When it comes to defined contribution pension plans, some “big rock” decisions for plan sponsors have the most impact on member outcomes, while other decisions are just not as significant, says Jafer Naqvi, vice-president and director of fixed income and multi-asset at TD Greystone Asset Management.

The four big rocks for DC plans are contribution level, early enrolment, having a multi-asset fund default option and including alternatives, he says.

The default option is of great importance because education only goes so far, he adds. “The default option really does the heavy lifting.”

However, after reaching the big rock decision of having a multi-asset default,  the specific type of fund doesn’t matter that much. “When you ran the numbers, target-date funds on the margin, they did appear to have a bigger difference, but when you quantified the impact of going from the balanced fund to a target-date fund relative to getting a member in a few years earlier, it really is minimal.”

Alternatives in DC, the other big rock, is still very new in Canada, but many of the largest plans have been doing it for a long time and allocations to alternatives in DC plans are increasing, says Naqvi. “We’re getting to the point where size doesn’t matter. The smallest programs can even now start to benefit from the inclusion of alternatives given developments in the industry over the last five years.”

The numbers show that adding alternatives to DC plans can make an impact almost as big, if not bigger, than having earlier enrolment or higher contribution rates, says Naqvi. “I think the equivalence in our numbers is, if you can get a 25 per cent weight in alternatives, that’s the same as saving for an extra 10 years or having [three] per cent higher contribution rate, so very impactful.”

When adding alternatives, considering liquidity is key. “We actually don’t advocate offering alternatives standalone for members. You add an element of liquidity risk that I think it’s just proven that plan members are not, by and large, equipped to handle these types of decisions. So adding investment decision complexity to that, we don’t think is the right way to go.”

On the other hand, adding illiquidity within a multi-asset fund would be the preferred option, he notes. “Because if you think about a multi-asset fund, what that allows you to do is it allows you to delegate that liquidity management and that asset allocation optimization to an institutional party who is equipped to do that.”