Target-date funds (TDFs) have the potential to improve retirement incomes for DC plan members. But how do you decide on a TDF strategy?
A moderated discussion at Benefits Canada’s 2014 Benefits & Pension Summit in Toronto last week—including Tim Mark, manager of retirement and savings plans with RBC and Beth Ewing, director, retirement services, with FedEx Services Corp., and moderated by Catherine Jackman, vice-president, Phillips, Hager & North Investment Management—examined two different approaches to implementing TDFs in DC plans.
RBC
RBC has a closed DB plan and a DC plan with 15,000 employees, which is also the plan for new entrants. The DC plan offers a range of investment choices including TDFs.
Mark said the pension committee examined the role of TDFs in more mature DC markets for quite awhile before introducing them in Canada. It was the automatic rebalancing feature that caught the committee’s attention, he explained, as RBC was hoping that “these funds could address some of the hurdles of traditional investment behaviour.”
When RBC conducted a survey to ask employees if they would prefer to choose their own investments and rebalance their portfolios themselves or to have those functions taken care of for them, 2,000 responded—and the majority (51%) preferred a hands-off approach.
Currently, 75% of RBC’s DC plan members are invested in TDFs—a substantial amount, especially since they have 11 other investment options to choose from. “We expected a strong majority to be invested in TDFs, and that’s exactly what we found,” Mark confirmed.
In 2012, RBC went a step further and changed the plan’s default option from a balanced fund to a TDF. However, this change is only for future investment direction—contributions already made to the balanced fund will remain there.
The company’s approach to TDFs is active management and “through retirement,” Mark added.
FedEx
For FedEx, the decision to adopt TDFs was driven by the U.S., Ewing explained. Since the company was already using TDFs there, it made sense to extend that approach to Canada as well.
By default, members’ investments are mapped to TDFs unless they make a different choice. In addition, in October 2008, the board decided to move all previous contributions from the existing default to the TDF. Despite the timing of the decision and the corresponding market turmoil, the board maintained conviction and went ahead with the decision, she added.
Unlike RBC, FedEx chose a passive approach to TDFs, since that’s what the U.S. was doing. According to Ewing, the No. 1 reason is cost, since the company feels that fees for active management can eat into returns over time.
For FedEx, it was important to communicate to employees that TDFs can be a one-stop investment. Through a campaign that included employee meetings and communication materials (both written and online), FedEx saw a huge jump in participation—from 60% to 90%.
The company’s approach to TDFs is currently “to retirement” in Canada but “through retirement” in the U.S., Ewing explained. However, she added that the company is now looking more closely at retirement income and de-accumulation, which may drive a change.
All the articles from the event can be found on our special section: 2014 Benefits & Pension Summit Coverage.