Most employee benefits teams have enough on their plates without trying to keep pace with stock market fluctuations. On that basis alone, the “set it and forget it” quality of indexed investment funds has a certain appeal.
Actively managed funds require more vigilant oversight and a higher tolerance for volatility—but do portfolios that exclude them limit plan sponsors’ opportunities to offer better results to plan members?
Taylor Pidgeon, CFA, Vice President, Defined Contribution at T. Rowe Price, emphasizes there is a place for both indexed and active funds. While indexed or passive investing provides low-cost exposure to diverse markets, he says, actively managed funds offer “characteristics that can support long-term outcomes.”
When markets are volatile or investment concentrates in high-profile sectors, such as artificial intelligence (AI), “active investment managers can construct a portfolio with an eye for quality and provide some level of downside risk mitigation when markets do correct,” Pidgeon explains. “Active investment managers will evaluate companies through a mosaic of different factors that they believe can generate sustainable long-term outcomes for the clients investing in their portfolio.”
Fund components such as valuation, quality, sustainability of earnings over time and company management are key considerations for active investment managers, he adds.
As Manager, Employee Benefits at CAPCORP Financial, Alex Sernoskie leans toward indexed funds as the default because they’re the simplest, easiest and, in some respects, safest option. “And then we always have the option on the other side of presenting some actively managed funds for those few individuals or employers themselves who want a bit more of a hands-on approach to their investing, to be a little bit more involved.”
Considering the unpredictability that marked much of 2025, active management, with its capacity for making quicker decisions in response to market volatility, could be a stabilizing factor.
Concerns around market volatility were higher at the start of last year, agrees Sernoskie, given the unexpected tariffs from the U.S. and new political leadership in Canada. “This led to more discussion around the active management approach. As the year went on and we saw steady growth, our concerns were alleviated. Although we remain ready to review more active options if needed,” says Sernoskie.
Risks and regulations
Pidgeon likewise sees the pros and cons of indexed and active fund management during a market “bubble” that sees heavy market concentration in an emerging sector. For example, AI stocks’ current prominence in U.S. and global equity markets has created “record levels of market concentration.” As a result, as long as stock prices continue to soar for indexed companies in the AI space, “a passive investment manager may look really sharp right now.”
On the other hand, an active investment manager may take a longer view of those stocks and regard them as too expensive or risky at their current valuations. “When markets are frothy and driven by momentum and high concentration, active managers may tend to underperform, and they may be okay with that,” Pidgeon says. “They will put their money in companies that they have high conviction in, and ones that they think can sustain different market environments.”
Pidgeon also notes the importance of staying on top of regulatory changes. “Canada has recalibrated the regulatory guideline for capital accumulation plans in Canada. Within that guideline update, there was a lot of emphasis on value for fees,” Pidgeon says. With that in mind, he encourages plan sponsors to factor value for fees into the investments they choose, by evaluating investments on a net of fees basis.
“The best way to look at that, whether you’re choosing active or passive, is assessing, is that supportive of better long-term outcomes for my membership? Will they be able to generate sustainable retirement outcomes if we’re offering purely passive, purely active, or maybe a combination of both active and passive strategies?” says Pidgeon.
The answers will be different for each plan sponsor—and your benefits advisor is in the best position to help answer them.