• Part two of a two-part series
• In part one, Jean-Daniel took a look at lifecycle (a.k.a. “target date”) funds from the perspective of plan members. He now considers their implications for plan sponsors.
Even though lifecycle funds do not provide plan sponsors with a “safe haven” from member lawsuits in Canada, they do represent a significant opportunity for more effective CAP governance and fiduciary responsibility. For instance, the American experience has shown that these funds reduce member apathy, resulting in fewer members making no investment decision. When used appropriately, lifecycle funds also increase the odds for members to end up with adequate savings for retirement.
Lifecycle funds—when used in isolation—also reduce the need for more thorough investment education, as they represent a “complete” investment solution. Member education can then focus on more appropriate(and proven to be more effective) areas, such as retirement planning.
For all the benefits brought to sponsors, however, lifecycle funds do present some challenges.
Better keep your eyes on the ball
A lot of efforts have been deployed by the CAP industry to engage plan members and have them play a more active role in their plan. The first thing to realize is that lifecycle funds, by their very nature, may subtly encourage members not to look at their plan on a regular basis. As members generally understand they should monitor their investments(which in theory forces them to at least care a little about what’s going on), having lifecycle funds may take away that feeling of necessity—one of the largest providers’ taglines in the United States is: “Pick one and you’re done”!
Secondly, while we have not seen much significant movement on that front in Canada, litigation in DC-type plans well started in the U.S. Interestingly enough—and contrary to what had been expected—most lawsuits up to now have had to do with the fees incurred by plan members. As lifecycle funds are currently priced at a premium, this may be considered an area of concern by plan sponsors. One might rather have expected that they would be offered at a more competitive price for the following reasons:
• Many of these fund families are proprietary to the plan administration provider;
• Most of these funds are “funds of funds,” which means lifecycle assets should truly be charged investment management fees at the marginal rate of the underlying funds; and
• As they require less member education efforts and result in less frequent transactions and call centre interventions than other approaches, administration fees should be lower.
Performance monitoring is a third consideration. As each lifecycle fund family has its own “recipe” for asset-allocation evolution, it is virtually impossible to compare them to assess relative quality. Even for one specific fund, the moving asset allocation means new ways of benchmarking will need to be created that will follow the “theoretical evolutionary path” of each fund—something most suppliers don’t even do themselves. It may therefore be difficult for a sponsor to defend against members who would question the performance of the investment options offered to them in a lawsuit.
Lifecycle approach evolution
The good news is that the Canadian market has been very proactive and responsive to issues brought forth regarding lifecycle funds(much more so than in the U.S., in fact). We are seeing new lifecycle fund families that combine target date and target risk features, as well as “unbundled” lifecycle approaches where separately available fund managers can be combined to create “customized” lifecycle portfolios that can evolve based on the needs and preferences of individual sponsors.
These changes are very beneficial, as they are bringing more flexibility and transparency to a very good idea which can be built on.