Custom target-date fund allocations in employer-sponsored defined contribution plans can vary drastically within vintages and asset categories but are still dominated by equities and fixed income, according to research from the Defined Contribution Institutional Investment Association.
Asset allocators and individual plan sponsors "had different views of the ideal glide path for each vintage, with asset allocations varying by as much as 30 percentage points," according to the second annual Custom Target Date Fund Survey released May 26.
"There's no single right way to build a target-date fund, said Chris Nikolich, head of U.S. glidepath strategies for AB's multiasset solutions business, and one of the survey's co-authors.
The differing views in terms of allocation construction in custom TDFs could indicate that when both the glidepath and the underlying asset classes were constructed, other factors were at play, such as the existence of a defined benefit plan or a plan where specific demographics were being considered, said the survey, which is based on 2018 year-end data.
An investment option was considered a custom TDF if it was tailored to the plan demographics, available exclusively to that plan's participant population and valued daily, the survey noted. Respondents were asked to allocate their custom TDF holdings in 45 asset classes. DCIIA then categorized the universe of asset classes into four broad asset categories: equity, fixed income, inflation-sensitive and diversifiers.
There were 14 asset allocators in the 2018 sample, up from nine in 2017, while the number of plans increased to 91 from 65 the year prior and the number of unique funds increased to 958 from 673.
In total, custom TDF assets represented in the 2018 sample exceeded $312 billion, while plan assets exceeded $1.2 trillion.
Warren Cormier, executive director of the DCIIA Retirement Research Center, said nine allocators participated in both surveys and noted the lack of information published on custom TDFs as a reason why DCIIA has poured time and resources into this topic.
The survey found that the average allocation to equities for target year 2060 funds was 86.3%, while the average allocation to fixed income was 6.6% for 2060 funds.
Allocations to diversifiers, which include alternative assets like hedge funds and private equity, still make up a small percentage in custom TDFs — 0.7% on average in both target years 2020 and 2060 funds — but may tick up in the coming years, Mr. Nikolich said.
"Those sorts of strategies weren't necessarily needed from 2009 through 2019 when the stock market goes up virtually every year by 10% and we were in the midst of a 35-year bull market in bonds," he said. "But now given the volatility we're seeing in the equities markets, the likelihood for lower returns and bond yields being so low, I think there's more value that these diversifying or alternative strategies provide, both from a growth perspective in terms of helping to deliver returns, and in terms of the diversification they could add to a multiasset class portfolio."
