The gross income replacement level of a typical capital accumulation plan grew by one per cent in the fourth quarter of 2016, according to a report by Eckler Ltd.
The slight change was due to increases in interest and annuity rates during that period, according to the report, which also notes the impact of volatility in the investment markets due to events such as Brexit and the U.S. election.
Capital accumulation plan members may have made adjustments to their investment allocations to respond to these events, the report noted. But it’s unlikely that those who defaulted their investments into target-date funds changed their investment mix after the events.
It’s important for plan sponsors to review their target-date offerings to ensure they’re aligned with members’ retirement income needs, noted Janice Holman, principal and defined contribution practice leader at Eckler.
“The economic environment has changed considerably since 2005, when TDFs were first introduced in Canada, and the number and complexity of available TDFs has grown significantly,” said Holman. “It’s important to ensure the TDFs in your plan are able to help your plan meet its objectives and suit the current environment.”
Eckler compared the likelihood of two target-date funds maintaining CAP members’ standard of living. While the current fund showed 67 per cent of members within the plan had a very low chance of hitting the income target, the alternate fund decreased the chance by 10 per cent. Similarly, the alternate fund improved the member’s moderate to very good chances of hitting income targets by five per cent.