Since 2008, when the U.S. enacted legislation allowing target-date funds as the default, total assets in these funds have grown from around US$150 billion to $3 trillion, according to Glenn Dial, vice-president of retirement thought leadership and research at American Century Investments, during a session sponsored by CIBC Asset Management Inc. at Benefits Canada’s 2025 DC Plan Summit.

Unfortunately, the timing of this legislation coincided with the 2008/09 financial crisis, which prompted questions about the suitability of TDFs, as well as the associated risk.

As a result, the U.S. Department of Labor set out characteristics for DC plan sponsors to consider when choosing a TDF. The most important, according to Dial, are the savings rates of plan members, including employer matches, and risk tolerance. “Those are the two big levers when you think about what’s a suitable target-date fund.”

Read: Adding liquid alternatives to target-date funds to improve DC plan member outcomes

Referring to what he calls the “transition risk zone” and using the coronavirus pandemic as an example, he said young plan members, even during a downturn, stay the course and stay in the funds. “But the closer you are to 65, the more likely you are to panic and sell out and lock in those losses forever because, as we get older, we transform from being just risk adverse to hyper risk adverse.”

There has to be a comfortable medium, said Dial, so it’s important to look closely at risk profile in the 10 years leading up to retirement. But there’s no right or wrong answer, he added, noting it depends on a plan sponsor’s employee population.

Another important development in U.S. pension legislation was the introduction of auto-enrolment and auto-escalation in 2006. One of the mistakes made by the industry was auto-enrolling plan members at three per cent, said Dial, noting there’s no difference in the stick rate between three and six per cent.

There has also been debate about whether plan members should auto-escalate contributions by one or two per cent a year and whether it should be maxed out at 10 or 15 per cent. “All these are still trying to find the sweet spot, but we know we can at least get people gradually to 10 per cent.”

Read: A look at the landscape for automatic features in Canadian pension plans

Now, the U.S. is trying to solve the decumulation phase, with employers afraid to offer guaranteed income products. In a survey of U.S. DC and 401(k) members, American Century Investments found 62 per cent believed their existing TDFs already provided income, while 36 per cent believed their TDF is guaranteed not to lose money.

The survey also found plan members want guaranteed income and they want their income to be protected as they enter the transition risk zone, said Dial. “They want all the upside, none of the downside and all the protection from market downturns pre- and post-65. . . . Believe it or not, there are products out there that are pretty close to that now. But the big learning from traditional annuities is they don’t want to give up control.

“That’s the two things I’ll leave you with. If you have a product you’re looking at, where [plan members] have to give up control, it isn’t going to work. Your uptick is going to be very low.”

Read more coverage of the 2025 DC Plan Summit.