Diversification is the best reason to include lifecycle funds in DC plans, said Peter Walsh, an institutional portfolio manager with Pyramis Global Advisors, at the third annual DC Investment Forum, Wednesday in Toronto.
When it comes down to it, he said, plan members on a whole don’t truly understand diversification.
“If they are in two or three funds they think they are diversified,” Walsh told the Plan sponsors gathered at the Forum.
With a lifecycle fund, the diversification is done automatically for the plan member and all they need to do is pick an estimated retirement date. As they move though the different stages of their life, the fund will automatically be rebalanced.
In the U.S., Walsh said, these funds have been gaining momentum and out of the 18,000 plans that Fidelity (the parent company of Pyramis) keeps records for, over 90% have lifecycle funds and 67% use them as their default option.
But all lifecycle funds and providers are not created equal, he pointed out.
When determining what would best suit your plan, as a sponsor, you need to consider more than just the firm behind the fund (although having one with a stable reputation is always best). The objective of the fund, specifically the glide path, is key to its future success.
“In a lifecycle fund there is not a single strategy,” Walsh explained. “You are looking at a 40 year journey, taking an individual from their 20s and into their retirement.”
For his company at least, he said, there’s been a change in mindset, since these vehicles first emerged more than a decade ago, from “to versus through.” Now, the focus is not just getting people to retirement but well past it and minimizing longevity risks.
Different providers have different reasoning behind their strategies. Making sure the manager and fund you choose is in line with your membership demographics is what’s most important.