The equity risk in target-date funds has been increasing substantially over the last decade, creating a ‘silent risk shift,’ according to Jafer Naqvi, managing director and head of client portfolio management at TD Asset Management Inc., speaking during a session at Benefits Canada’s 2026 Defined Contribution Plan Summit.
At the same time, the underlying stock indices are becoming riskier, he said, with more concentration and fewer stocks driving returns. “Not only have the equity rates started to go up on our default funds, the indices we’re benchmarking against are also seeing a narrow concentration in the number of stocks within them.”
For the average Canadian DC plan member invested in target-date funds, about 15 per cent of their exposure is in 10 stocks, said Naqvi, noting these are mostly technology companies. “Fifteen per cent in 10 stocks in a default fund isn’t diversified enough. . . . A default fund has to cover a wide range of both member needs, risk tolerances and market outcomes.”
He also highlighted that age isn’t the sole determinant of risk suitability and that risk and return aren’t independent. Sharing an example, he described an investor who started with $100 and had an incredible 40 per cent return in the first year. In year two, they lost 30 per cent. “On average, they had a five per cent return, so it was worth taking that risk. . . . But the reality is, they’re not up. If 30 per cent loss and 40 per cent gain don’t equal five per cent [annual] gain, they’re actually down $2 because, when you compound returns. Losses and gains aren’t equal.”
Alternative assets are also important to improving DC plan member outcomes, said Naqvi. Using the example of a 25-year-old with a portfolio that’s 70 per cent invested in stocks, he noted the addition of alternatives provides inflation protection and diversification.
“Eighty per cent of the time, a portfolio with less equities and diversified private assets put more money in the pocket of that 25-year-old than a higher risk portfolio that was holding 90 per cent in stocks.”
Read: 2025 DC Investment Forum: Using private assets in DC plan portfolios as an inflation hedge
Naqvi once again highlighted the importance of understanding that members have a wide range of risk tolerances and default funds have shifted risk. “That’s a fact. Equity weights have been going up in target-date funds over the last decade. That has to be reviewed.”
It’s also important for plan sponsors to understand the risk tolerance of their membership, as well as their demographics. “If we go through this process and realize the risk level we’re taking — based on shifts in recent years — is too much, the good news is there are other solutions available to DC plans . . . to help balance the need for diversification with the need for sufficient returns to help members achieve outcomes.”
Read more coverage from the 2026 DC Plan Summit.