Saving for retirement is supposed to be hard work, isn't it? You need to pay regular visits to your financial planner, pick from dozens of financial products, weigh risks and balance your portfolio while worrying about where the market or the economy is going year by year.
But what if there were one solution to the long-term investment problem? Pick a date, for instance the year you turn 65, and plough your money into a fund tied to that target date, which will take care of your retirement financial needs. It grows aggressively at the beginning with a heavy weighting in equity investments but gradually shifts to less-risky investments as time goes on because you need to be more certain of your income as you approach retirement.
You might have already encountered these target-date funds if your employer's RRSP plan offers them as an option, or even as a default. Or you might come across them during a visit to your financial planner.
Not all target-date funds are designed for the very young. Not all are even designed for retirement. The key commonality is the requirement to pick the date for achieving the goal and to shift over time within the fund from equity exposure to less-risky income assets such as bonds.
Kin Chin, director and lead strategist in BlackRock Inc.'s defined contribution business, says target-date funds aren't for everyone, but they probably work for 80 per cent of the population.
"You need time, knowledge and discipline. Someone like myself, I may have the time and I may have the knowledge, but do I have the discipline every single quarter to go back and adjust my portfolio to reflect the fact that I'm one quarter closer to my retirement date? It makes sense for a lot of people."
Target-date funds have been around in Canada for about 10 years. Several companies offer the funds. BlackRock's funds are designed for workplace and group retirement plans, usually offered through insurance firms.
"By design, these funds are meant to be the only investment option in your retirement plan," says Mr. Chin. The employees in the plan receive quarterly statements on how their fund is doing and they are designed to be held until the target date.
The basis for target funds is shifting asset allocation, heavy on equity at the beginning and changing over the years to fixed income. Different firms offer different mixes and vary how quickly the assets change.
"From BlackRock's perspective a 20-year-old would have 100-per-cent equity in the portfolio. Once you get to 65, it would be … 40-per-cent equity, 60-per-cent fixed income," says Mr. Chin.
For some workplace plans, there is also the carrot of employer contributions, making the funds more attractive.
But not every financial advisor is a fan. Critics point to the uncertainties of market cycles which the regular recalibration of a retirement plan can mitigate. Management fees vary from company to company and plan to plan. And customers might not get the full value of the strategy if they have to withdraw from the plan early.
"Sometimes the equity markets and the fixed-income markets move in tandem and sometimes they're perfectly negatively correlated and sometimes it's in between," says Paul Bourbonniere, a certified financial planner, HollisWealth, at Polson Bourbonniere Derby Wealth Management in Markham, Ont.
He has reservations about locking in the equity to fixed-income ratio by proximity to retirement date. He uses the example of a period of relatively high interest rates followed by the threat of a recession when rates would begin to fall.
"You might want to increase your fixed-income allocation above what the target date is doing because you want to lock in some of those higher rates, so that would cause you to break the contract."
Mr. Bourbonniere says management fees have been on a downward trend for the past 20 years.
"I'm not convinced that the fee structure in a target-date fund will follow that same trajectory. If you look at the total fees paid over the 20, 30, 40-year lifetime of the contract, as opposed to an actively supervised portfolio, taking account of the new technologies and the new reality, that's going to be a big number."
And there is also the question of the asset mix on retirement.
"It may be that your biggest risk in your portfolio is not short-term volatility, but it's running out of money," says Mr. Bourbonniere. "You may want to or have to strive for higher than expected returns because otherwise you're going to be flipping burgers at age 90 and nobody wants that. So you may decide that 'I'm a more experienced investor. I'm okay with 60 or 70 per cent equity in my sixties because I now have a new set of resources or because I've purchased an annuity to guarantee my longevity so now I want some growth.' "
All that said, Mr. Bourbonniere says group plans, particularly with an employer contribution, can make sense.
"If the client has enough assets, and is sophisticated enough … then the advisor should not reach into his tool kit and say target date is what you want. But for people who have limited access to advice, target dates would be perfectly appropriate."
And a target fund for a goal other than retirement is another possibility, he adds.
"If a grandparent wants to fund an education plan and you buy a 15-year target date because that's approximately when the grandchild is going to be graduating and perhaps the parents are too busy or have no inclination to monitor things, that would be a perfect application."
That Registered Education Savings Plan idea is one of the faster growing categories of target-date funds that the Bank of Montreal offers, says Trevor Philp, senior product manager, BMO Global Asset Management. BMO has offered the target-date education savings plan since 2014.
BMO's target-date fund business is largely retail and designed to be used in conjunction with regular advice from a bank branch financial advisor. "We're not encouraging anyone to just go in one day to a branch, buy a fund and forget about it for the rest of their lives," says Mr. Philp.
So far, BMO offers target dates only up to 2030. "We have people use these things for retirement, but we also have people who use these for specific goals that are tied to times and dates," he says.
BMO funds can start from 90-per-cent equity/10-per-cent fixed income and progress all the way to completely fixed-income portfolios.
Because the funds target specific dates, anyone who is likely to have a lot of variability in when they need the money would not benefit, Mr. Philp says.
And Mr. Chin also offers advice on which investors should look elsewhere for long-term investment.
"Targeted funds are blunt instruments so they are not meant for everyone. The beauty is they're simple and they're meant … for a good 80 per cent of the population. If you have a large inheritance and a lot of assets outside the employer's saving plan, then the allocation may not be optimal for you."