Introduction to target date funds

The Advantages Retirement Plan™ offers target date fund options that are tailor-made for retirement

Learning Objectives

  • Understand how target date funds provide a saving solution that can reduce the complexity and stress of investing for retirement
  • Learn more about how the Advantages Retirement PlanTM incorporates retirement target-date funds to simplify and automate investing while you grow your nest egg

Key Insights

  • Savings to grow your retirement nest egg on your own can require spending time to monitor and manage your savings – time that physicians may not have
  • Savings in the average Canadian investment fund can mean paying expensive fees that eat into your retirement income
  • Target date funds manage investing for you – by auto-rebalancing your portfolio to invest more conservatively as you get closer to retirement
  • The Advantages Retirement PlanTM offers target date funds tailor-made for retirement. Savings are allocated based on a target retirement date that you choose, and the fees are low compared to the average Canadian mutual fund.[1]

Taking the guesswork out of retirement saving: How target date funds can help

Investment returns are critical for beefing up your retirement savings. But monitoring and managing your own savings can be a headache – physicians are busy enough already.

Here are some of the activities you may need to juggle if you manage your retirement savings on your own:

  • Allocating your savings to different investment asset classes. What proportion of your savings will you invest in equities, which are generally riskier but can bring higher returns, and what proportion in fixed income, which is generally less risky but can come with lower returns?
  • Readjusting your asset allocation according to your own investment “risk profile,” which will likely change over time. For example, many investors move to a more conservative approach as their expected retirement date nears.

An easier way: Introducing target date funds     

Target date funds are designed to grow your savings and potential income and investment growth in time for retirement.

Target date funds allocate your money into a mix of equities and fixed income that changes over time. To manage risk, more of your money in a target date fund is invested in equities in the early years of your career to grow your money as much as possible during your working years. As you approach retirement, the balance shifts to less-risky fixed-income to preserve your returns. When you’re younger, you can usually take more investment risk. That’s because you’re less affected by the ups and downs of financial markets, both because you have a longer time horizon to recover from any losses, and because the amount of money you’ve saved is usually smaller.

The purpose of target date funds is to help you save for the long-term. It’s not a short-term approach, which would require a more aggressive investment strategy. If you decide you want to save in a different way, you can choose to do so and not invest your savings in the default target date fund offered through the Advantages Retirement Plan™.

A 30-year-old physician planning to retire at age 67 might save in a target date 2055 fund. As the physician moves closer to the target date of 2055, the fund will automatically be rebalanced so it becomes more conservative, with fewer equities, which are generally riskier but bring higher expected returns, and more fixed income, which is generally less risky but brings lower expected returns.          

Target date funds are sorted by the approximate date for when you may want to retire. For example, if you want to retire when you’re 65, and you turn 65 in 2039, that means you could pick the LifePath 2040 fund – the portfolio closest to the ‘target year.’ Each LifePath fund is designed to continuously reduce risk exposure over time. When a target date fund reaches its target year, the assets in the funds will automatically move into LifePath Retirement, which is designed to provide the potential for income and moderate long-term growth for members during the retirement years.

The Advantages Retirement Plan™’s Investment Committee, which is made up of investment experts and physicians, has selected BlackRock — the world’s largest asset manager that pioneered target date funds in 1993. BlackRock’s LifePath Target Date Funds are offered as saving options through the Advantages Retirement Plan™ to generate retirement income. BlackRock has over $7 trillion USD in assets under management, including managing over C$200 billion in assets for Canadian clients.

With the Advantages Retirement Plan™, you can choose from nine BlackRock target date fund options, all of which are highly diversified and less costly than the average Canadian mutual fund.[1] The key difference among the nine different target date fund options lies in the target retirement year that each fund has been constructed for and thus the corresponding asset allocation mix. BlackRock’s target date funds are a simple way to save for retirement. The benefits of choosing to grow your retirement savings by using a target date fund includes:

  • Having access to a diversified asset allocation for as long as you are invested in the fund
  • Automatic rebalancing your portfolio to decrease risk as you get closer to retirement
  • Automatic rebalancing for asset allocation to help mitigate against swings in the markets

References

[1] Morningstar, “Global Fund Investor Experience Study” (2019)