Despite all the hoopla surrounding custom target-date funds, there is actually very little customization in these offerings (Custom target-date funds are replacing off-the-shelf ones,, Pensions & Investments, May 26).
I personally consider it deceitful to use the word custom. Worst case, custom target-date funds are merely packaging of defined contribution investment-only families of funds offered by a single investment management company. These are closed architecture packages comprised solely of funds provided by a single investment firm, clearly designed for asset gathering rather than superior results. Best case, the custom fund is open architecture, but even then the glide path is usually licensed from a consulting firm. In the hierarchy of what matters in target-date funds, asset allocation is paramount, and this means that the glide path is critical. Cookie-cutter glide paths are not customized, and not all cookie cutters produce good cookies.
Of all the benefits that are commonly touted for custom target-date funds, the only one that may stand up to scrutiny is lower fees, but this is certainly not always the case. Let's get these important offerings right, and be honest about their descriptions. Target-date funds are growing in dollars and importance, so the stakes are high for plan beneficiaries and their fiduciaries.
President, PPCA Inc.
Principal, Target Date Analytics LLC
San Clemente, Calif.
EDITOR'S NOTE: Mr. Surz wrote an Other Views commentary, Good, bad and ugly of target date, in the March 17 P&I.