Are custom funds better than pre-packaged options?

By BenefitsPro

By Paula Aven Gladych

Defined contribution plan sponsors are evaluating their current target-date funds and considering whether or not custom TDFs are a better option, according to a survey by SEI.

Of the plan sponsors currently offering TDFs, 12 percent currently use custom funds rather than proprietary or pre-packaged options. The poll suggests that percentage is rising as 37 percent of those surveyed said their organization is likely or somewhat likely to implement or revise custom target-date solutions in the next 18 months.

Last year, the Department of Labor offered guidance to plan sponsors suggesting those offering proprietary or pre-packaged TDFs consider custom or non-proprietary options.

"While there wasn't a noticeable immediate response to the Department of Labor's guidance by plan sponsors, the survey results suggest that tide is shifting toward evaluating custom or multi-manager TDF options," said Scott Brooks, managing director, Defined Contribution, SEI's Institutional Group. "This makes complete sense as DC plan sponsors are recognizing that their fiduciary responsibilities have evolved and they need to focus on making sure the DC plan's investments can provide participants with adequate retirement income."

The survey found that only 29 percent of organizations measure the effectiveness of the investment options in their DC plan by evaluating if projected participant income replacement ratios are being met at retirement. An overwhelming majority (98 percent) continue to measure effectiveness by only reviewing investment performance, which tends to focus on short-term metrics such as three- and five-year performance, not long-term goals.

The lack of focus on meeting retirement income needs comes despite the fact that 57 percent said the objective of the company's DC plan was to provide a primary source of retirement income.

The majority of respondents only offer DC plans to employees. Less than half (47 percent) said the organization still offers a defined benefit plan as well. A significant number (39 percent) of plan sponsors who only offer a DC plan said the objective of the plan was to provide supplemental retirement income. This could suggest they feel their DC plan cannot provide sufficient retirement income to be primary, or that employees' primary retirement income will come from either Social Security or savings vehicles outside of the DC plan.

Concerns around being able to effectively meet fiduciary and oversight responsibilities when implementing more sophisticated funds might be causing delays for some plan sponsors to shift to custom TDFs. When asked why they don't currently implement custom TDFs, 49 percent said concern over added complexity/liability was a reason, while 31 percent cited they lack internal resources for implementation and ongoing oversight. This explains why 42 percent said the organization would consider outsourcing investment manager selection in some areas of their DC plan. Of that group, 43 percent said they would do so when implementing custom TDFs.

The poll was conducted by SEI's Defined Contribution Research Panel in February 2014. It was completed by 285 executives overseeing DC plans in the United States.

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