While many defined contribution pension plan members have similar objectives around retirement readiness, each person’s journey to reach the goal will be different. During his presentation at Benefits Canada’s Defined Contribution Plan Summit, Shawn Cohen, director of relationship management at MFS Investment Management Canada Ltd., discussed how to incorporate the journey into the investment experience offered to members.
Generational differences are just one of the reasons why plan sponsors should consider the type of investment profiles that best represent the cohorts in their plans and what type of investment experience may be suitable. “Millennials may have faced one or two significant market downturns in the bursting tech bubble and the global financial crisis,” said Cohen. “This has made them far more cautious investors when compared to the boomers and gen-Xers.”
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Cohen described three different investment profiles — defensive, benchmark-aware and total return — to consider when designing and evaluating a plan’s investment platform. A defensive profile may be appropriate for millennials, given their cautious nature and fear of significant losses in down markets. An investment platform with a defensive profile would include investment managers who, due to their management style, tend to protect in down markets. Such a platform could also offer low-volatility investment options.
While generational differences are one consideration, others may exist. Cohen said those employers with an engaged and investment-savvy population may consider a total-return profile focused on delivering strong market returns, while recognizing significant underperformance can occur in negative market environments. Highly concentrated investment mandates may be appropriate for such a profile.
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Plan sponsors may also look to the characteristics of the investment committee to determine which profile is best. An investment committee that makes decisions about the investment platform based on quarterly performance may be a good fit for a benchmark-aware profile that provides investment options that deliver a similar experience to the relative benchmarks while still having the ability to add value above them.
“Demographics, behavioural finance and investment committee considerations can help to identify the most suitable profiles for your plan,” said Cohen. “If you understand the profiles, you will be in a much better position to deliver the optimal investment experience.”
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