Most plan members with defined contribution (DC) retirement savings plans sat tight during the early days of the pandemic, confirms recent research. Results also indicate a solid general understanding of how target date funds (TDFs) work, but several misconceptions about how TDFs provide income in retirement.
Sixty percent of DC plan participants took no action with their accounts in early April 2020, reports the 2020 MFS Global Retirement Survey, which polled 1,005 Canadians. Fourteen percent changed it to be more conservative and 21% moved some (13%) or all (8%) of their account balance into cash.
“Our phones were really busy in late March and early April last year and we reiterated the same messaging we’ve been hammering home for years, which is to be diversified and stay long. The market has seen these types of events in the past and we’ll continue to see them,” says Rahim Peera, senior vice-president, group retirement, of Penmore Financial Group in Concord, Ontario, member of the Benefits Alliance Group.
As the pandemic unfolded, conversations—and actions—around TDFs also grew. “We’re continuing to see inflows gradually increase in target date funds,” notes Peera. “We have some clients where 85% of their assets are a target date fund. It’s such a great product, where the fund manager makes the asset allocation decisions and de-risks as employees get closer to retirement.”
While the MFS survey did not capture how many participants have a TDF, “there is no doubt in my mind that increased target date fund use helped members stay on track during 2020,” says Jessica Sclafani, defined contribution strategist, MFS, who presented the results at a webinar hosted by Penmore on May 14.
Research by SunLife Financial in 2019 found that the percentage of plan members holding TDFs increased from 37% in 2010 to 60% by the end of 2018. Seventy-seven percent of DC plans with at least 200 members used a TDF as their default in 2018.
When the MFS survey asked about TDFs, 73% of plan participants (increasing to 78% among those aged 50 and older) understood that the fund gets more conservative as they get closer to retirement. Sixty-eight percent agreed that TDFs are an easy way to diversify with a single investment.
However, participants’ views on TDFs regarding risk and income are not accurate:
- 64% (48% among those aged 50 and older) believe a TDF provides a guaranteed stream of income in retirement;
- 61% believe it provides a guaranteed rate of return in retirement; and
- 54% (44% among 50+) believe the fund invests entirely in cash or low-risk investments in retirement.
“As advisors we can help employers alleviate the misconceptions simply through ongoing communications, for example with education sessions twice a year and by offering to meet with employees one on one,” says Peera.
A key message that resonates with plan members is the ability to “set it and forget it,” since the TDF’s portfolio manager is on task to de-risk as retirement approaches. Similarly, plan sponsors who set a TDF as their default fund can rest assured that plan members who miss the selection window will be in the capable hands of a professional assets manager.
First, however, plan sponsors need to select the right TDF. “This is where your benefits consultant comes in. There are some TDFs that are doing great and some that aren’t doing so well,” notes Peera.
Equally important, the TDF needs to reflect the plan sponsor’s philosophy and workforce demographics. “Is performance more important to you? The fees? How important is socially responsible investing to your employees? We’re here to help you make those decisions. And then constantly review the products available that will delivery lower-risk, diversified investment solutions for your employees,” summarizes Peera.