(April 2, 2013) — Why buy bespoke when off-the-shelf will serve just as nicely—and comes with a much smaller price tag?
Over the past year alone, that position has gone from peripheral to predominant among leading consultants to defined contribution (DC) plans, according to new data. aiCIO has obtained a copy of the Pacific Investment Management Company’s (PIMCO) latest DC consulting survey highlights. A total of 51 firms participated—representing $2.4 trillion in client DC assets—including Callan Associates, Hewitt EnnisKnupp, Mercer Investment Consulting, Towers Watson, and UBS Institutional Consulting.
Custom target-date funds (TDFs), the survey revealed, are one of the most divisive topics among these DC specialists. A nearly identical portion of consultants told PIMCO that customization improves upon current packaged offerings (43%) as said off-the-shelf options provide plenty of choices to meet unique demographic needs (45%).
This was not the case a year ago. In 2012, 71% of respondents felt that custom approaches trumped packaged options, while only one-fifth (21%) said the current product range offered “plenty” of variety.
Despite the divided stances, the majority of consultants (70%) reported that their firms either support client interest in customization or actively promote it. Just two DC shops out of the 51 represented in the survey said they discourage use of custom strategies.
Customization aside, TDFs in general garnered nearly unanimous support. In total, 98% of DC consultants said they recommend that clients provide the option of a target-date or target-risk investment tier. One such TDF option would be plenty, according to 90% of respondents.
While the survey indicated that TDFs enjoy almost universal support among DC consultants, implementation has not quite caught up.
Consultancy NEPC, which participated in PIMCO’s poll, did its own survey of 74 corporate sponsors last year, and found that 64% had glide paths in place. “We discovered there was an absolute explosion of the implementation of glide paths in 2012,” said Bradley Smith, a partner at NEPC, during a webcast in January. “We found this very consistent with the data from last year’s survey, where there were actually more plans in the process of building the glide path than had one in place.”
Custom TDFs appear to be catching on more slowly than their prefab counterparts. As of last fall, only an estimated 20 to 30 corporate plans had chosen the custom path.
“We do a ton of custom proposals, but only about 10% of clients actually end up going that route,” the co-head of DC for a leading asset manager/consultancy recently told aiCIO. “That’s because the outcomes of customization tend to look a lot like off-the-shelf.”
Related magazine feature: The Target Date Conundrum