Plan members in TDFs are less likely to make panic-driven moves than those managing their own portfolios: BFL CANADA
With tariffs expected to come into full force next week, the potential impact they could have on defined contribution (DC) plans and capital accumulation plans (CAPs) raises critical concerns for pension funds.
As retirement consulting experts at BFL CANADA argue, the added volatility tariffs could bring disrupt long-term investment strategies for plan members.
“Tariffs have the potential to impact plan members through heightened volatility in the global economy, but also to financial markets around the world,” said Yahya Beg, senior consultant and practice leader, investment consulting at BFL CANADA.
If higher tariffs ultimately result in higher interest rates, that could cause poor performance in certain asset classes, like fixed income and bond funds, which are typically included in a pension fund’s investment lineup, explained Beg.
“Tariffs ultimately introduce an element of uncertainty, and what's unique is that plan members will be the ones who need to navigate this, depending on their circumstances and their strategy,” he added.
One key strategy BFL CANADA emphasizes is utilizing the role of target date funds (TDFs) as the structured nature of TDFs provides a level of guidance many members need, particularly in volatile environments.
“There are two types of investors. There's the, 'Let me do it' investor... and there's those who have no idea, typically ending up in target date,” said Jean-Daniel Côté, vice president and practice leader, retirement consulting at BFL CANADA.
“What's nice about target date is that there's a pilot in the plane so you're not flying yourself. You automatically get that protection that proactive investment decisions bring.”
Côté explained TDFs for DC members offer built-in protections that help institutional investors stay the course during market turbulence, pointing to data from plan providers that consistently shows members in TDFs are far less likely to make panic-driven moves than those managing their own portfolios.
"The number of people who are in target date who actually intervene and make decisions during those times is just about zero," Côté said.
Contrastingly, actively managed portfolios tend to see more reactionary shifts, though not at alarming levels, he added.
“By the design of the glide path of the targeting solution that you're using and active management strategies, they can go outside of the typical limits when something happens. The idea is if you're nervous about your investments, go outside and play, don't play with them,” said Côté.
Beg agrees with Côté, emphasizing that TDFs take the guesswork out of investing because they automate the asset allocation process. As a result, members in their early to mid-careers would have more stock market exposure.
“That can be a good thing, where active managers can actually take advantage of opportunities that might come up. Some target date fund suites have built-in protection for things like inflation,” he added, highlighting inflation-linked bonds and alternative assets like real estate and infrastructure.
Beyond TDFs, plan sponsors can take other steps to support members. Beg asserted communication is key for plan sponsors, ensuring plan participants understand market movements and their potential impact.
Targeted messaging, tailored to all plan members, can help clarify risks and reinforce long-term strategies. Consequently, plan sponsors could also review the demographics among their plan members and split them up according to where they are in their career and working life.
Notably, young and mid-career members can take the impacts in stride, Beg added, because “they have a longer time horizon.”
“Because these CAP plans are employee directed, it’s important for them to receive regular communication and touch points,” he said. “Volatility creates uncertainty, but also opportunity to really communicate with members and get in touch with them. It also highlights the importance of diversification.”
However, for older members, asset allocation adjustments may be necessary to reduce exposure to volatility.
"Conventional financial theory would suggest that nearing retirement and nearing your target date, you should be invested more conservatively," Beg noted, adding that sponsors can also work with record keepers and consultants to relay fund manager insights, offering reassurance that professional oversight is in place.
In-plan advice is another underutilized resource. Beg explained historically, financial planning services were reserved for more wealthier Canadians, but that’s recently started to change.
"In recent years, we've seen this start to become more democratized, and one of the leading sources of this has been the retirement carriers or the record keepers that have made in plan advice available," Beg said, emphasizing the services are complimentary to both the plan sponsor and the member.
“We only see the upside where plan sponsors are having as many members as possible seek professional guidance without the conflict of interest that’s typically there when it comes to product sales outside of an arrangement like this. It helps members navigate some of the current uncertainty just by having that one-on-one guidance,” he added.
