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Custom Target-Date Funds: A One-Stop Retirement Benefits Option for Employees

Pat Kavanaugh, Morningstar Investment Management LLC


Many plan sponsors don’t know how to help solve the problem of employees not saving enough for retirement. We previously provided an overview of the challenges plan sponsors may face with helping employees prepare for retirement and a few options for consideration. We’ve also taken a closer look at off-the-shelf target-date funds. Now, let’s find out what a little customization can potentially do for a plan and its participants.

What are custom target-date funds? 

Like target-date funds, custom target-date funds are a one-stop retirement benefits option for participants. Participants can pick a fund based on their expected retirement year, and then not worry about selecting or monitoring investments. It presents an asset mix and investment selection for various retirement dates, but it also may take into account the demographics of the employees at a company. Built from funds that the sponsor selects for the plan lineup, custom target-date funds provide more visibility into how these funds are constructed than an off-the-shelf product. And often, fees are tied to assets under management. That means that the more assets participants put into the funds, the greater the cost savings to the plan sponsor.

When can custom target-date funds be a good retirement benefits option?

A custom target-date fund uses a diversified-portfolio approach much like a target-date fund, but it can allow for some modifications. This option can incorporate overall workforce demographics and attributes, including pensions, industry, location, and employee-risk capacity. Plan sponsors could adjust asset allocation (or their glide path) based on actual data. For instance, the custom target-date fund for an energy company might want to consider underweighting commodities to manage the risk the participants are taking on because they already work in the oil industry.

What are some factors to consider with custom target-date funds?

Custom target-date funds can work well for plan sponsors if employee demographics are similar but vary from the average investor. For example, a custom target-date fund might be a good option for a health care company that has a defined-benefit plan, a low employer match, and high salaries. So what if the plan sponsor wants to offer a custom target-date fund and provide more detailed recommendations or guidance to participants? The plan sponsor could offer custom target-date funds with another option such as managed accounts. There is some work involved in implementing custom target-date funds, so this route is often better suited for investment-savvy plan sponsors. Additional costs may also be added if the plan sponsor decides to hire an investment manager to design and apply the asset allocations.

Please see below for an important disclosure.

Which Retirement Plan Investment Option is Right for You?

If you need more information to determine which option might be best for your plan, you can read our full analysis. "How Can You Help Your Employees Retire?"
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Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

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