We believe TDFs continue to take the lion’s share of retirement investments, which is why it’s important to understand how they’re evolving—and how they may impact your business. We’re all familiar with the limitations associated many TDFs offered in retirement plans. The majority of them are comprised of a single investment manager; this lack of open architecture reduces manager diversification. There is also a lack of control regarding replacement of the underlying funds in a single-fund-family TDF. This is especially important when it comes to plan sponsors exercising their fiduciary duty. As an example, what would a plan sponsor do if one of its TDFs were underperforming? With a pre-packaged (or off-the-shelf) TDF, there is no other recourse but to remove the entire fund and replace it with another TDF. The process for doing so is an administrative burden. Also consider how sponsors would explain this change to their employees and the potential confusion it could cause. Lastly, the pre-constructed glide path of many single family TDFs may not be appropriate for the plan.
What if there were a better alternative? In our view, there is.
The semi-custom TDF is one available strategy that seeks to leverage the most ideal features of the single-family and other pre-packaged TDFs without the undue complications of a full custom-model TDF. While I am an advocate for full custom-model TDFs, I do recognize that the majority of plan advisors don’t necessarily have the in-house capabilities or capacity within their business model to develop glide paths for a custom-model approach. For many, their key focus is the selection and monitoring of appropriate investments for the plan’s lineup.
Enter semi-custom TDFs.
How Do Semi-Custom TDFs Work?
With a semi-custom approach, a third party (such as Morningstar, Wilshire, Mesirow, a record keeper or platform provider) takes on the fiduciary responsibility for glide-path construction. They offer pre-determined glide paths with each vintage date available in multiple styles (such as conservative, moderate, and aggressive). What’s more, glide paths can be tailored for either a “to” or “through” approach to better align with plan goals. This is significant because it allows you to flex your consulting muscles.
During your next client meeting, you may want to ask your plan-sponsor clients what they believe is the overall objective of their TDFs. For example, would it serve to complement existing plan features? (For plans with an existing defined-benefit (DB) component, a “through” approach to the glide path or one with a heavier tilt toward equities may serve to complement the DB component.) What is the objective of the glide path? What are the plan’s assumptions or beliefs about how investments are managed during the accumulation and de-accumulation phases—and are they reflected in the asset allocation of the glide path? With semi-custom TDFs, you can provide consultation on the investment lineup and help sponsors select the appropriate glide path for their TDFs.
We believe that TDFs are here to stay—and that’s a good thing for participants. They can play an important role in helping employees pursue their retirement goals. With that said, and in our view, the natural evolution of TDFs is the semi-custom TDF. It bridges the gap between single investment manager TDFs and the full custom model approach. I strongly believe that advisors willing to explore this option will find that the semi-custom approach can help set them apart from their peers. We believe there are many benefits to semi-custom TDFs. The semi-custom TDF approach is a way for plan sponsors to improve how they manage their fiduciary due diligence; it’s a means for participants to access a diverse offering of investments as opposed to being locked into one fund family; and lastly, it allows you to do what you do best: serve as a source of counsel for plan sponsors.
Learn more about custom models and TDF reviews. URL: https://www.oppenheimerfunds.com/advisors/article/kustom-advisor
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Diversification does not guarantee profit or protect against loss.
The date in a target date fund's name refers to the approximate year when an investor in the portfolio is assumed to retire and likely would stop making new investments in the portfolio, and may plan to start withdrawing money. Using an asset allocation “glide path,” (how the asset allocation changes as the target date nears) the portfolios generally become progressively more conservative until and after the approximate date of an investor's “transition” into retirement. An investment, including the principal value, in a target date fund is not guaranteed and a portfolio can suffer losses, including losses near, at, or after the transition date, and there is no guarantee that a portfolio will provide adequate income at and through the investor's retirement.
Discussion of custom or semi-custom models is not intended to represent investment advice that is appropriate for all investors. Each investor's portfolio must be constructed based on the individual's financial resources, investment goals, risk tolerance, investing time frame, tax situation and other relevant factors.
OppenheimerFunds does not recommend any specific asset allocations. A financial advisor can suggest an asset allocation strategy designed to meet your financial goals, time horizon and risk tolerance. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss.
This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.
These views represent the opinions of the National Sales Manager, DCIO, at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.