Weighing the pros and cons of custom target-date strategies

When does it make sense to choose a custom target-date strategy instead of an off-the-shelf menu? It’s a complicated question with no easy answer.

There are a number of factors plan sponsors should consider when deciding whether a custom or cookie-cutter target-date strategy is most appropriate for their plan – including asset allocation, management selection and fee structure, according to new research from JP Morgan Asset Management.

JP Morgan predicts target-date strategies are going to become increasingly popular in the coming years. But for plan sponsors, weighing the pros and cons of a custom vs. an off-the-shelf target date strategy must be a strategic exercise.

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Some of the benefits in choosing custom plans include potential fee savings, as well as the opportunity to have “best-in-class” manager rosters, the study notes. However, there are some challenges in implementing custom plans too; for example, complex administrative burdens and demanding reporting requirements.

To establish the goals of any DC plan, sponsors need an intimate knowledge of their participant population, the study states. Often, plan sponsors lean toward a custom target-date strategy over an off-the-shelf offering because of the belief that a tailor-made approach would better address specific characteristics of their workforce, such as the demographic profile of their participants.

Some employers need to look at their demographics when weighing the benefits of custom target-date funds, as these can be precisely designed to meet specific requirements.

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For example, the research notes, “an organization that requires participants to retire at age 60 will necessitate specific plan parameters that may be best incorporated in a custom target-date strategy.

“Target date strategies continue to hold a growing share of DC plan assets and, like many in the industry, we expect they will become increasingly popular as both custom and ‘off-the-shelf’ strategies allow participants to access powerful asset class diversification,” says Dan Oldroyd, portfolio manager and head of target-date strategies, multi-asset solutions at J.P. Morgan Asset Management.

But weighing the pros and cons of these options requires a lot of work, he adds. “Plan sponsors and advisers need to be thorough, careful and thoughtful in their analysis when determining a course of action.”

Many plan sponsors say participant communications is one of the most important components in DC plans, the research notes. Plan sponsors won’t be able to deliver the best possible retirement outcomes for employees without a robust communication plan and good communication is critical in implementing custom strategies, says the report.

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As an example, certain circumstances present specific demands on plan sponsors that offer custom strategies. If a custom strategy includes managers or asset classes that are not included in the plan’s core fund lineup, the plan sponsor is obliged to communicate that fact to all participants.