Considering the investment options for variable benefits
For Canadian defined contribution plans, legislation is underway to offer more decumulation options to members, but what’s on the horizone from an investment perspective?
Almost all jurisdictions across the country have now introduced variable benefits, including Ontario, which began allowing the option on Jan. 1, 2020. As a result, the industry is well-versed in the upsides of variable benefits for both plan sponsors and plan members. But Canada is slightly further behind other countries when it comes to robust options from an investment fund perspective during decumulation.
For plan sponsors proceeding with variable benefits, it’s important to consider the available investment options, says Tom Reid, senior vice-president of group retirement services at Sun Life Financial. “They need to think about — should the investments look a little bit different? They should. They should probably offer a few more vehicles that would be more appropriate just for decumulation that they wouldn’t have offered for the accumulation members.”
Zaheed Jiwani, princial at Eckler Ltd., suggests plan sponsors consider the differences between target-date funds that offer a flat glide path versus those that offer a de-risking glide path in decumulation. And he believes more attention will be paid to this part of the glide path going forward.
“I think you’re going to start to get a little bit more attention paid for variable benefits and other decumulation vehicles. So you might get more income-oriented funds that aren’t just purely fixed income; they could be dividends, equity funds, but something a little bit more sophisticated.”
While Jiwani hasn’t seen Canadian products specifically designed for decumulation, he notes some are on their way. And, with the U.S. further along the decumulation journey, Canadian plan sponsors can look at trends south of the border.
In the U.S., T. Rowe Price is engaging in more conversations with DC plan sponsors about keeping retirees in the plan post-retirement, alongside discussions about the benefits of choice when it comes to retirement income, says Michael Oler, a U.S.-based retirement income product manager at the investment manager.
“It’s not necessarily going to be a one-size-fits-all proposition where a singular retirement income solution is going to work for everyone. Understanding the importance of choice and having potentially multiple retirement income offerings in a plan is also part of that conversation as well.”
The industry is also working on investment strategies that connect the accumulation and decumulation stages, notes Oler. Specifically, a managed payout product connects to one of T. Rowe Price’s target-date fund series. “Individuals are getting continued access to that same investment that they’ve had during accumulation. But now, when they’re in retirement, they’re actually able to start receiving monthly income from that strategy as well.”
He’s also starting to see plan sponsors offer more flexibility around distribution options at retirement. “It doesn’t have to be an all-or-nothing proposition where they either have to leave their money in the plan or take all of it out at once. I think we’re starting to see more plans adopting instalment options, which allow for periodic withdrawals or systematic withdrawals out of the plan.”
Returning to Canada, the current situation with the coronavirus pandemic highlights the importance of options such as variable benefits, says Jiwani, noting whenever there’s an economic crisis, people are reminded about risk mitigation, which may push plan sponsors to act.
In times of market correction, he adds, employers want to protect their plan members and ensure there’s as much money in their pockets as possible. “That really means low fees all the way through, not just in accumulation, and really good investment products that are appropriate for them at every life stage, not just in accumulation.”
This article was adapted from a longer article on Benefits Canada‘s companion site, the Canadian Investment Review.