Customization Seen as Top TDF Trend

Customization is of growing interest to those adding target-date funds (TDFs) to retirement plan investment lineups.

“The trend of customizing target-date funds to the needs of plans and participants seems to be gaining steam,” says Marek Pfeil, managing director of investment research for SageView Advisory Group. “However, with customization options, as well as glide paths and the choice of products, you need to determine whether the benefits of going with a new set of target-dates funds outweigh the benefits of your current setup.”

Pfeil discussed a number of TDF trends during a recent webinar hosted by Manning & Napier Advisors LLC, of Fairport, New York. Other presenters included Brian C. Ternoey, principal of Curcio Webb LLC; Jeffrey S. Coons, president and co-director of research at Manning & Napier; and Bradford Long, research analyst, DiMeo Schneider & Associates LLC.

Long adds, “What asset level, or assets under management, make customization strategies worthwhile depends on how you define the term ‘custom.’ It is plan specific and depends on the demographics of the plan participants.”

Long also cautions that plan sponsors and fiduciaries need to do their homework before committing to a customized TDF approach. “You need to see, after all the fees, if a customized target-date fund solution is worth it. Make sure that you dig into the underlying structure and options of the funds.”

All presenters agreed that plan sponsors and fiduciaries should make sure to perform due diligence steps when evaluating TDFs as investment options for their retirement plan.

“For target-date funds, the glide path, the allocation throughout, and the research process used to choose funds are all important parts of the decision process,” says Long.

Pfeil adds that some other important factors in plans choosing the right TDF include how long the team managing the fund has worked with their firm, as well as how the underlying funds have performed historically.

Both Ternoey and Coons point to the importance of transparency, both for TDFs and for their underlying holdings. “Increasing the transparency of target-date funds is an important part of the due diligence process,” says Ternoey. “People investing in these funds need to know what they’re getting into. We also need to see what the underlying holdings are. Otherwise, fiduciaries or plan sponsors are guessing at how the target-date funds operate. This information is also useful in supporting good, well-documented decisions should any questions arise later.”

Fiduciaries and plan sponsors need to ask questions of TDF providers, says Coons. “They need to understand the asset allocation of the underlying funds," he says. "Transparency is important because it shows you that what you’re paying for, in terms of various fees, is what you’re getting.”

The presenters also discussed strategies with regard to alternative investments and TDFs. Ternoey recommends that more diversifiers be added into target-date funds. “Indexing can also be used in areas such as commodities and real estate. You can also consider mutual funds that replicate hedge funds,” he adds.

Coons agrees with the use of diversifiers and adds, “You need to look at where we are in bond yields today. For example, low bond yields can have a big impact on investments. And while alternative investments can look great on paper, they also present their own set of risks.”

In terms of trends, Long sees regular monitoring of TDFs by plan sponsors and fiduciaries as gaining popularity. “Evaluating your target-date funds on a regular basis is a good idea. Take a look at what you have and make sure it’s appropriate going forward. Goals may have changed.”

Pfeil advises, “You need to know what the right glide path is for you. Establish guidelines and benchmarks on what elements you are going to monitor regularly.”

Ternoey foresees an increasing legal component to the choosing of TDFs. “We are seeing the beginnings of more-detailed benchmarking. There are more legal nuances to target-date funds and subsequently more involvement from members of your legal staff.”

More information on the webinar is available by emailing