One defined contribution plan sponsor sings the praises of the traditional balanced fund, while another outlines a different option that better matches risk levels according to plan members’ life stages.
Rob Jackett, senior director of finance and administration at Canadian Baptist Ministries
Balanced funds are still relevant today for employer-sponsored savings plans.
It’s important for employers to recognize who they’re serving with their plans. Many employers make the mistake of assuming members have a certain level of investment sophistication and offer a plethora of investment options. This can lead to non-optimal selections and members not fully designing a portfolio that aligns with their financial goals, risk tolerance and time horizon.
After all, we’re asking employees to take the time to construct a portfolio from different investment options, from different investment managers, with different risk profiles and likely different investment styles and returns — something even seasoned investment advisors would find challenging. There’s a better way.
Balanced funds offer the following characteristics: diversification — a mixture of equity and fixed income and sometimes even alternatives such as real estate, infrastructure and mortgages; simplicity — an easy and convenient way to invest, saving time and effort; professional management — leaving the investment selection, asset allocation and rebalancing to the experts; and they’re designed with the end in mind — taking a long-term perspective and providing stable performance.
Balanced fund offerings also include target-risk and target-date funds, which are great options for different time horizons and risk tolerances, addressing the needs of diverse groups of employees. New product offerings are sure to appear in this space, ensuring the balanced fund will continue to have a place in plan sponsors’ investment lineups.
Jeremy Phillips, assistant deputy minister at Saskatchewan’s Public Employees Benefits Agency
I don’t think I could argue that balanced funds should be done away with, but the Public Employees Pension Plan believes a more nuanced approach, with more risk at the beginning of the career and tapering it off towards the middle and end, produces better outcomes for plan members.
We do have a balanced fund, which is one of eight investment options available to our members. It’s the second-most popular, after the PEPP Steps fund, largely because it was the default investment option before the Steps fund was introduced. It’s still the default fund for plan members who haven’t made an investment choice.
While our Steps fund hasn’t replaced our balanced fund, it has definitely become the top investment choice for members. To put this into perspective, as at June 30, 2023, assets in the fund were around $5.8 billion compared to $3.4 billion in the balanced fund.
Although the structure of the Steps fund looks linear, it’s really a curve. Younger members will enjoy a higher risk-adjusted return profile earlier in life with infrequent moves in steps and gradual decreases in risk-adjusted returns. As members grow older and approach traditional retirement ages, they’ll move to more advanced steps more frequently and enjoy more conservative risk-adjusted return profiles.
While offering a balanced fund is entirely reasonable, we think it’s even better to provide members with a lifetime investment option that accepts higher risk-adjusted returns earlier in life and gradually shifts to lower risk-adjusted returns later.