Sun Life Assurance Co. of Canada is introducing what it says is a “great bridge to decumulation” by launching new target-date funds that focus defined contribution pension plan members on their goal for retirement income.
The funds, which will be available for group savings plans in 2018, will require plan members to set a retirement income target and will provide several choices to help them close the gap. It will also allow members to consider factors such as salary levels, accumulated savings and other pensions and savings.
“I would say the chassis is target date,” says Mazen Shakeel, vice-president of market development for group retirement services at Sun Life.
“What they see is an income target,” he adds, noting that the investment mix would change according to an individual’s likelihood of meeting the retirement income goal. So those members with a higher likelihood of reaching their income goal would go onto a more conservative glide path, he says, noting the opposite would be true for those on track to fall short.
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Members will make three essential choices: their expected retirement date, their savings rate and their income target. Asked how members would go about setting an income goal, Shakeel says the platform would provide for an initial default option in the range of 60 to 70 per cent income replacement.
“We really want people to start with a number,” he says, acknowledging the ongoing debate about the ideal approach to retirement income replacement. Members, he adds, could personalize their goal and have the option of adjusting it, as well as their savings rate and retirement date, according to changing circumstances and how they’re tracking towards their target.
“One of the fundamental differences is customization,” says Shakeel, noting that contrary to the traditional approach of target-date funds, people in different circumstances should have different investment strategies.
Sun Life will be offering the new fund in partnership with investment firm Dimensional Fund Advisors.
“Many Canadians now spend as much time retired as they did working throughout their career. We need to be adapting our mindset around retirement savings to account for that evolution,” said Robert Merton, a resident scientist at Dimensional.
“Prioritizing sustainable income in retirement rather than wealth accumulation should be a focus for not only plan members but also plan sponsors.”
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The new funds will be available for plan sponsors to add to their defined contribution plans starting next year. “This kind of solution is a great bridge to decumulation,” says Shakeel, noting it in many ways applies the principles of defined benefit pensions to defined contribution plans.