, such as income, contribution level, and existence of a defined benefit pension. In addition, customized funds use many of the same money managers that are already investing the plan’s non-target-date assets.

For instance, a company with a highly paid staff might shift its asset allocation a bit more than usual toward stocks, explains Rod Bare, a defined contribution consultant with Russell. Why? “Having higher or more stable earnings actually is a very bond-like attribute,” counterbalancing the increased equity allocation, he says. Similarly, a traditional pension adds a bond-like component to the employees’ retirement portfolio, to be offset by a larger equity allocation in the target-date fund. A company with a mandatory retirement age would need a different tilt, Bare adds, in order to accomplish the glide path objectives in a shorter time frame than usual.

通常，任何定制的成本超过货架的物品。但专家表示，它与定制的目标日期基金相反，因为他们可以利用已经在计划的投资选项菜单中的机构资金，而不是预打包版本中使用的共同资金。因此，裸露和其他人说定制费用低于普通目标日期基金的30％至50％。

“The Number One reason [for their popularity] is control,” says Stacy Schaus, Pimco’s defined contribution practice leader. “Plan sponsors want control of who they hire and fire as the underlying managers. They want control over the glide path structure. And they want control over the fee.”

So why don’t all employers rush to offer these products? Size is the biggest roadblock. Vendors won’t customize for plans with less than $500 million in assets. However, that limit has already dropped from $1 billion a few years ago, and Bare says that “the minimum threshold gets smaller every year.”

But sponsors may have another, more subtle worry. If the funds rely on the managers that the employers themselves chose, they had better make sure they made a wise selection. Unlike traditional retirement-saving advice, they’re putting a lot of eggs in the same basket.

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.