Saving and investing for retirement is a high priority for many Canadian private sector workers. Unfortunately, individual investors are often bad at investing.

They make improper stock selections. They hold onto losing securities for too long. They sell winning securities too early. They either rebalance too frequently or not frequently enough. They pay higher fees than necessary. They select inappropriate asset allocations for our savings goals. When saving for retirement, any of these mistakes can be costly and can ultimately reduce an individual’s retirement income and/or delay their planned retirement.

Multiple studies (ex. “The Value of a Good Pension”) conclude that the vast majority of individual investors make sub-optimal investment choices. The excerpt below is from the Value of a Good Pension, a report published by the Healthcare of Ontario Pension Plan (HOOPP):

“A significant body of evidence points to the fact that retail investors make predictable, costly mistakes.  One widely cited study concludes that “individual investors have a striking ability to do the wrong thing” when it comes to making decisions related to their investments.

Poor decision-making extends to the three key sources of investment return: security selection, asset allocation, and market timing. Research from Vanguard has calculated the value of helping individuals avoid these types of mistakes in investment decision-making, finding that effective rebalancing adds 0.47%, while staying invested during downturns and avoiding attempts to time the market is worth 1% to 2% in net return.”

There have been three solutions to this well-known problem adopted by most defined contribution pension providers.

The first, and most popular, has been to provide literature, tools and other materials to educate each individual on how to manage their retirements savings. This solution effectively passes the responsibility of investment expertise to the individual. More than 95% of individuals in traditional defined contribution pension plans achieve lower returns than an average professionally managed defined benefit pension plan. Individuals simply cannot be expected to dedicate the required time and resources to effectively learn all the necessary information, analyze all the appropriate data, and consider all the risk-reward tradeoffs required to effectively manage their savings.

The second solution adopted is to provide a la carte professional investment services at additional cost. This has shown to be effective for some high wealth individuals, but many argue that the benefits of a personal actively managed asset portfolio does not exceed the cost of these investment services. 

The third solution, and ultimately the most effective, is to remove the individual’s choice in how to invest.  This is accomplished through the use of target date funds. Target date funds invest an individual’s retirement savings on their behalf, manage all aspects of the investment selection process, and formalize the change to the individual’s asset allocation as they approach retirement within the terms of the funds. More than 35% of all plan member contributions to defined contribution pension plans go to target date funds.

The ideal solution for an individual saving and investing for retirement is to remove investment choice altogether. The terms of the savings arrangement would require the member’s account to be invested professionally, at a low fee level, with allocation of the individual’s assets automatically changed to reflect the time until their expected retirement and the form of their expected retirement income. Providing this to all Canadian private sector workers would be a good for us all. The ICPP is a first step to achieving this goal.