Much-touted target-date funds have been coming in for some harsh criticism, thanks to their bundled approach and wild variations in how they're structured.
Nearly 90 percent of direct contribution plans use TDFs as their default investment option. But did you know, for example, that while the average 2030 TDF is made up of 70 percent in equities, others have just 20 percent?
As a consequence, some participants are exposed to more risk than they're aware of, while others might be under-exposed. In other words, the very act of bundling limits the effectiveness of TDFs in answering the needs of the age group to which they're targeted.
Recommended For You
Also read: New 401(k) plan features alone aren't enough
So what's the answer? According to a new paper from Towers Watson, it's customized TDFs that discard the bundled approach and take into account an individual plan participants' risk tolerance, age and savings rates, among other items.
"It is important to remember that an appropriate glide path today may not be appropriate in the future," the firm said in its paper.
Ordinary off-the-shelf TDFs, it said in the paper, are "considered a bundled option because one firm is responsible for overseeing the glide-path design, determining portfolio construction (asset allocation), implementing the underlying managers (manager selection) and, in many cases, managing the underlying funds through the use of proprietary products."
The problem with that is that with only one provider, participants tend to get "a generic glide-path design meant to be appropriate for the average participant." And, as we all know, nobody's "average."
"Unfortunately … this bundled approach means a plan sponsor has no control over which asset classes are used in the portfolio construction or implementation factors such as manager selection," Towers Watson said.
"In effect, this creates an all-or-nothing scenario where a sponsor would have to consider replacing the entire suite of TDFs if it is unhappy with any of the underlying components or if adjustments were required based on evolution of the plan needs."
Unbundled TDFs, on the other hand, mean not only include better tailoring of investments to participants based not just on age, but on plan design and participation rates.
Unbundled TDFs also can help sponors save money, thanks to added fee transparency. Sponsors also will find greater freedom in selecting asset managers and greater flexibility in making changes when and where necessary.
Sponsors going the unbundled route at first might have trouble with the "perceived increases in oversight responsibility, complexity and cost compared to bundled options," Towers Watson said.
But the unbundling trend is gaining traction in the TDF marketplace. According to its own surveys, 49 percent of sponsors view custom TDFs favorably and more than 20 percent have already implemented one.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
