One of the first suits I bought when I started my career more than two decades ago was an “off-the-shelf” Hart Schaffner Marx two-button gray wool suit from Nordstrom. For many years, I never considered buying a custom-tailored suit, as off-the-rack suits fit me reasonably well and I didn’t think going custom was worth the additional cost.
In 2014, my family and I moved to Hong Kong for a three-year overseas assignment. I quickly learned that the cost of a custom suit there was significantly less than it was for one in the U.S. In fact, a handmade suit in Hong Kong was about the same price as a quality off-the-shelf suit back home. With a custom suit, you don’t get a brand name, but you do get to choose the fabric, the number and color of buttons, the color of the lining, and the number and size of inside pockets. Plus, you get a perfect fit.
Retirement plan sponsors often find themselves with a similar choice when they review their defined contribution (DC) plan menus. Like the Hong Kong custom suit, sometimes a custom-made target-date or white-label fund is a prudent alternative to an off-the-shelf option. But, how do you know if a custom option is right for your plan?
Identify the issue you’re trying to solve
Think about the specific reason you’re considering a custom target-date fund (TDF) or white-label offering for your plan menu. Do you want to offer options with clearer, more descriptive names? Do you want to combine options that are similar? Want to include additional asset or sub-asset classes? Or, do you have strong views about using a specific manager for your plan? Depending on your starting point, cost may be your motivation.
We like to discuss customization in terms of the three Cs:
- Consolidation. By eliminating some options while combining and renaming others, the menu can be more instructive.
- Control. If you have specific investment beliefs that require allocations to certain asset classes or manager strategies, you can use customization to implement them.
- Cost. With more control and significant scale, you may leverage lower all-in pricing, one of the most powerful tools for a fiduciary working to improve participant outcomes.
What plans should include custom options?
We partner with consultants to help plan sponsors answer the customization question on an individual basis. Each plan is unique. However, generally speaking, customization tends to be better suited for larger plans whose demographics are fairly homogenous and materially different than the U.S. population. A good candidate has the scale to make customization more cost-effective.
Custom options come with administrative complexities and demand additional oversight, which must be handled by the plan sponsor or outsourced. Sponsors are expected to understand how the balance between risky and less risky investments shifts within a TDF over time. This shift is called the glide path.
The level of fiduciary responsibility assumed by the plan sponsor should also be considered. These additional considerations may be worth it for some plan sponsors who believe that the custom glide path or white-label funds are a better fit and will likely generate solid returns for the plan going forward.
Vanguard’s custom tool kit
We use a full suite of tools when we partner with plan sponsors and consultants to analyze the appropriateness of custom alternatives. We offer a custom target-date fund evaluation, including a utility score of different glide-path options and a certainty fee equivalent to show you your cost benefit analysis. We can also provide comparisons of standard mutual funds with custom funds, as well as forward-looking return and risk expectations and historical performance analysis on various types of white-label products. Vanguard can model, implement, administer, and oversee a variety of custom solutions, if deemed appropriate for your plan.
All sewn up
Just like there is no right or wrong answer when you’re considering the purchase of a custom suit, each plan sponsor should carefully evaluate whether the implicit and explicit costs of going the custom route for your portfolio is worth the benefit.
For more information, read the new Vanguard commentary Considering custom for your DC plan if you’re interested in talking about custom options, please contact your Vanguard representative.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.