More American DC plan members are investing in target-date funds over time.
In a period when equities performed better than other asset classes, American DC retirement plan members cut their holdings in domestic equities and increased their investments in fixed income assets in 2012.
Canadian pension plan sponsors are increasingly focused on finding new ways to mitigate the employer risk inherent in DB plans, while also being mindful that many Canadians are not comfortable assuming the level of risk and responsibility that DC plans call for. Target benefit plans (TBPs)—which fix contributions and retirement benefits according to a predetermined formula but allow benefits to be adjusted up or down as future conditions affect plan funding—are emerging as a potential fix to this challenge.
Target date products (funds or automated portfolios) automatically reduce the exposure to equity and other risky assets of a DC member’s invested savings as he/she approaches retirement. But is this reduction in risk good for everyone?
With more than 80% of Canadian plan sponsors currently offering a DC option in their employer-sponsored pension plans, the shift to DC is firmly entrenched. In the U.S., nearly 60% of all pension assets flow into DC plans, according to the 2012 Towers Watson Global Pension Assets Study.
Target-date funds or life-cycle portfolios now represent the most frequently used default investment option for new Canadian DC arrangements. And they are quickly replacing passé default options such as money market funds—which are currently providing a lot of members with negative net returns these days—or balanced funds. Yet it is surprising how many of these pre-packaged, easy-to-use solutions remain quite conservative and basic in how they are constructed.
Millions of visitors flock to Niagara Falls each year to see one of the world’s greatest natural attractions, and to tempt Lady Luck at Casino Niagara and Fallsview Casino Resort. But Niagara Casinos’ executive team wanted to ensure that luck had nothing to do with securing a strong financial future for its employees. A review of the employees’ DC pension plan in August 2011 showed that significant changes were needed to achieve that goal.
More important today than ever before is having a retirement savings portfolio that’s balanced between capital preservation and capital accumulation. To help members achieve this, plan sponsors need to consider TDFs, a relatively underappreciated asset class.
When it comes to DC investment issues, plan sponsors need to think about their members first. That was the message Marcus Turner of Towers Watson stressed yesterday at the ACPM’s Ontario Regional Council spring session—The New Normal for Investments and Other Updates—in Toronto.
Canadian employers are listening to their employees' concerns about achieving retirement income adequacy and are finding new and better ways to encourage retirement savings, according to a survey by Benefits Canada and the Canadian Institutional Investment Network, and sponsored by Great-West Life Assurance Company.