Customization for More Control

As defined contribution (DC) plans represent 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 increase participant contributions, minimize their 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 plan sponsor decide to use a custom approach, one option will be white-label funds; their name reflects their asset class or objective and can be single-manager, single-asset-class-multimanager, multi-asset-class-multi-manager or custom target-date fund.

Before selecting a target-date fund, sponsors need to consider the provider’s underlying assumptions about the participants. If those are incorrect for your participant base, you may want to consider a custom TDF, Vanguard says.

Other benefits of customization include broader diversification, a simpler naming convention that may minimize portfolio construction errors, tailored asset allocation and the capability 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 writes. 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 advises. 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.