Target date funds (TDFs) are the “cool kids” when it comes to group retirement options, Jennifer Wood, Director of Investments, Group Retirement Services at Manulife, told benefits advisors attending Benefits Alliance’s Spark conference in Toronto in April 2023.
These investment products make up 73 percent of default options in group registered retirement savings plans (RRSPs) in Canada. They include stocks, bonds, real estate and mortgages, which are packaged in a single solution and chosen and managed by a portfolio manager based on a plan member’s retirement date. Younger workers with retirement dates far into the future have their target-date funds managed more aggressively, while older plan members opt for TDFs that are managed more conservatively. The end goal is a well-funded retirement with minimal input from employees.
“They are rapidly becoming best practice in the industry,” said Wood. “They’re particularly good for members who don’t have the time, knowledge or interest to manage their retirement savings.”
While TDFs can put plan members at ease by paving a customized yet smooth investment path to retirement, plan sponsors need to ensure good governance. A recent Benefits Canada survey found 63 percent of plan members hold their employer responsible for ensuring their group RRSP contributions are invested appropriately and judiciously, noted Wood.
Employee expectations are clearly high. So how does a plan sponsor provide good governance?
Do your homework
First, plan sponsors should take advantage of the expertise of their advisor or recordkeeper, said Wood, adding that the differences between funds should be determined and reviewed. “Not all TDFs are alike,” she said. “It’s really important for the plan sponsor to understand the nuances between them.”
Educate plan members
TDFs take the guesswork out of asset allocations. But members need to be made aware of this, said Wood. She says they should be guided to select a fund based on their target retirement date and contribution levels, and educated about the value of a more aggressive strategy at the front end and a more conservative one nearing retirement. “Provide plan members with educational tools so that they understand how target dates work, the benefits of them and how to use them effectively,” said Wood.
Assess managerial skill
Wood said that plan sponsors need to determine whether the portfolio manager has the expertise and skill to manage all of the aspects of the TDFs. A fund’s portfolio manager assesses the selected time horizon to determine the acceptable level of risk for a fund and readjusts portfolio risk levels when necessary. A plan sponsor should also be aware of the fees charged.
Determine the glidepath
A glidepath is a roadmap of how assets will change over the entire investment time horizon. Wood said plan sponsors need to determine its construction—that is, whether assets are passively or actively managed—its level of sophistication, and how it compares to other TDFs. “You should also ask when the glidepath was last updated,” said Wood. As well, determine whether environmental, social and governance principles are incorporated into investment decisions, and to what degree. Responsible investing can increase risk-adjusted returns and be an effective risk management tool. “It can help plan sponsors perform their fiduciary duty,” noted Wood.
The performance of the plan is another area that needs to be reviewed periodically, said Wood. “Managers do change these funds so it’s important that you’re periodically reviewing them to ensure they’re meeting expectations,” she said. She suggested employers compare them to the performance of other TDFs available in the market, adding that their performance will change with market conditions.
“Good governance isn’t just about making the right decisions,” summarized Wood. “It’s also about documenting those decisions, which includes having processes in place to review and document the considerations that went into those decisions.”