The $2 billion City and County of San Francisco Deferred Compensation Plan introduced target-date investing to participants on April 27, the latest example of a large DC plan choosing a customized approach.
Following two years of study, plan executives decided custom target-date funds would better serve participants than off-the-shelf funds. Plus, “we could factor in any unique workforce demographics,” said Carol Cypert, deferred compensation manager. “We want participants to redirect their focus from how to invest to how to save.”
A custom portfolio also offered more flexibility in choosing and terminating managers and adjusting investment options, she said. Eighteen funds from 12 money managers are used. “The main issue was diversification,” Ms. Cypert said.
Russell Investments advised the San Francisco plan on creating the custom portfolio and developing the glidepath.
As target-date funds take up a bigger piece of DC plan assets — thanks in part to their qualified default investment alternative status — custom funds are expected to play a more prominent role, research by Casey, Quirk & Associates LLC, Darien, Conn., shows.
The firm forecast that target-date funds will account for $3.68 trillion, or 48%, of the predicted $7.7 trillion in DC assets by 2020. Of that $3.68 trillion, about 37% will be in customized portfolios.
Target-date funds represented $550 billion, or 12.5%, of the $4.4 trillion in DC assets in 2010. Customized strategies totaled about 26% of the target-date assets.
Various surveys confirm that custom target-date portfolios are gaining acceptance, albeit slowly. For defined contribution plans that had target-date fund options in 2010, 8.1% offered customized portfolios, compared with 7.6% in 2009, according to the most recent surveys by the Plan Sponsor Council of America, Chicago.
Among the largest plans — those with more than 5,000 employees — custom strategies represented 16% of the PSCA target-date universe in 2010 vs. 14% in 2009.
Also, surveys from Aon Hewitt, Lincolnshire, Ill., show that 19% of DC plans with more than $200 million offering target-date funds had customized versions in 2011, compared to 14% in 2009.
And in its annual surveys of DC plans, Callan Associates Inc., San Francisco, found 13.2% expect to offer custom target-date portfolios this year. Last year, 11.3% of plans offered them.
Morningstar Inc. estimates that half the 30 companies in the Dow Jones industrial average offer custom target-date funds, said Jeremy Stempien, director of investments for the retirement solutions business of the Chicago research firm. When Morningstar designs custom target-date funds, it takes into account, among other factors, employee demographics, the presence or absence of a DB plan, participants' savings rates, the size of account balances, and trends among employees to remain in or leave the DC plan when they retire, Mr. Stempien said.
The San Francisco deferred compensation plan chose a custom target-date portfolio for many of the same reasons that other DC plans select off-the-shelf products. It helps participants who lack the time to manage their investments or who “are overwhelmed by the many investment choices available in the core investment lineup,” Ms. Cypert said. It also helps those “who do not have the financial literacy to invest through the self-directed brokerage option.”