Sun Life uses target date funds to capture group retirement market share

Simplicity is driving their popularity. Should advisors be worried these funds will make them redundant?

Sun Life uses target date funds to capture group retirement market share
In the most recent InFocus feature on our sister site, HRM Online, Nadia Darwish, Sun Life Financial’s vice president of market development discussed why target date funds are all the rage these days in the group retirement business.

According to Sun Life data, 80% of the country’s 2,500 pension plans employ target date funds as an investment option. Sun Life says that 50% of those individuals who enrolled in its plans in both 2012 and 2013 are using target date funds and of those people, 74% are using them exclusively, which suggests that 37% of all those signing up in the last two years have chosen them exclusively.

New enrollees are choosing the path of least resistance.

Darwish states, “I think the single-biggest reason we see the growth of a target date fund is due to the simplicity, they provide an easy and convenient way for DC plan members to get exposure to a variety of asset classes with a single investment option.” Like a jet on autopilot, target date funds do all of the driving.

The Sun Life executive further elaborates suggesting “It helps to get people investing right away and automatically reduces their investment risk over time.” Most importantly, Sun Life has found that the longer you are invested in target date funds, the better the performance compared to other investment choices.

Its data suggests this outperformance could be worth as much as 150 basis points annually to its plan holders which is nothing to sneeze at.

Analysts suggest that target date funds provide a kind of carefree investing opportunity for Canadians without necessitating the need for independent advisor support or guidance.

There’s no question these professionally managed target date portfolios remove a lot of the decision-making required of individuals, but ultimately are the higher MERs worth it? It’s a question advisors, understandably, have a vested interest in answering.

The Sun Life Milestone 2035 Fund charges an annual MER of 2.27%. In today’s low-cost ETF environment, it would be easy to scoff at such fees. But there’s one very important point to consider about this particular brand of funds and that’s the guarantee that comes with it.

Operating much like a segregated fund, as long as an investor holds the fund to maturity in 2035, he or she can expect to receive a guaranteed value on their investment, regardless of what happens in the markets. For many the simplicity and peace of mind provided by these Sun Life funds is worth the trade-off of higher management fees.

If you’re a do-it-yourself investor these funds are definitely not for you. But for anyone in a Sun Life group retirement plan, it’s understandable why so many are choosing this option.