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The difference between theory and practice, as the saying goes, is bigger in practice than in theory. For target-date funds (TDFs), which took off in popularity in the US following the 2006 Pension Protection Act, evidence is mounting of an implemented reality that falls far short of its graceful theory.

“Retirees deserve better,” concluded the authors of a 2013 paper in the Journal of Retirement. The typical glide path strategy fails on both of its purported capabilities, they argue: maximizing net value and minimizing uncertainty. “And yet, they collect steadily-accelerating new asset flows because the target-date story is so compelling!”

Authors Robert Arnott, Katrina Sherrerd, and Lillian Wu of California-based Research Affiliates point to four “basic design flaws” that they say prevent glide paths from achieving their goals: “1) inefficient asset class exposure, 2) mis-specification of risk and return, 3) poor diversification, and 4) constant risk premium assumptions.” These researchers, like many others, make the case that with booming enrollment in defined contribution (DC) schemes, the time has come for a more sophisticated strategy—one that holds up in theory and in practice.

Interestingly, experts are increasingly advocating for going custom all the way, regardless of plan size. Many mega-plans are looking to fully customize their TDFs, and smaller mid-markets generally lean towards custom allocation services offered through their recordkeepers, says Nathan Voris, large market practice leader of Morningstar’s retirement solutions group. “A custom solution boils assumptions down to the individual client, throwing the median solution out the window, and digs into the labor profile of the plan sponsor: participants’ savings rate, ages, salaries, income replacement goals, etc.”

Custom TDFs, previously reserved for the largest plans with strong investment structures and vast pools of capital, could become a feasible option for smaller plans, Voris says. It’s left up to scaling—trying to figure out how a $20 million plan sponsor can take advantage of custom products without breaking the bank. And this is no easy task.

Successful customization takes detailed demographic data and tailors a fund to the individual’s needs, a practice that only a handful of third-party firms have been able to master. But these hurdles and difficulties are stopping no manager or consultant from vying for a piece of the action. Money is flowing in and competition is skyrocketing.

According to consulting firm Callan Associates, its index of DC assets rose 20% last year while the average corporate defined benefit (DB) fund climbed 12.56%, gross of fees. As expected, TDFs have thrived, becoming the single-largest holding in the typical DC plan and accounting for more than one-fifth of total assets within the index.

Aon Hewitt reports similar findings. Its research studying the participant behavior of 3.5 million DC-eligible employees found three-quarters of plans offered TDFs and 90% offer “pre-mixed investment options,” defined as “diversified, target-date or target-risk portfolios.” The consulting firm also reported that 65% of participants were invested in TDFs, almost 24 percentage points more than a decade ago.

So how does a manager take advantage of these monumental figures and stand out in a swarm of TDF-touting firms? Greg Jenkins, Invesco’s senior director of US institutional consultant relations, says managers are likely to reach a fork in the road: “They either offer custom glide path services or simply try to compete for different sleeves of assets. Some managers are focused on introducing alternative investments into custom TDFs. This route is more difficult because there are few clear trends, and managers need to be ready to compete in various areas.”

Custom plans’ open architecture only adds to the competition, Jenkins continues. The flexibility places fewer limits on what can be selected in the TDF, giving plan sponsors more freedom. Managers, in turn, should be ready to offer plan sponsors expertise on specific asset classes in order to differentiate their products and strategies. Certain managers—those that aren’t necessarily the big names in the industry—may have to dial back their ambitions.

“Some managers are not equipped to manage entire TDFs,” says Josh Cohen, head of institutional DC at Russell Investments. “Looking beyond proprietary solutions, it may serve them better to focus on one area and show that they can be most distinctive in it.” Like Cohen, Invesco’s Jenkins sees barriers to entry for managers on the operations side. “Management firms that want to participate in custom TDFs generally need to offer products with daily liquidity for benefit responsiveness,” he says. Achieving such liquidity may be a difficult task, particularly for traditional managers.

This introduction of DB plan managers into the DC and TDF space has been interesting for plan sponsors as well as providers, says Robin Diamonte, CIO of United Technologies (UTC)—who also serves as chair of the dominant industry group: the Committee on Investment of Employee Benefit Assets. Diamonte sees established managers struggling to find their place in the new custom DC era—their services may be wanted, she notes, but their approach must be fresh.

So how will these members of the old guard fare? “It’s too new to tell,” Diamonte says. “It’s important for traditional managers to take all the tools they use to manage DB plans and make them fit into DC plans. The transition is difficult, particularly because the nature of communication between managers and plan sponsors is changing.”

As custom plans gain mainstream popularity, a parallel trend of off-the-shelf funds blending active and passive management—usually via a low-cost index option—is also gathering momentum.

And this was exactly what Diamonte wanted for UTC’s $20 billion-plus DC plan when she led its overhaul in 2012. “We felt it was confusing to our participants with all the active and passive options,” Diamonte says. “The investment philosophy behind our savings plan is for it to be simple, flexible, and low cost. For us, it made sense to go passive.” UTC’s TDF investment sleeves are all passive, managed by State Street Global Advisors.

But for providers, going passive doesn’t necessarily mean less competition. The barriers to entry remain high for these off-the-shelf funds as well, according to Morningstar’s Voris. “You see a lot of fund families that have been around a long time, with great names and products, that don’t pick up traction simply because of the distribution structure,” he says. “If you’re not attached to a recordkeeper or a low-cost alternative, it’s tough to get access for your products.”

Off-the-shelf funds’ lower costs may be instantly appealing, but Voris cautions plan sponsors against sticker swoon.

“While fees have been driven pretty low in the industry across the board as recordkeeping and asset management fees continue to go down, building a custom solution still costs money,” Voris explains. “We try to figure out the value of the custom versus an off-the-shelf product built for the median demographic. It’s typically worth the cost.” In these cases, the extra basis points charged for custom plans sufficiently reward participants with higher yields and minimal risk specific to their needs and goals.

So for those managers who haven’t been noticed by plan sponsors, what’s a prudent next move? Many experts point to TDFs with integrated lifetime income or annuity products—if the long-anticipated demand ever materializes.

“Annuities are something we’ve been talking about for what feels like a decade,” Voris says. The institutional market for lifetime income add-ons remains tiny, as companies dwell in wait-and-see mode. “There’s not a lot of groundswell of plan sponsors asking for it,” he says. “Plan sponsors are waiting for some sort of safe harbor; the portability issue hasn’t been figured out completely; and they’re probably waiting for more institutionally-priced products.” Unstable market and legal standards for in-plan annuities also stand in the way.

Even if an investment board or committee decides to implement a lifetime income feature, the execution process may be taxing, Voris warns. With little precedent to work from, plan sponsors must determine whether to place the feature in a glide path, a standalone vehicle, or a managed account program. And—as every plan sponsor knows—with major innovation comes major due diligence.