The majority of Canadian defined contribution plan members are invested in the appropriate target-date fund vintage and those who are may be better prepared for retirement, according to research by Fidelity Investments.

The research, which examined data from Canadian record keepers to understand investors’ savings behaviours in a DC context, found about 70 per cent of plan members were invested in the correct target-date fund based on their age and years to retirement, representing an average 12 per cent improvement across all age cohorts from seven years prior. Plan members aged 20 to 24 and 30 to 34 saw the biggest improvements, with a more than 20 per cent change for those invested correctly.

Between 2014 and 2021, the average TDF balances have risen across all DC plan member age cohorts, largely due to a combination of higher employer contributions and the growing prevalence of TDFs in the Canadian market.

Read: Use of custom TDFs increasing among U.S. DC pension plans: report

“I think what is happening here is that members are more engaged, they’re invested in the appropriate target-date vintage and they’re also more aware of what their plan is designed to deliver for them, so they’re better able to capture the true economic value that’s available to them,” said Jon Knowles, institutional portfolio manager in global asset allocation at Fidelity, while presenting the research during Benefits Canada’s 2024 Defined Contribution Investment Forum.  

As of 2022, Canadians’ average retirement age was 64 and their average retirement duration was just over 20 years. The average retirement age has been steadily increasing from a low of 61 in the late 1990s and the average retirement duration has slightly declined from a high point of 22 years for those who retired between 2006 and 2008.

“That’s ultimately the question we’re solving for: how many years of retirement income does somebody need to fund on average?” said Knowles.

Plan members invested in the appropriate TDF appear to be more retirement-ready, he added, noting the research found those who are had notably higher account balances than the plan member average for their cohort.  

Read: 59% of Canadians with a workplace pension plan feel prepared for retirement: survey

The average account balance for all plan members aged 30 to 34 was more than $10,000, but for those who were appropriately invested it was closer to $20,000. For those aged 45 to 49, the average account balance was approaching $30,000 on average, but soared to about $57,000 among those appropriately invested. The difference was particularly pronounced for those approaching retirement: plan members aged 60 to 64 were nearing a $60,000 average balance, but those who had been appropriately invested had an average account balance of over $80,000.

However, high inflation has impacted this trend. Plan members’ contributions (both theirs and their employer match) to their DC plans decreased between 10 and more than 30 per cent on average across all cohorts except plan members under age 20, whose contributions increased more than 10 per cent.

Knowles said the data underlines the importance of baking inflation sensitivity into portfolios to offset the impact of shock inflation on plan members’ ability and willingness to save.

Looking into the future, he noted potential improvements in life expectancy could influence what plan members need to save for as could changing ideas of retirement. More Canadians are expecting to continue to do some level of work into their golden years, which would allow them to offset retirement expenses with slightly reduced income.

Recent enhancements to the Canada Pension Plan and Quebec Pension Plan will also likely factor into their retirement decisions and income needs, he added.

Read more coverage of the 2024 DC Investment Forum.