The industry can provide better investment options for disengaged plan members. That change begins with the default options in your plans.

The Joint Forum’s Capital Accumulation Plan(CAP)guidelines bring an old proverb to mind: “You can lead a horse to water, but you can’t make it drink.”

The CAP Guidelines outline in great detail how to get the best outcome for plan members engaged in the saving and investing process: the horses who are willing to drink.

But industry studies agree that at least 15% of horses couldn’t care less about water. An additional 15% of horses can’t read the directions to the water hole and won’t ask for help. So 30% of horses are going to die from dehydration. Because, no matter how often you lead a horse to water, the CAP Guidelines agree that you can’t force it to drink.

In other words, 30% of plan members will never save for retirement, or if they do, it won’t be in a meaningful and effective way. And don’t forget the plan members who, no matter how much help you give them, insist on drinking out of the wrong water holes. These members buy high, sell low, and take risks at the most inappropriate times in their careers.


Plan members have three basic needs: to contribute to their plan, to keep their money in the plan and to have an appropriate investment allocation. Traditional plan design and education initiatives can help with the first two needs. The third is the real conundrum, because investment decision-making does not come easily to many employees.

For employees who have difficulty choosing their asset allocation, companies have typically chosen default options as “safe” temporary investments. But the frightening reality is that a stop-gap will end up being a long-term investment for up to one third of your members. Ten to 15 years into a plan, 20% to 30% of assets will be sitting in the default option—which, in most cases, is not the best place for them to be.

All of us in the industry need to get a little more creative. Here are some approaches to consider.


Disengaged plan members include everyone from 25-year-olds with minimal expenses to 60-year-olds with minimal savings. How do sponsors meet the needs of everyone?

Target retirement funds have been available in the U.S. for 10 years, and they’ll be showing up in Canada this year for group and retail investors. The concept is simple: plan members invest in a fund that has a strategy consistent with that member’s time horizon.

For example, if a member is 35 and expects to retire in 25 years, he would invest in a “2030 fund.” Over the next 25 years, the fund’s asset mix will evolve to become more conservative. By the time 2030 arrives, the fund will have a mix appropriate for a 60-year-old. And none of this requires any action by the member, except for enrolment.


What if one could refine target funds by factoring in not just age but demographic data, such as salary, years of service or current savings? While these options are still years away, with advances in technology and behavioural finance theory, they are a possibility.

Another possibility is “non-mainstream” investment vehicles, such as synthetic or absolute return funds, which are designed to provide diversification in a single package.

We need to be open to these and other options as they emerge. Because the reality is that while the CAP Guidelines effectively address plan design and intent, they don’t address human nature. That is our responsibility. Otherwise, we’ll be stuck with a lot of thirsty, unhappy horses.

Dave McLellan is vice-president, Defined Contribution Program Development, Fidelity Investments, in Toronto. Dave.

For a PDF version of this article, click here.

© Copyright 2005 Rogers Publishing Ltd. This article first appeared in the April 2005 edition of BENEFITS CANADA magazine.


Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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