Since the early days of radio, the music industry has come a long way as listeners can now customize playlists on their personal devices. A similar evolution to personalized options is emerging in the defined contribution space, according to Zaheed Jiwani, senior vice-president for client strategy at Greystone Managed Investments Inc.
At Benefits Canada‘s 2016 DC Plan Summit, Jiwani mapped out the move from single balanced funds to target-risk structures and then to personalized options that offer a broader distribution of returns. Jiwani explained that while there’s a perceived increase in personalization, there are shortfalls when examining the factors that drive the distribution of returns.
One of the shortfalls is human nature, something that’s evident when comparing the 20-year annualized returns of the index to the individual investor for equities, bonds and asset allocation. “In every single case, individuals significantly underperformed the index,” said Jiwani.
Another shortfall is the fact that members often don’t follow up by taking action when they commit to making change. “There’s a high degree of inertia in our plan members,” he said. “And that inertia is problematic because we do know that over time, they should be taking some risk off the table.”
Video: Customizing target-date funds
Target-date funds, which automatically de-risk over time, address those two behavioural factors. “Unfortunately, if we just look at pooled target-date funds, we’re back to a less personalized approach,” said Jiwani. “So what is the target-date equivalent of those… playlists?”
Jiwani said plan sponsors should look at both the savings and retirement needs of their plan members to customize target-date funds. For example, considering actual savings rates against what members’ retirement needs are can help determine what they’ll need from investment returns. A plan with greater savings will need less from returns and, therefore, require less risk.
Jiwani also said it’s possible to personalize the approach even further by looking at members’ unique situations to customize target-date funds based on how much they’ll need from investment returns.
“If the music industry has taught us one thing, it’s taught us that technology can change faster than we think and impact an industry a lot faster than we think,” he said. “So it’s not out of the realm of possibilities that we will see individual target-date funds in our lifetimes.”