Target date funds have been great for defined contribution (DC) plan participants—they are age-based vehicles that reduce risk as retirement nears—but there are still limitations. Increasing numbers of large U.S. plan sponsors have decided that off-the-shelf target date funds aren’t for them and are finding custom target date funds more attractive—for several reasons:
- Custom funds allow for increased control of the glide path and underlying investment allocations
- Custom funds take into account materially different participant characteristics, relative to the general population
- Custom funds help meet sponsors' desire to control fees
This paper discusses our eight observations on custom target date funds, including: glide path construction, building block decisions, operations, and ongoing monitoring.