Many employers are still concerned about setting up a Group RRSP because of a fear of being too involved in the investment decision for employees. In a previous post, this, along with other employer myths were addressed. Unlike some pension plans, the investment decision in group RRSP is always the decision of each individual employee. The employer is however, as the plan sponsor, responsible for selecting the fund line-up (also known as the investment menu) which represents the list of investment options for employees. Like a coach selecting a starting line-up for game day, your fund line-up plays a critical role in the program’s success and ultimately each employee’s success in saving and investing for retirement. Starters typically represent the best players on the team at their given position. In this post we’ll explore three starters to consider in key roles of your group RRSP fund line-up.
Starter #1: Target Risk Funds
Establishing a fund line-up that is appropriate for all employees in your group can be a real challenge. Companies are often comprised of diverse groups of individuals with varied financial needs, investment knowledge and levels of interest. Industry best practices, known as Capital Accumulation Program (CAP) Guidelines, suggest that Group RRSP investment menus should consist of a wide range of investment options or a diverse selection of funds. “Wide range” should not however be interpreted as lengthy. The old adage “less is more” holds true, as a long list of options may offer diversity but at the cost of unnecessary complexity and confusion for your employees.
A simple solution to creating a short but diverse investment menu is starting with target risk funds, also known as asset allocation funds. As opposed to each employee selecting individual investments to build their own portfolio, a target risk fund offers employees an option of assets, allocated between expertly selected and diverse funds. In this manner a lengthy investment menu can be shortened to a handful of asset allocation options that represent various target risks levels. A simple questionnaire will identify risk tolerances and match employees with a suitable asset allocation classes: such as aggressive, moderate, or conservative.
Starter #2: Target Date Funds
While the target risk fund offers a simplified way to invest savings it still requires the engagement of employees to evaluate their choice at least every 2-3 years to ensure their target risk is still suitable. Nearly all organizations will have employees with limited knowledge or interest in investing and this added step can easily be missed or ignored. However, these employees still have a need for saving and investing. In order to encourage savings as the primary goal, a starter to nearly every group retirement program should be the convenience of Target Date Funds.
A Target Date fund, also known as a retirement date or age date fund, is an investment option that automatically adjusts target risks based on the years remaining before your desired retirement age. The fund, made up of familiar asset allocations, will follow an established investment philosophy of re-calibrating from an aggressive approach in younger years, to a moderate approach in middle years, transitioning to a conservative approach leading up to retirement. This generally accepted and tested path is expected to produce a reasonable rate of return on investments for employees while managing risk near retirement. Given the target date’s autopilot-like approach this also makes it a great default option to protect employees who contribute savings but neglect to make an active investment decision.
Starter #3: Guaranteed Funds
So far the starters to the fund line up have offered employees the opportunity to safely and effectively invest their savings with either an active or passive approach. While this may (and should likely) cover 95% of employees there is one risk tolerance we’ve left out, the one that makes a conservative investor look like a gambler. There will always be employees who don’t want any risk, whether it’s their personal preference, past market experience or simply their present situation (imminent retirement for example). With our primary goal of saving first in mind, it’s important to offer a menu item for these employees as well. This option is starter number 3, the guaranteed fund.
A guaranteed fund, for example, a guaranteed interest account or guaranteed investment certificate, is an investment that guarantees a very small rate of return with no market risk. While a guaranteed fund or interest-bearing account is unlikely a suitable default account it should be offered for employees to consciously select as their investment option if they prefer. If participation in Group RRSP is based solely on risking an employee’s money in the market, you could be alienating employees with very low-risk tolerance and missing an opportunity to encourage the positive habit of saving regularly.
Let’s put it all together. Remember, in Group RRSP the investment decision is always with each individual employee; as such, the employer who establishes the fund line-up of investment options should consider starters that cater to each individual employee in some way. Reminding ourselves that the success of a group retirement program is primarily driven by the participation and active engagement of members in the plan the investment menu should encourage both. A target risk fund offers interested employees with limited investment knowledge the ability to easily invest and grow their savings. For those employees who have limited interest in investing, a target date fund offers them the automation to effectively and passively manage their contributions without frequent monitoring or evaluation. And for those employees with no interest in risking their contributions in the market but who still recognize the need to save, a Guaranteed Fund will offer them a safe harbor to accumulate savings with the least amount of risk.
As a final comment to establishing an appropriate fund line-up for your employees, CAP Guidelines also suggest that employers review demographics regularly. While 95% or more of employees should consider one of the three options above, some employees with higher levels of interest and investment knowledge may desire even greater flexibility. For a complete CAP guideline and retirement program review please consult a licensed advisor working in partnership with an established group retirement plan provider to tailor a solution.