 |
|
 |
||||||
Home
A Conversation With |
Benefits and Pensions MonitorA New Generation Of Life Cycle Funds The Perfect Solution? Traditional Life Cycle Funds, which weʼve just described, are not the perfect solution, however. One asset allocation is not ideal for everyone who is ʻXʼ years old and plans to retire in year ʻY.ʼ For example, a 35-year-old who follows the stock market closely and who is a risk-taker will want a different asset allocation than someone who is the same age but more conservative, and who has significant family responsibilities, even if both of them plan to retire the same year and, therefore, have the same investment horizon. Traditional Life Cycle Funds only take into account the time remaining until retirement and completely ignore individual differences like financial knowledge, accumulated savings, and risk tolerance. They use the same format for anyone with the same investment horizon! A New Generation Of Life Cycle Funds For many years, financial experts have been telling investors how important it is to determine their investor profile and make their investment choices accordingly. However, this concept that is so vigorously promoted is ignored in traditional Life Cycle Funds, which only take into consideration the investment horizon. Why not integrate this key factor – the willingness to rake risk – which is still, without a doubt, a fundamental investment principle? This is what the new generation of Life Cycle Funds offers. Thus, in addition to looking at the investment horizon, this ʻimprovedʼ generation of Life Cycle Funds also takes into account each investorʼs attitude toward risk. With this unique, avantgarde solution, each plan member can invest in a portfolio that will be automatically adjusted over time to preserve their capital as retirement approaches, while respecting their investor profile at all times. This new approach offers the best of both worlds, combining respect for the investorʼs risk tolerance with automatic adjustment of their asset allocation based on how much time is left before retirement. These ʻimprovedʼ Life Cycle Funds are also an especially attractive investment option to help plan sponsors achieve the sound governance standards for capital accumulation plans set out in the guidelines published by the Joint Forum of Financial Market Regulators. Under these guidelines, the choice of investment options available must take into account several factors, including the ability to review the options regularly, the diversity of the membersʼ demographic profile, the diversification of the investment options available, and their level of risk. The new generation of Life Cycle Funds is an investment alternative that takes into account each memberʼs situation in terms of risk tolerance and investment horizon, that is adjusted automatically over time, making it easier for plan members to meet their responsibility to review their investment choices on a regular basis. This solution is even more attractive when you consider that plan members are not always diligent about their responsibility to get the information they need to make informed investment decisions, even though plan sponsors endeavour to make all the necessary tools and information available to them. As well, these investment vehicles are excellent default options for plan members who have not provided any investment instructions. The plan memberʼs contributions would then be invested in a Life Cycle Fund that corresponds to their investment horizon. Keep in mind that, under the guidelines, it is the plan sponsorʼs responsibility to establish default investment instructions. How Are Life Cycle Funds Designed? Life Cycle Funds differ from one provider to another in terms of how the assets are allocated among the various classes over time and in terms of the investment funds and managers that make up the portfolio. Nevertheless, there are certain basic principles that must be followed. The most forward-thinking providers offer multiple-manager solutions. The selection and monitoring of these managers and their investment funds is a rigorous process using a series of qualitative and quantitative criteria such as:
How well the managers and the investment funds selected complement one another is also a key factor to consider in designing the Life Cycle investment solution. It is essential to integrate the visions and investment strategies of several managers in order to maximize the diversification of the investment funds and, therefore, reduce their volatility. Regular audits must be carried out to ensure that the managers and funds initially selected are still a good complement to one another. Certain plan sponsors will really appreciate a provider that offers them the option to build customized portfolios to meet the specific needs of their group. In these cases, the investment funds and managers and their allocation within each portfolio, along with the investor profiles and retirement dates, could then be determined according to the client's preferences. A New Era? We can expect the trend in investment options available under group pension plans to move toward replacing asset allocation funds with Life Cycle Funds, in particular the new generation of these funds. Some companies have already gone in this direction, and others are likely to do so before too long since these investment vehicles are the perfect way to meet the need for simplicity and peace of mind so highly sought after by todayʼs investors. ■
Julie Caron is fund manager, institutional advisor, at Industrial Alliance Investment Management. Michael Marmoreo is Toronto regional sales director for Industrial Alliance Insurance and Financial Services.
|
|
||||
Home / News Alerts / Archives / Classifieds / Events / Directories / Resources / Subscribe / Login / Contact Us Copyright ©1999 - 2008 Benefits and Pensions Monitor. All rights reserved. |
||||||
PDF version 
Word document 
