Customization Gives Sponsors More Control Over Investment Vehicles

It also enables them to negotiate lower fees, Vanguard says.

With defined contribution (DC) plans representing a growing share of U.S. workers’ retirement savings, plan sponsors may want to consider whether they should offer custom investment solutions in those plans, Vanguard says in a new white paper, “Considering Custom for Your DC Plan.”

But aside from moving to custom investment choices, plan sponsors also need to make efforts to increase contributions, minimize early withdrawals and reduce all-in plan fees. “These strategies typically have more influence on participant outcomes than changes to a target-date fund (TDF) glide path or the creation of a white-label fund,” Vanguard says.

Should a sponsor decide to use a custom approach, one option is white-label funds; their names reflect their asset class or objective and can be single manager, singe asset class multimanager, multi asset class multimanager or custom target-date funds.

Before selecting a TDF, sponsors need to consider the underlying assumptions of the participants made by the TDF provider. If they are different from their own participant base, they may want to consider a custom TDF, Vanguard says.

Other benefits of customization include broader diversification, simpler naming convention that may minimize portfolio construction errors, tailored asset allocation and the ability for the investment manager to act as a co-fiduciary.

“Customization enables the plan sponsor to create a plan that reflects the unique circumstances, beliefs and demographics of its own employees,” Vanguard says. It also enables sponsors to offer different asset classes: “Customized options can tap specialized managers in different asset classes, potentially increasing the opportunity to add value.”

However, there are challenges, as well, Vanguard warns. Broader diversification increases complexity of oversight, customized solutions may not have a historical track record of performance, and plan sponsors still have a fiduciary responsibility.

In conclusion, Vanguard says, “We believe it’s an important part of due diligence to consider custom options. Each plan is unique and deserving of careful analysis and expert consideration.”

The full report can be downloaded here.