Traditionally, money market funds have been the most popular default fund in defined contribution (DC) pension plans but now that people are living longer, and increasing their retirement years, those funds just don’t cut it anymore. “You simply can’t retire on a money market fund,” said Zaheed Jiwani, senior investment consultant with Hewitt Associates, at the CPBI Forum 2008 in Toronto this week.

Money market funds have been more popular because “the perception of risk is lower, and nobody wants to lose money,” he said adding that when comparing a money market fund to a balanced fund, over long periods of time, money market funds don’t have as high a rate of return.

Balanced funds are catching on with plan sponsors, but before employers follow this new trend, they need to determine what is best for their demographic.

For example, target date funds may seem ideal if you have no-touch or low-touch members. With these funds, the asset mix changes and the risk diminishes as the employee gets closer to retirement. “But everything isn’t a bed of roses,” Jiwani said. “There are cons.”

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Target date fund assume that everyone has the same risk tolerance. Plus, they have a shorter track record in Canada (they’ve only been around since 2005) and it’s easier for plan members to get disengaged.

While Jiwani stresses that money market funds likely won’t adequately prepare your members for retirement, he advises sponsors and board members to look at the whole picture before making any moves. Are you going to have a passive money manager or an aggressive one? What about multi versus single managers? These too are options that need to be considered.

Despite the type of fund your organization has, Jiwani said, employers need to be aware of how their fund is performing and how members will be affected in the long run. “You need to do your due diligence and make sure you’re in the fund that is right for you.”

For more stories from the annual conference, click here to visit our special online section, CPBI Forum 2008.

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