Many industry experts have warned for some time about the fiduciary concerns with using pre-packaged target-date funds absent a comprehensive selection process. General complexity and lack of uniformity can make these funds difficult to understand, monitor, compare to each other or even compare to a benchmark. Given these difficulties, ensuring — and documenting — that proprietary target-date funds comply with a plan's investment policy statement may be nearly impossible.
Using a custom target-date solution would help address those challenges — and others. In fact, according to a recent survey, more than half of consultants, 51%, believe a custom target-date approach is an improvement over current packaged funds, according to a 2013 PIMCO survey.
By choosing a custom target-date solution, a plan sponsor can avoid being locked in to one manager for all underlying components of the target-date funds.
What's more, a custom approach allows plan executives to leverage their core lineup — presumably composed of “best in breed” funds. In a well-managed plan, these funds are already subject to rigorous fiduciary oversight and control — and those same monitoring efforts will be automatically applied to the target-date solutions.
Plan executives readily admit they are not confident that the funds underlying their target-date funds are best-in-class. Specifically, although more than 80% of executives believe they have a fiduciary duty to evaluate underlying investments in target-date funds, the majority, 57%, of those whose plans use a single-manager target-date fund are unsure about having best-in-class underlying funds, according to 2013 information from Janus Group.
Fiduciary liability concerns can arise from this uncertainty. For example, a plan sponsor might choose to replace a core fund in the overall investment lineup — but that fund might still be a component of a pre-packaged target-date fund. With a custom solution, the unwanted fund would automatically be removed from the target-date solution as well — ensuring a consistent investment monitoring process for all funds.