It may be a function of baby boomers headed to retirement, but target date funds are quickly becoming the default for a growing number of plans across Canada.
“The question is changing from ‘what is a good default fund?’ to rather, ‘Is there anything unique about the membership that makes something else a better default than a target date solution?’” says Nadia Darwish, VP of market development at Sun Life Financial. “What we’re starting to see more commonly is target date funds as the new default fund, and they’re growing at a very rapid rate.”
A recent Sun Life report found of the 5,200 pension plans across the country, four out of five policies use those funds, which automatically juggle a member’s investment assets to reduce risk as he or she ages and readies for retirement.
That’s something of a sea-change.
Five years ago target date funds represented about seven per cent of cap assets and by the end of 2013 that total had more than doubled to 16 per cent, according to that same Sun Life “Design for Savings” report. The percentage of plan sponsors offering target date funds also increased from 28 to 50 per cent over the same period.
“That’s significant,” says Darwish. “We don’t generally see such significant change in our industry so it’s quite interesting to watch. I think we’ll start to see variations on these products but they’re definitely here to stay.”
50 per cent of all members enrolled in Sun Life plans in 2012 and 2013 are now invested in target date funds, with 74 per cent of these members using this investment vehicle exclusively. “I think the single-biggest reason we see the growth of a target date fund is due to the simplicity, they provide an easy and convenient way for DC plan members to get exposure to a variety of asset classes with a single investment option,” says Darwish. “It helps to get people investing right away and automatically reduces their investment risk over time.”
Darwish says the glide path approach – where plans gradually shift out of return-seeking strategies that rely on equity exposure into liability-hedging, long-duration, fixed-income strategies – is increasingly popular. “They’re quickly becoming the default because it’s an easy and right solution for plan sponsors,” she says.
Still, there are other positives sponsors can point to in attempting to make target date funds even more attractive to members.
Sun Life analyzed personal rates of return for plan members using target date funds versus those who go it alone and choose other solutions. The research showed target date funds consistently outperforming other options – ranging from approximately 0.5 per cent to 1.5 per cent depending on how long they’re in that target date.
“It’s pretty compelling,” Darwish says. “We’re seeing considerable movement towards target date funds; I don’t see that changing. What we will see is more target date funds being built with varying glide paths to support those employees through their retirement.”