How many investment options do you need in a group plan?

In the world of pensions and Group RRSPs, the Capital Accumulation Plan Guidelines are put in place to help provide a framework to ensure that plans are properly designed, managed and monitored.

Under the CAP Gudelines, one of the responsibilities of the employer is to ensure there are adequate investment options for the members.

Unfortunately, there is no simple guideline for this, there is a science to investing that can be used as a framework for developing an appropriate investment line up.

Passive vs Active Investors

In every organization there are two types of investors.  The passive investor is typically hands off.  For the most part, they are not wired to be great investors.  They generally don’t desire to learn more about investing.  The last thing they want to do is watch a TV program on investing or surf the web for investing websites.  Passive investors may look at their statements but typically don’t make any changes to their portfolio.

The active investor is the polar opposite.  They enjoy reading about investing and researching and look for new ideas to implement in their portfolios.  Active investors tend to engage more and thus also make changes to their portfolio.

When setting up a group retirement plan, it’s important to include investments that cater to both extremes of investors.

Investments for passive investors

Target Date Funds and Asset Allocation funds are best suited when catering to passive investors.  They are ideal for passive investors because the process of choosing an investment is really simple and the ongoing management of the fund is automated so they are designed for that hands off investor.

Basic guideline for the active investor

When it comes to providing options for the active investor, there needs to be a balance between giving these investors enough choice to make investing interesting but also limiting choice so it’s not too confusing and daunting.

Here’s my general guideline for developing and an investment line up for a group retirement program.

Options for the conservative investor:

  • 1 daily interest option
  • 3 GIC options
  • 1 active Bond Fund
  • 1 low cost index bond fund

Cdn Equity options:

  • 1 active managed
  • 1 lower cost index option
  • optional – socially responsible, growth, value, small cap

US Equity Options:

  • 1 active managed
  • 1 lower cost index option

Global Equity Options:

  • 1 active managed
  • 1 lower cost index option

Other Options:

  • optional – Real Estate, regional, sector specific

My five cents

In my experience, most investors are more on the passive side.  Most investors are not wired to be active investors.  As a result, it’s so important to include so really solid passive investing options.

I love index based target date funds.  One example is the BlackRock target date funds that can be found in many of the big insurance companies, which are leaders in providing group retirement plans.

A complete investment line up will have 8 to 12 investment options for the active investor plus a set of target date funds and 5 asset allocation funds.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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