DC Plan Summit: The impact of low-volatility equities on DC behavioural biases

Behavioural economic biases, particularly among younger and older defined contribution pension plan members, may influence their investment choices and put retirement outcomes at risk, participants at Benefits Canada’s Defined Contribution Plan Summit heard. But during his presentation at the February event in Vancouver, Tim Choe, quantitative analyst at Fidelity Investments, suggested low-volatility equities as a solution to behavioural bias.

Although plan sponsors typically have a default option with a target date, Choe noted “some people, despite all the nudges and guidance and ways we try to design the plan to put them in that particular option, still refuse and want to do their own thing.”

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Millennials are more likely to be risk averse after witnessing significant volatility in the market over the past decade. Instead of equities, Choe said millennials may prefer more conservative approaches that include cash and lower allocations to stocks. Older members, on the other hand, may move away from traditional target-date to non-default options once they have more assets. Rather than protecting their accumulated assets by focusing on bonds, they can become too confident and may decide to manage their funds themselves or put more of their assets into equities.

One option is to offer low-volatility equities for those who avoid the default option. “Low-vol equities have unique characteristics. They have low volatility but are projected to have similar returns to the market,” said Choe.

By providing a mechanism for risk-averse millennials and older members who want to invest on their own, low-volatility equities can provide more protection during market declines and better returns than traditional low-risk investments such as cash or bonds, Choe noted. “So low-vol investing could solve some behavioural economic bias issues and promote more successful outcomes.”

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