Custom Target Date Funds Offer Personalized Retirement Planning

Custom target date funds offer a unique approach to retirement planning, allowing individuals to create a personalized investment strategy tailored to their specific goals and risk tolerance.

These funds automatically adjust their asset allocation over time to optimize returns and minimize risk, typically based on a target retirement date.

A key benefit of custom target date funds is that they can help investors avoid the common pitfall of over- or under-allocating to certain asset classes, which can be a challenge for DIY investors.

By spreading investments across a range of assets, custom target date funds can provide a more stable and predictable retirement income stream.

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A target date fund is a type of investment option that automatically adjusts its asset allocation based on a specific retirement date. It's designed to become more conservative over time as the target date approaches.

Traditional target date funds typically only include the proprietary funds of the investment manager. Custom target date funds, on the other hand, allow a retirement plan investment committee to select and control the underlying investment options.

The Department of Labor considers custom target date funds as an alternative to "pre-packaged" target date funds.

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Custom target date funds offer several benefits to retirement plan participants and plan sponsors alike. With custom target date funds, plan sponsors can create custom glidepaths for their plan participants that are tailored to the shifting demographic needs at each point in the glidepath.

Plan sponsors can reduce their liability by using custom target date funds, which can help minimize investment manager and longevity risk for participants. This is especially important for plan sponsors who want to provide a secure retirement for their participants.

Custom target date funds offer competitive pricing that leverages the efficiencies of the companies' investment and research capabilities. This can lead to lower costs for plan sponsors and participants alike.

Plan sponsors can also customize their target date fund to fit the needs of their participants, creating multiple versions of a glidepath based on participant risk preferences. For example, a custom target date fund could include a conservative, moderate, and aggressive version to cater to different participant preferences.

By using custom target date funds, plan sponsors can provide a more personalized investment experience for their participants, which can lead to better outcomes.

myTDF has been used by over 300 plan sponsors since its launch, managing approximately $470 million in assets combined.

The product is now live on four recordkeeping platforms, with plans for further expansion. Integrating with additional platforms requires time, resources, and coordination with recordkeepers.

Martel expects the process to accelerate as familiarity with the systems improves.

The early rollout of myTDF was a significant milestone, starting in earnest around 2019 and gaining momentum by mid-2022. By 2023, the product was available to a broader market.

Over 300 plan sponsors have adopted myTDF, managing a combined $470 million in assets. This is a testament to the product's appeal and effectiveness.

myTDF comes in two versions, catering to different client needs. The main difference between the two lies in who acts as the fiduciary under ERISA Section 3(38).

The product is now live on four recordkeeping platforms, with plans for further expansion. Each connection requires time, resources, and coordination with recordkeepers, but the process is expected to accelerate with increased familiarity.

Data quality is a significant challenge in creating personalized Target Date Funds (TDFs). The accuracy of data is crucial to delivering effective glide paths.

Martel emphasizes the importance of accurate data, stating that what they're delivering hinges on the data being correct. As they add more factors, ensuring accuracy and consistency will be critical.

PIMCO hopes to address cost concerns by exploring a dual-QDIA model, where participants initially invest in traditional TDFs and then transition to personalized options as they near retirement.

This approach could maximize the benefits of personalization when participants' balances are larger and their circumstances more complex.

Advisers have given positive feedback about plans with diverse participant demographics, which is a major plus for personalized TDFs.

The interest in personalized TDFs lies in their ability to offer tailored solutions without requiring participants to actively engage with investment platforms, a common barrier to adoption.

Advisers have also expressed interest in the dual-QDIA model to balance cost and value, a concept that's still being considered as the product evolves.

Feedback from plan advisers suggests that while simplicity is the focus, there are areas where the product can improve to better meet the needs of participants.

Personalized target-date funds have taken off in recent years, offering a more tailored approach to retirement savings. They gather basic data points such as age, salary, and savings rate to make an optimal investment recommendation.

This innovative solution blends two off-the-shelf TDFs at the right percentages to achieve the target, providing a more personalized and risk-appropriate investment recommendation than a single TDF. By leveraging this data and underlying methodology, personalized TDFs can fill the gap between off-the-shelf TDFs and full-service managed account programs.

Ascensus recently announced the launch of a PEP with Capital Group, featuring the American Funds Target-Date Plus, a leading personalized TDF solution. This marks a significant step towards making personalized TDFs a more common choice as the full QDIA.

However, there are some tradeoffs to consider, such as sacrificing the leverage of the core menu and facing potential fee compression in the managed accounts space. The basis point fee of personalized TDFs typically sits between that of TDFs and managed accounts, which could make it difficult to compete with managed accounts on cost.

myTDF, a more precise path to and through retirement, takes the simplicity of TDFs and adds the power of auto-personalization, allowing plan fiduciaries to align participant allocations with their individual circumstances.

Custom target date funds offer a broader glide path choice beyond the traditional "one size fits all" approach, allowing plan sponsors to tailor their retirement plans to meet the unique needs of their participants.

Plan sponsors can benefit from reduced liability and diminished investment manager and longevity risk for participants.

Custom target date funds also provide competitive pricing that leverages the efficiencies of the companies' investment and research capabilities.

Plan-level customization can lead to better outcomes for participants.

Here are some key benefits for plan sponsors:

Plan sponsors need to consider the potential need for operational adjustments, more complicated recordkeeper transitions, and custom participant communication when implementing custom target date funds.

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myTDF represents an evolution of traditional target-date funds by incorporating up to five demographic factors beyond age in seeking to deliver a more personalized default asset allocation with the same ease as traditional TDFs.

myTDF is designed to provide a more tailored investment approach by considering factors such as income level, education level, and whether the investor has dependents, among others.

These additional factors can significantly impact investment decisions, as they can influence risk tolerance and return expectations.

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Traditional target-date funds have evolved with the introduction of myTDF, which incorporates up to five demographic factors beyond age to deliver a more personalized default asset allocation.

myTDF represents an evolution of traditional target-date funds by incorporating up to five demographic factors beyond age.

Incorporating demographic factors can help provide a more tailored investment strategy to meet individual needs.

myTDF seeks to deliver a more personalized default asset allocation with the same ease as traditional TDFs.

By considering factors beyond age, myTDF aims to offer a more nuanced approach to asset allocation.

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Recordkeeper models offer a range of benefits, including the ability to build custom models using a templated asset allocation framework and core menu.

For many years, recordkeepers have had asset allocation programs that allow plan sponsors and advisors to create custom models, which have evolved to incorporate a target-date or glide path approach.

These custom model programs can be a great option as the "TDF" component in a dynamic QDIA, and they can be free or included in the recordkeeping cost, or a few basis points for 3(38) or 3(21) programs, depending on the fiduciary duty and complexity.

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Custom model programs improve upon off-the-shelf TDF options by leveraging the core menu, creating consistency of asset classes and fund-specific building blocks across the full QDIA.

One added benefit is that Morningstar Investment Management is often the consultant, sometimes even the fiduciary, for many of the recordkeepers' custom model programs, which can lead to some consistency in asset allocation methodologies.

However, these programs may not consider participant or plan demographics when creating the asset allocation, instead using a simpler risk-based glide path construct, where nearly every plan uses the "moderate" option.

This can lead to asset class rigidity, where certain requirements may feel like trying to fit a square peg into a round hole, but high-quality advisors have been navigating this successfully on behalf of their clients for years.

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