Top 10 Advantages of Target Date Funds

For employees who are too busy or uninterested in investing, TDFs are often viewed by plan members as a “set it and forget it solution” which allows them to focus on other things. Getting employees involved in planning and saving for retirement is difficult and can be costly.

TDFs address this in a number of ways:

1. Plan members are automatically slotted into a “one size fits all” family of balanced funds;

2. Asset mix and investment options are automatically selected and managed by a professional manager;

3. The asset mix is automatically adjusted over time:

4. The fund portfolio is rebalanced regularly;

5. The TDF can provide better diversification if a wider range of asset classes and options are used in the TDF than otherwise available to members in the plan;

6. There is no minimum investment;

7. Management fees can be lower vs. retail investment funds;

8. The members can still make use of the other investment options available and the planning tools and information provided by the sponsor and record keeper;

9. The employee can opt out of the TDF and start to manage their own investments in whole or part; and,

10. The employee can become more involved when it suites them (in the meantime, they will be invested in a reasonably prudent manner).

TDFs have definite advantages in terms of convenience for the plan members by providing broad based balanced investment funds which provide diversification, management of asset mix, professional investment option selection and regular portfolio rebalancing. The annual Benefits Canada survey and other surveys have indicated that these are key concerns for CAP members. TDFs are expected to facilitate savings and reduce the burden and worry about investing for the average CAP member.

From a CAP member perspective, TDFs are a step in the right direction but still do not provide the return guarantees and security of capital that most CAP members want. Customized TDF products that provide capital preservation and guarantees are likely the next step in the evolution of TDFs likely won’t solve the problem either and will cost more and require an even greater level of involvement and expertise from a governance and administrator perspective. The message should be clear: before adding a TDF be sure you understand the key concepts, the issues and the pitfalls.

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