Go to the Globe and Mail homepage

Jump to main navigationJump to main content

The Gillett and Johnston, which has run nearly continuously since it was installed in 1900 at The Old City Hall Clock Towers in Toronto, There is only four in working order in the world and it contains three trains. One is the quarter Striking Train, which sounds the bells at the quarter hour, then the Going Train, for the hand movements of the clock and the Striking Train for the hourly bell ringing. (Deborah Baic/The Globe and Mail)
The Gillett and Johnston, which has run nearly continuously since it was installed in 1900 at The Old City Hall Clock Towers in Toronto, There is only four in working order in the world and it contains three trains. One is the quarter Striking Train, which sounds the bells at the quarter hour, then the Going Train, for the hand movements of the clock and the Striking Train for the hourly bell ringing. (Deborah Baic/The Globe and Mail)

STRATEGY

Retirement-date funds: Smart no-brainer or investor cop-out? Add to ...

The concept is simple enough. Invest in a fund, leave your money in it for years, let other people do all the pesky fiddling with asset allocation and diversification, then – voila – draw money from your expertly balanced fund upon retirement.

As the ultimate “set and forget” investment vehicle, what’s not to love about low-maintenance target date funds?

Globe and Mail Update May. 08 2014, 5:00 AM EDT

Video: Are set-and-forget funds right for your retirement plan?

More from Adviser's View

“There’s a lot of simplicity with a one-fund solution. When you put your retirement plan in place with one of these target date funds, you’re really putting it on autopilot,” says Shannon Dalziel, an investment adviser with PWL Capital in Toronto.

Target date funds, also known as life-cycle funds, are set up to do what we’re all supposed to do anyway: invest mostly in equities when we’re young, then slowly move into more conservative bonds and cash equivalents as we approach retirement. The same can be said for any long-term savings goal, such as saving for a child’s education.

The funds are popular in the United States, where many employers set them as the default option for defined-contribution pension plans. Investors pick the target date they expect to retire – say, 2030 or 2040 – then make automatic monthly contributions, and the money presumably grows until then.

While not as widely used on this side of the border, plenty of Canadian options exist. Ms. Dalziel says that if some of the large U.S. players, such Vanguard, eventually move into the Canadian market in the coming years, target date funds could rise in popularity for employer retirement plans.

And for good reason. They’re perfect for those experiencing investor apathy fuelled by a lack of knowledge. They are also good for those feeling overwhelmed by the sheer number of investment options. If given the choice between balancing their own portfolio or buying a product that does it automatically, they’ll probably choose door No. 2.

The buy-and-hold (or forget) approach can also be a boon for those who would normally panic over small, short-term market drops. Also, they may keep investors from tinkering with their portfolio needlessly or raiding it looking for fast cash.

“Behavior-wise, I think these funds – and balanced funds in general – help investors stay the course over the long term,” Ms. Dalziel says.

Jason Abbott, a certified financial planner and president of wealthdesigns.ca Inc. in Toronto, says he can see the intrinsic appeal for novice investors buying into a company group plan. But for everyone else, he describes his feelings about target date funds as “lukewarm.”

His problem with them? While the funds are one-size-fits-all, investors’ needs are not.

“The philosophy is based on the fact that everyone who has the same target date has the same risk tolerance, the same need for growth and income, and the same investment profile. We know that’s not the case,” Mr. Abbott explains.

Not only that, but two people with similar goals, time horizons and income requirements at the beginning could be hit with entirely different events over the course of their lifetimes that will have an effect on how much retirement income they will eventually need. Divorce, illness and the birth of a child can be financial setbacks. A large inheritance or other windfall can change retirement needs substantially.

In short, life happens and a fund set on autopilot doesn’t always reflect the investor’s reality.

For instance, if alimony payments suck money away from investments for 10 years and the person’s nest egg is depleted at age 50, does it make sense to automatically glide toward conservative fixed income at 55? Probably not. This investor still needs growth options, but target date funds don’t offer that elasticity.

“There is no flexibility,” agrees Adrian Mastracci, president of KCM Wealth Management Inc. and a fee-only portfolio manager in Vancouver. “You cannot say, ‘Can you personalize this fund for me?’ The answer is no. You either accept it the way it is, or you don’t.”

You also can’t mess with the asset mix, which can have tax implications, Ms. Dalziel says. Bonds are more tax efficient inside registered retirement savings plans (RRSPs) than outside, while the opposite is true for equities. With target date funds, they’re grouped together.

Don’t forget fees. Ms. Dalziel says the fund expenses – the management and trading expense ratios – for these products hover around 2.3 per cent, while an adviser could build a similar portfolio with similar asset allocation and using low-cost exchange traded funds (ETFs) or mutual funds for a fee that’s one per cent cheaper.

It pays to do due diligence when looking at fees, since they vary, but so do the funds themselves. The asset mixes can be radically different, Mr. Abbott says. To prove his point, he pulls up the details of two funds that target the year 2020. The first offers roughly a 50-50 split between equity and fixed income. The other is 85 per cent in fixed income.

Without doing your homework, you could find yourself investing in a fund that is much more aggressive than you can stomach or more conservative than you need.

“If the target date is the same for all these funds, you would expect that the asset mix would be fairly similar over time,” Mr. Abbott says. “But they’re all over the map.”

Follow us on Twitter: @GlobeInvestor

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories