As a new decade revs up, is it time for capital accumulation plan sponsors to revisit the investment vehicles they offer?
According to a recent whitepaper from Sun Life Global Investments, the aggregate capital in defined contribution plans in their largest markets — Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S. — has “caught up” to that in defined benefit pension plans.
The coronavirus is still testing the viability of DC plan design, as well as the strength of target-date funds that are becoming an increasingly popular default investment for plan members, according to the paper.
“TDF solutions that do not effectively balance capital appreciation and downside risk may be exposed not only to heightened market volatility, but also greater risk of poor plan member behaviours, such as divestment and/or reduction of contributions following times of market stress,” the paper read.
An early and significant decline in a plan member’s balance could lead to their exiting a TDF too early and investing too conservatively to meet their retirement goals thereafter, the paper posited.
Indeed, these types of worrisome behaviours correlated with the market turmoil seen towards the beginning of 2020. According to an analysis by Sun Life Group Retirement Services, the number of CAP members making inter-fund transfers rose by 264 per cent between March 1 and May 29, 2020, over the same period the year before.
As such, CAP sponsors should ensure they understand a TDF’s glidepath — the journey the fund’s holdings take over time as it adjusts to correlate with a member’s stage in life and related risk tolerance. Glidepaths should be fundamentally based on rigorous modelling, the paper noted; however, factors underpinning a TDF’s holdings aren’t set in stone. Its modelling and the research guiding it should be revisited periodically to reflect “ongoing structural market changes.”
Further, CAP sponsors should be wary of glidepaths that don’t delve into adequate detail, the paper noted.
“While an important consideration, the glidepath shape merely provides an indication of the TDF manager’s high-level preference for capturing growth opportunities to drive wealth accumulation while balancing risk across the life of the TDF,” it said. “A more detailed analysis of the underlying asset class building blocks can help shed additional light on portfolio diversification and key drivers of risk and return.”