Barbara Best, principal at Capital Strategies Investment Group, LLC, leading a panel at the PLANSPONSOR National Conference, noted this is an important topic because the Department of Labor (DOL) put out three-page advisory about target-date fund (TDF) basics, and in it suggested plan sponsors should evaluate whether to buy a solution or build one.
She said one point to remember is that if a sponsor buys a solution, it will be limited to the available glidepaths in the market. When buying a TDF solution, “you have hired Vendor X to manage the assets for any participant who does not want to do so himself,” added Mark Davis, senior vice president and financial adviser at CAPTRUST Financial Advisors. So plan sponsors are not just picking funds, they are hiring investment managers.
Randy Long, managing principal at SageView Advisory Group, said the decision between custom and off-the-shelf is a process for evaluating the needs of participants. Plan sponsors must consider such things as whether they also offer a defined benefit (DB) plan–which would mean the TDF glidepath could be more risky since participants have that backup–and whether participants roll out of the plan at age 65 or not–which would determine whether an asset allocation strategy should be “to” or “through” retirement.
Also, plan leakage through loans or hardships should be evaluated to determine the glidepath need, added Hal Bjornsen, client portfolio manager at J.P. Morgan Asset Management Global Multi-Asset Group. “Is there a glidepath already out there that meets these needs?” he asked.
Bjornson said a $500 million plan size is the minimum J.P. Morgan would consider for a custom TDF solution. But, Best queried whether it's a matter of plan size or a matter of plan sponsors having a best-in-class investment menu with which to build a best-in-class asset allocation solution. Davis said plan sponsors would have to have a compelling reason for justifying the cost of unitization and time needed for offering custom funds. Best conceded that it is hard to justify a $10,000 cost per TDF portfolio for a $150 million size plan.
Long said plan sponsors should also remember that a regular investment lineup doesn't usually include real estate funds, TIPs or other alternatives that may make sense in a TDF.
Some plan sponsors feel going with a custom solution creates more risk for them than selecting an established solution, Best noted. Long said risk depends on the experience of a plan sponsor's investment committee. "If the same committee monitors DB assets, it can handle custom TDFs," he stated. He also noted more plan sponsors with custom TDFs are looking at passive management using indexed funds.
Bjornson concluded that using custom TDFs is not necessarily riskier and taking on more fiduciary control; plan sponsors need to just remember to document their processes.
-Sara Kelly and Rebecca Moore