More pension plans using target-date funds as default option

Target-date funds continue to be the most common default investment option offered to members of workplace capital accumulation plans, according to new research by the Canadian Institutional Investment Network and Great-West Life Assurance Co.

The 2016 CAP Benchmark Report found 50% of defined contribution plan sponsors and 51% of group registered retirement savings plan sponsors allocate target-date funds as their default option. That compares to 43% of defined contribution plans and 44% of group RRSPs that did so in 2015.

The main reason for the popularity of target-date funds as a default investment option is they’re the simplest allocation for members to understand, says Christine van Staden, vice-president of national accounts, group retirement distribution, at Great-West Life. She notes the majority of members who attend workplace education sessions or webinars aren’t savvy investment experts but are generally individual members who may not understand how investments work.

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“More and more employers are completely understanding the need to help their members by ensuring they have the opportunity through their plan design… to understand the concepts,” she says. “And a target-date fund is, just simply, the easiest to understand, to explain and for [members] to grasp.

“They also realize a level of security… that their employer is working with a provider and with an investment fund lineup that they feel secure with. And then the way the target-date fund works gives them additional security that, as they reach their retirement age, they’re moving from a more aggressive investment model to a more conservative model. So it’s ease, it’s simplicity and it’s security.”

The survey also found the most common types of investment options offered to defined contribution plan members were Canadian equity (89%), balanced (80%), fixed income (86%) and foreign equity (86%). The order of the top four are the same for group RRSPs, although at slightly different percentages: 90% for Canadian equity, 82% for balanced, 83% for fixed income and 82% for foreign equity.

“There’s a tremendous amount of activity stirring up the market, so to speak, certainly with the political arena and the U.S. situation,” says van Staden. “But we always remind our members that their defined contribution plan is a long-term view… and we don’t see that general underlying philosophy to be impacted or changed.”

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The survey also found 44% of capital accumulation plans are defined contribution pensions. That number is down from 53% in the 2015 survey. This year, just 16% offer a group RRSP only, while 41% provide that option as well as a defined contribution pension plan.

The survey also found participation rates in defined contribution pensions were the highest at 90.2%, compared to group RRSPs (59.7%) and deferred profit-sharing plans (62.7%). The 2015 survey broke the numbers down by mandatory and voluntary plans, with participation in voluntary defined contribution plans at 67.7% and group RRSPs at 53%.

When it comes to the tools and services offered to help plan members nearing retirement, the most common available to defined contribution members are seminars (58%), dedicated call centre support (53%) and the services of a financial advisor (38%). The same percentage of group RRSPs offer the services of a financial advisor, but dedicated call centre support (47%) is more common than pre-retirement packages (19%).

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“There’s a lot of opportunity there for employers to be more strategic in terms of putting education and communication strategies in place,” says van Staden, adding it’s important for employers to understand that the diversity of their employee population will require different approaches to education and communication.

“And then building your communication strategy with multitudes, leveraging all of the opportunities that your plan provider is willing to offer to reach out to those members,” she adds. “For one group, it might be [webinars], another may need individual sessions or the ability to reach out to someone. It’s very important that employers continue to realize their member population is going to be very diverse and have different requirements in terms of how they gather and act upon information.”

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Disclosure: The Canadian Institutional Investment Network and Advisor.ca share the same parent company, Transcontinental Media.