Choosing the perfect default fund for a defined contribution plan isn’t easy, but a roundtable discussion at the DC Investment Forum in Toronto provided a number of recommendations for plan sponsors.
“I think having target date funds, not only as the default fund, but as the only option in plans, is optimum,” said Carol Geremia, president of Boston’s MFS Institutional Advisors. “Having done thousands of face-to-face educational meetings with employees, I would say that target date funds would be a great direction for the majority.
She added that a default fund should be as close to a participant’s tolerance and time horizon as possible and it should be made up of the underlying fund options that have already been through all of the sponsor’s due diligence.
Plan sponsors should make the default portfolios as good as they can be, according to Richard Davies, AllianceBernstein’s head of defined contribution product strategy, from New York City. If sponsors believe a large majority of assets are going to be in the default options, then they should not consider relying upon one money manager.
“So if your scale permits, you’re going to move to a multi-manager structure,” he said. “And that will give you the latitude to do a lot of things on a customized basis.”
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However, not everyone agreed that there is a one-size-fits-all solution.
“Personally, I dislike the fact that default options are promoted,” said David Lester, director of national accounts at SEI in Toronto. “If you want members going into a certain type of investment, they should be choosing them and not defaulting into them.”
He added that plan sponsors have a fiduciary duty to members to explain to them what will happen if they don’t make investment decisions.
Still, explanations are what plan members need, according to Mark Bandola, vice-president of business development with Franklin Templeton Institutional Investments in Calgary.
“It would be helpful for members to know that if they’re going to invest in this default fund, they can expect to get a certain amount of earnings back over a certain time period,” he said. “A risk is that members may perceive a default fund as an implicit recommendation.”
To comment on this story, email craig.sebastiano@rci.rogers.com.