In the face of a challenging capital market and its subsequent volatility, defined contribution plan sponsors must consider the affect on plan member behaviour, said Colin Sinclare, managing director of institutional sales for Western Canada at MFS Investment Management.
“Volatility affects the compounding of returns in DC plan members savings plans. As well, it has behavioural implications for how DC plan members behave in certain types of environments,” he said during a session at Benefits Canada’s DC Plan Summit in Banff, Alta. in February.
A recent MFS survey asked DC members how they’d react to a drop in their balances. Many participants said they’d stop making contributions or shift their assets in a way that de-risked their portfolios.
Since equities are a significant allocation across all age cohorts, market volatility can contribute significantly to these types of plan member actions, said Sinclare. “So how can we give some ideas, or at least equip participants with some tools to navigate what potentially could be more choppy market environments?”
Sinclare suggested creating a defensive equity portfolio sleeve that helps address behavioural biases and provides downside protection in a challenging market environment, especially given the full market risk many DC plan members take on with passive investments. “Why don’t we be thoughtful about it and allocate 50 per cent of the capital to [an actively managed] low-volatility approach, one that provides you with some downside protection, and the other 50 per cent to that passive portfolio?
“So it’s compounding your wealth by essentially winning by not losing but [also] protecting the downside to help achieve outcomes,” he added. “And as you think about that, the more that can contribute to additional income in retirement if you preserve your capital and grow it over time.”
Read more coverage from the 2019 DC Plan Summit.