Additionally, mixed target date fund investors appeared to have relatively diversified portfolios, but are more aggressive than the average target date fund would be for a given age, especially at older ages.
“The average allocation of mixed target date fund investors is 37% target date funds, 49% equity funds, and 13% bond funds,” Blanchett added. “The non-target date fund weights are relatively constant across different levels of target date fund holdings.”
Plan advisors and sponsors, therefore, “should encourage participants who are not interested in using the TDF in its entirety to use some type of in-plan advice solution, such as advice or managed accounts.”
Comfort in Custom Target Date Strategies
Another potential solution to the “all or nothing” target date dilemma is the rise of custom target date fund strategies.
“As target date strategies continue to become more prevalent in defined contribution (DC) plans, more plan sponsors are contemplating custom offerings that can be tailor-made to meet the specific goals and objectives of individual plan sponsors,” Daniel Oldroyd, CFA, CAIA, head of target date strategies for multi-asset solutions with J.P. Morgan Asset Management, argued.
More specifically, custom target date strategies can be precisely designed to meet specific plan requirements.
“These strategies can take into account employee demographics and particular plan design features (for example, a prohibition against plan loans or pre-retirement withdrawals),” Oldroyd added.
Yet the comfort more customizable solutions provide might be offset by their communication and transparency issues.
“Effective communications are critical when implementing a custom strategy,” Oldroyd cautioned. “While participants in an off-the-shelf target date strategy can access relevant information about their strategy’s funds on fund company websites, participants in a custom strategy may have only one source of information about their retirement funds: the communications they receive from their plan sponsor.”
Thankfully, this lack of available information when custom strategies are compared with their off-the-shelf counterparts is something that hasn’t gone unnoticed, and the Defined Contribution Institutional Investment Association (DCIIA) has taken up the cause, with the advocacy organization launching a custom TDF research initiative in 2017.
“While there is a great deal of publicly available information on packaged (as in, mutual fund and collective investment trust) target date strategy performance and asset allocations, little to no comparative information exists on custom target date strategies,” DCIIA noted upon the release of its inaugural custom target date survey in 2019.
It found that the total custom TDF market was estimated at $430 billion at year-end 2017, with the DCIIA sample accounting for roughly 80% of the total market.
As one would expect, a majority of the custom strategies’ exposure was allocated to equities and fixed income, with the average allocation to equities for 2060 funds was 85%, falling to 28% for income funds, while the average allocation to fixed income increased from 7% for 2060 funds to 52% for income funds.
“The central focus of this initial study is to better understand the asset allocation approaches among custom TDF strategies,” the authors—including Capital Group’s Brett Hammond and T. Rowe Price’s Joshua Dietch—concluded. “Looking beyond this first iteration of its custom TDF research initiative, DCIIA looks forward to completing the custom TDF universe and expanding the data set.”
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