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On April 23, 2012, Boeing’s defined contribution (DC) plan ascended to an elevated plane. That spring day, almost $2 billion was transitioned into a custom, open-architecture target-date fund. That fund was years in the making, because customization is complex and time-consuming: It took the combined efforts of Boeing’s substantial in-house investment resources, BlackRock (chosen to provide and implement the glide path), Russell Investments (to consult on the project), and State Street Global Markets (to manage the transition) to will it into being. The result, Boeing officials believe, gives its employees a best-in-class, actively managed default option for an all-in cost of about 45 basis points. 

Boeing is far from the first large and sophisticated plan sponsor to come to the conclusion that its employees were better served by a customized target-date fund. Intel took this path from the outset, and companies like Verizon, American Express, Starbucks, and United Technologies quickly followed—even a handful of 457 plans, notably the city and county of San Francisco, have gone the custom route. Some of these customized target-date funds include esoteric asset classes—TIPS, commodities, real estate, and hedge funds—and tailor-made glide paths. The question that is now being answered is whether more large employers (and, hence, most participants) are going to eschew off-the-shelf target-date funds and go down the custom route. 

This battle, it should be understood from the outset, is the most important struggle now playing itself out in the defined contribution arena, not least because while there are hundreds of thousands of defined contribution plans, almost half of all the assets are in a tiny handful (1% is the common wisdom) of very large plans. And target-date funds, in a remarkably short period of time, are now dominating the defined contribution scene, and for good reasons. For one, they fit hand in glove with the theories of behavioral finance that have swept all before them this past decade. The regulators have blessed them, not least because the evidence of inept investment decision-making by defined contribution participants (either overly aggressive or too cautious—and, whether the former or latter, invariably long on inertia) was there for all to see. Plan sponsors like them, particularly given the safe harbors that accompany them. And, finally, providers, and specifically the large mutual fund complexes that recordkeep most defined contribution plans, very much favor target-date funds, not unexpectedly for self-serving reasons. Target-date funds, full-service providers have discovered, are a handy bulwark against the open-architecture investment architectures that threaten to undermine the economics of their businesses. 

The net result has been an explosion of assets into target-date funds. Vanguard says that 47% of defined contribution participants are now invested in target-date funds, an astonishing number considering the Pension Protection Act, which established the safe harbors that catapulted target-date funds into their present prominence, is barely five years old. Moreover, as many of these participants are part of the “auto” generation (that is, they are being automatically enrolled, or in some cases mapped into these funds), the assets in target-date funds will only grow and grow. It is now accepted as common industry wisdom that most participants going forward will both start and end their workplace savings in target-date funds. UBS Asset Management estimates about $3.7 trillion of a projected $7.7 trillion in DC assets in 2020 will be in target-date funds.