A look at the ‘big rock’ decisions for DC plan sponsors

When it comes to defined contribution pension plans, some “big rock” decisions for plan sponsors will have the most impact on member outcomes, while other decisions just aren’t as significant, says Jafer Naqvi, vice-president and director of fixed income and multi-asset at TD Greystone Asset Management.

The four big rocks for DC plans are contribution level, early enrolment, the inclusion of a multi-asset fund default option and the inclusion of alternatives, he says.

The default option is of great importance because education only goes so far, he adds. “The default option really does the heavy lifting.”

Read: How default investment funds are becoming smarter

However, after reaching the big rock decision of including a multi-asset default, the specific type of fund doesn’t matter that much. “When you ran the numbers, target-date funds on the margin, they did appear to have a bigger difference, but when you quantified the impact of going from the balanced fund to a target-date fund relative to getting a member in a few years earlier, it really is minimal.”

Alternatives in DC, the other big rock, is still very new in Canada, but many of the largest plans have been doing it for a long time and allocations are increasing, says Naqvi. “We’re getting to the point where size doesn’t matter. The smallest programs can even now start to benefit from the inclusion of alternatives given developments in the industry over the last five years.”

The numbers show that adding alternatives to DC plans can have an impact almost as big, if not bigger, than earlier enrolment or higher contribution rates, says Naqvi. “I think the equivalence in our numbers is, if you can get a 25 per cent weight in alternatives, that’s the same as saving for an extra 10 years or having [three] per cent higher contribution rate, so very impactful.”

Read: A look at the TTC pension plan’s move to more illiquid assets 

When adding alternatives, considering liquidity is key. “We actually don’t advocate offering alternatives stand-alone for members. You add an element of liquidity risk . . . . I think it’s just proven that plan members are not, by and large, equipped to handle these types of decisions. So adding investment decision complexity to that, we don’t think is the right way to go.”

On the other hand, adding illiquidity within a multi-asset fund would be the preferred option, he notes. “Because if you think about a multi-asset fund, what that allows you to do is delegate that liquidity management and that asset allocation optimization to an institutional party who is equipped to do that.”

This article originally appeared on Benefits Canada‘s companion site, the Canadian Investment Review.