Reflecting a bit on my upbringing, I had the great fortune of dining most evenings with my family. My mother had a tremendous gift for balancing the culinary excesses for which my brother and I naturally wished for with devoted portion control. During my early years at home, my mother normally did the cooking, and at most dinner settings, my plate would have exactly the same amount of meat, potato and over-cooked cabbage as my brother’s plate. Our milk glasses—lined up side by side—showed no signs of favouritism, despite my brother being three years my senior.
In my later years at home, my father assumed the cooking duties, while my mother went back to school to achieve a university degree. My father maintained a sense of my mother’s “everything in moderation” cooking principles, while carefully introducing our household to alternative dinner creations. Subject to my parents’ monitoring and enforcement, my brother and I were offered measured samplings of wine that complemented our meals. As we discovered, some wines paired well with certain dishes, some did not pair so well, and when it came to cost, some wines were not even close to being worth the price paid for the bottle.
The personal anecdotes above simply illustrate that we tend to change our habits and mature in the things that we do. Investing is no different. The traditional notion of balanced investing must be open to other investment ideas—old and new—and always with a view to their cost-benefit analysis. In Canada, DB assets currently outnumber DC assets by about 10:1, so it is understandable that DB investment structures have evolved—and will likely continue to evolve—more rapidly than what we see in DC investment structures. Alternative investing is on the radar for many DB sponsors, and considerations can range from “oldies” like real estate to newer approaches, such as “advanced” LDI products, which require the use of derivatives. These evolving investment structures require similarly evolving monitoring and oversight. Ultimately the sponsor has to decide whether to commit fund assets and the resources for governance.
There are two significant reasons why DC sponsors should keep an eye on what are the current and emerging concepts in DB investment structure. First, DB sponsors invest a great deal of time, money and resources into arriving at investment structures that are most likely to meet their plan’s risk-return criteria. DB investment structures act as a good barometer to help DC sponsors address cost benefit issues and to assess possible emerging trends in DC investing.
Second, the aforementioned process has been tried and tested over a long time. DC investment structure is largely in its infancy in Canada, so DB investment structures can provide a good guideline in terms of doing the right things in the right order. DB sponsors arrive at investment structures by following three steps: First, DB sponsors get advice from a host of professionals; second, DB sponsors select investment managers and asset classes from a broad menu of best-in-class candidates; and third, DB sponsors can choose how much each manager / asset class gets allocated in the program.
If we replace “DB sponsor” with “DC member” and turn the three steps into questions, we arrive at the following: First, are DC members getting proper advice? Second, are DC members selecting from a menu of “best in class” choices in terms of managers and asset classes? Third, can DC members control how much each manager and asset classes get allocated in their program?
In our view, most DC programs in Canada limit their members’ ability to meet the criteria in points one, two and three in the absence of DC members receiving quality advice. Our own research indicates this, and we believe that most independent industry research validates this position. The ability for DC members to create adequate investment structures that will contribute substantially to successful retirement planning is an enormous responsibility that can not be covered exclusively by member education and “investment decision tools.”
Going back to my personal anecdotes, I was using a favourite life-food analogy to convey the regular and sustainable approaches that DB investors use to create their investment structures. Traditional asset classes are the meat, potatoes and vegetables. The milk “classes” are “rebalanced” if filled too much or too little. The experience of trying wine for the first time with a new spicy food is a bit like the introduction to an alternative investment. My mother’s return to school is representative of the continuing education process that fiduciaries require, in order to stay on top of ever-changing investment ideas and approaches; or maybe it’s the ability to recognize that an approach has been around a long time and served well—we are just fine with it.
Notwithstanding the asset size of DB compared to DC today, the trend appears to be that more sponsors are moving towards DC plans. What concerns us is that the DB investment structures that have been developed and tested through many market cycles are not being translated into DC investment structure design. For example, it is a very challenging process for a DC sponsor to create a multi-manager fund with the managers of their choice, in the allocations of their choice and all at a reasonable fee. If an organization is sponsoring both DB and DC, which is common in Canada, most sponsors would like the ability to build on the DB investment structure to create their DC investment structure. They should be able to use managers they have a good, existing relationships with, understand, and that can add the desired management skills at scaled fees. Another example is the reasoning and promotion of target-date funds. These funds appear to be based more on member convenience than the soundness of the parts that go into them. We accept that DC members can be “reluctant consumers,” but the responsibility for investing and their retirement future necessitates that education and advice must be part of the DC investment process. If members do not possess the skills to grasp education, then the options regarding the obtaining of quality advice from professionals must be communicated clearly to members. .
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