Many investors utilized the help of financial advisors when it comes to managing their investments.
The whole point of the Group RRSP and other Workplace Savings Programs is to make it as easy and simple for the employee to make investment decisions because there is not always access to advisors for help. There are really only three general investment strategies to use in your program at work.
1. The default approach.
Most group plans provide a general default investment so if money goes into he plan without direction or investment instructions it has a place to go. Typically, this default tends to be either a more conservative option like a money market investment, some other form of fixed income or a conservative asset allocation product or something that is age appropriate like a target date fund.
Generally, the default is not an approach you choose but rather the approach that gets put in place when you do not make a choice. The other two approaches are better because rather than the one investment fits all approach, there is some customization.
2. The packaged approach.
In the retail world, many companies provide packaged approaches to help make things easier for the buyer. For example, a stereo store might bundle a TV, DVD, stereo and speakers together and offer a package discount. The buyer does not have to worry about compatibility because the package has been put together to ensure the parts work well together. Another example might be the packaged meal deal at a fast food restaurant or a computer system that is designed for a specific use. Mac has really done a great job, making sharing pictures, music, videos and games easy for the home application.
In the investment world, these packaged solutions also exist. They are known as asset allocation funds or target date funds.
Asset allocation funds are investments that provide investors with a mix of different asset classes like stocks, bonds and cash. The science of diversification suggests that there is a ‘optimal mix’ of assets to produce the greatest return for each unit of risk. Asset allocation funds incorporate this nobel winning science so investors do not have to do a lot of managing. Generally all the management in these funds are done for the investor since it is a packaged approach.
Asset allocation funds usually come in a few categories. In most group retirement plans there are typically 5 categories: Conservative, Moderate, Balanced, Growth and Aggressive. Basically the investor fills out a questionnaire and the answers to that questionnaire determines which if the 5 portfolios is most appropriate.
Target date funds (or sometimes called life cycle funds) are similar but take the allocation to the next level. Similar to an asset allocation fund, the mix of assets is optimized through science and all the management is done for you. The difference is these target date funds also adjust the mix by shifting to more conservative holdings like cash or fixed income over time. By changing this allocation, the overall risk of the fund decreases as the investor gets older (or as the fund reaches it’s target date). Target date funds are really designed as the autopilot solution because there is very little decisions making and management required.
3. The active / customized approach.
Some people criticize these asset allocation and life cycle funds as “one size fits all” solutions which leads to more complacency. As investors develop more knowledge and start to pay more attention to their portfolios, they may want to change their strategy to a more customized approach.
If we go back to the stereo analogy, someone might do a little bit of research and instead of buying a pre-packaged solution, they prefer to shop for the best TV, the best stereo and the best speakers on their own. They buy different components to create their own customized solution.
In the group RRSP plan, the investor would select their own investments based on some thought and research and then manage their own portfolio by making buy decisions as well as sell decisions. The customized solution requires a little more work. For this solution to work, you have to have the time, expertise and desire to get involved. Not all plans allow for this level of customization.
My two cents
The Packaged solution and the Customized approach are better than the default approach simply because there is a greater amount of customization. Choosing between these two solutions really depends on your level of desired involvement. If you want to be less involved, the packaged solution is probably better because there is less maintenance. If you are willing to take a more active role, then adding some customization might be right up your alley.