When the Department of Labor issued its “Tips for Plan Fiduciaries” on TDFs last month, it covered all the basics, including:

  • Establish a process for comparing and selecting TDFs
  • Establish a process for the periodic review of selected TDFs
  • Understand the fund’s investments
  • Review the fund’s fees and expenses
  • Document the selection and review process

But tucked in the middle of those fundamentals was the suggestion to “inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan.” If advisers needed any more ammunition to guide clients to a way to access best-in-class asset managers for their TDFs, this is it. And who knows, plan sponsors who read the DOL’s tips and haven’t already been nudged in that direction might even ask you about the option un-solicited.
The DOL’s “tip” was music to the ears of Daniel A. Noto, Senior Retirement Counsel at Alliance Bernstein. AB, early to champion open architecture TDFs, has been encouraging large plan sponsors for years to adopt customization. “More recently,” Noto stated, “customization has become financially feasible for a wider asset range of plans.”

He says large providers like AB can bring their costs down as they build up a larger customer base for that product, rendering them “more attractive to smaller plans,” he says. Noto adds that AB has “reduced the operating expense component” of its customized TDF service “significantly” since launching the service in 2007.

Avoiding Conflicts

While customized TDF solutions are everywhere, advisers need to avoid falling into the same trap as the large fund companies that originally tried to lock clients into their own proprietary funds, warns Steven W. Kaye, President of AEPG Wealth Strategies. He is aware of smaller advisers to “claim to be fiduciaries, searched the marketplace for the most suitable funds or managers for their client and, low and behold, came up with themselves.”

“Are they performing ‘best efforts’ for the plan and participants? I think not in most cases,” Kaye says.  Kaye instead advocates “quasi-customizing.”

Quasi-Customized TDF

“There are so many different flavors of target funds with varying levels of volatility, allocations, glide paths, strategies, styles and philosophies that advisers already have a lot to work with, provided by institutional managers with vastly deeper and broader resources than most independent advisers,” he observes.

 “I think a better result occurs when advisors are focusing their efforts on due diligence within the marketplace, versus reinventing the wheel with cruder tools than larger providers employ,” Kaye concludes.



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