Many products in the institutional investment market were tested by the 2008/09 financial crisis, and target date funds (TDFs) were no exception. Still relatively new in Canada, TDFs have existed in the U.S. since the 1990s.
In 2009, the U.S. Securities and Exchange Commission and the Department of Labor held a hearing to examine the need for greater disclosure and improved communication regarding the compositions, glide paths and strategies of TDFs. The hearing concluded that the inner workings of TDFs and their promised returns must be more transparent to investors.
In many cases, says Dan Farley, managing director of State Street Global Advisors, TDFs “provide a good savings vehicle while in the savings years, as well as a diversified portfolio. Generally speaking, there is still confidence in TDFs—but some good questions have been raised.”
Active investors needed
The TD Bank Financial Group recently surveyed more than 2,000 retired Canadians and Americans between the ages of 55 and 70. Of the Canadians surveyed, 39% said the smartest thing they did was work for a company with a pension and/or matching retirement savings plan. When asked about retirement planning, 11% felt the biggest mistake they had made was not seeking professional advice in planning their retirement. Furthermore, 28% said they didn’t start to save for retirement until after age 40.
The results of this survey demonstrate that employees must be active participants in planning for retirement. Michelle Loder, Canadian DC business leader with Towers Watson, and Ken Choi, a senior consultant, note that improving savings is more important than improving investing. In particular, savings levels should be connected to how an employee’s career and income progresses. “People aren’t saving enough in Canada,” Choi adds. Farley agrees, remarking that “investors need to be engaged and educated, and to take an active role in their savings plan.”
But what happens when investors aren’t engaged? TDFs can do the heavy lifting for those who do not have the expertise, interest or time to manage and research their own investments. Ross Gascho, a partner in the pensions and benefits group with Fasken Martineau Dumoulin LLP, observes that for “plans that have lower levels of member engagement and evidence of little change in asset allocation as members age, TDFs could be useful.” They offer professionally managed, one-size-fits-all funds with diverse asset classes, glide paths and risk adjustments designed to meet investors’ long-term needs. “If your expectations are realistic, TDFs can deliver,” adds Dale Powell, director, investment consulting, with Morningstar Canada.
Barriers to success
However, there are some challenges with offering TDFs. Some observers argue that the one-size-fits-all approach is a disadvantage, claiming that investors’ individual needs are too specific to be met with just one fund.
In addition, TDFs can be expensive, as they may contain several—sometimes hidden—layers of management and fees. Gascho, for one, questions if “the incremental expense for paying the manager to change the proportion invested in the underlying funds is worth paying additional fees, if any. That answer may differ across plans and depend on the level of financial knowledge of the membership.”