How to Choose the Right Funds For My Retirement Plan Portfolio

May 26, 2014

Once upon an earlier time, an insurance company offered only 7 mutual funds and 5 guaranteed funds for clients to choose from for their retirement plans. The choice was easy; the client invested in all the funds, nothing more, nothing less. Now, the options are mind-boggling with some providers offering over 240 funds from over 35 different fund managers, both retail and institutional. This level of choice is potentially paralyzing to both the employer and the employees.

To prevent this paralysis, it is recommended that between 20 and 25 funds, including target risk and target date funds be part of an employer’s retirement offering. Target risk funds walk your employees through a risk questionnaire to determine optimal risk tolerances before suggesting the appropriate asset allocation fund. Target date funds, simply ask when the employees would like to retire and an appropriate fund is selected (these funds alter risk as the employees approach retirement). It is a good idea to provide only one fund choice from each target risk and target date options as employees are very unlikely to select more than one. The fund line up is then rounded out by adding some guaranteed, GIC-like programs. Not only does the overall fund line up provide choice for the employees, it also keeps the plans simple.

Highlighting different fund management styles, ie. growth, value, core, index, etc., is also advised to ensure the employees have reasonable access to alternative risk models. Funds should be analyzed to determine the best alternatives, taking into account past performance relative to peers across differing and set time periods. The funds should also adhere to their stated mandate, i.e. only investing in Canadian funds if they are Canadian equity funds, and their management expense ratios should be compared to get the best value. To ensure that the employer is compliant with the best practices set out by Capital Accumulation Plan Guidelines, this analysis should be done on a regular basis.

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