Target-date funds in Canada: Investing for the year you plan to retire

A target-date mutual fund or exchange-traded fund (ETF) is basically a one-stop shop for a retirement saving strategy. Canadian investors simply choose the year they would expect to stop working, then buy a target-date fund targeting the same or nearly the same year.

At this point, target-date investors pretty much go back to whatever else they were doing. Behind the scenes, however, investment managers will be gently nursing the savings toward the investor’s retirement goal. If you decide to go with a target-date fund, your role in the process is to continue to make regular contributions and check in occasionally to ensure everything is on track according to your expectations.

Simple, right? Well, that’s the plan. But there is more.

What is a target-date fund?

Target-date funds carry names along the lines of “2030 Target-Date Fund,” “2035 Target-Date Fund,” “2040 Target-Date Fund,” and so on. The number is the detail to watch. It represents the year in which fund investors generally expect to retire. That date, in turn, determines the fund’s asset mix.

Those with later dates—say 2050, 2055, or even 2060—are geared toward younger investors. Generally, they’ll have a greater proportion of equities in their asset mix compared to fixed income or bond investments. Equities can be volatile, but they generate growth over time. So, loading up on them when you have a long time horizon for your investments is a good way to build wealth.

Funds with sooner target dates, meanwhile, have more weight in income-focused investments, such as bonds. These funds are about protecting capital and are generally for investors focused on conserving their wealth as they near retirement age and start to draw an income. 

Regardless of the year, all funds rebalance their asset mixes as they mature, creating what investment managers call a “glide path” toward the target retirement date—a soft landing for when you’re ready to say goodbye to the work-a-day life.

Under the hood, most target-date funds are “funds of funds.” That means they are made up of investments in other funds representing different asset classes—stocks and bonds, for example—rather than individual investments, such as those a stock-picker would make.

This approach is beneficial for small investors as it increases the diversity of their holdings, thus minimizing overall risk in their portfolios. (You can also find similar structures in some mutual funds and ETFs. Those products, however, don’t provide the glide path to retirement that you’ll have with a target-date fund.) 

One shortcoming of the “fund of funds” model is that they may charge higher fees than other popular types of investments. Which raises the question…

Are target-date funds good investments?

The short answer is, “yes.” 

Myron Genyk, CEO and co-founder of Toronto-based Evermore Capital Inc., which has target-date funds as part of its offering, says these funds were first developed in the U.S. during the 1990s to attract the large proportion of people in workplace retirement programs who were simply using basic savings accounts.

“What better thing than a fund created specifically for retirement investment,” Genyk says. “Saving is only half the equation… your money needs to grow and compound over time.” 

Today, target-date funds are the leading investment choice for members of defined contribution pension plans in Canada and are the default investment in about two-thirds of workplace retirement savings plans in the United States.

Investors, however, should understand a few nuances when it comes to selecting a fund for investment.

How to choose a target-date fund

For Colin Ripsman, president of Vaughn, Ont.-based pension-fund consultancy Elegant Investment Solutions Inc., which also offers target-date funds, a fund’s asset mix is one of the most important. Writing in Benefits Canada, he notes that all target-date funds will have cash, equities and fixed income assets. But those with a sprinkling of specialized investments—say some small-cap equities, long-term bonds, or even real estate—can deliver better returns at lower risk than other more basic funds.

It also helps to know whether a given fund uses a “best-in-class” methodology when choosing its component funds. Managers who work for large financial services firms, for example, may be required to build their funds from in-house investment products. And other managers may be able to choose the best-performing funds, regardless of who controls or sells them.

That doesn’t mean one type of fund is necessarily better than the other. The in-house funds one manager may be required to use may be best-in-class. But you want to ask your adviser at the outset how a fund manager does their work.

Likewise, Ripsman says it’s important to evaluate a fund’s glide path to ensure its asset mix and timeline matches your personal risk-tolerance profile.

Are there cons to investing in target-date funds? 

Sure. Target-date funds offer simplicity and value, but they’re not right for everybody. Some people, for example, want an active role in managing their portfolios in hopes of generating an above-average return. Chances are, they’ll be frustrated if they’re forced onto a steady, predictable glide path and can’t move their assets around in response to shorter-term market conditions. 

That said, a scan of personal finance forums on sites such as Reddit shows that some people use target-date funds as a foundation in their portfolios. They treat it as a lower-risk holding to help them meet their core needs in the future. Then, they adopt more active, potentially higher-return strategies with the balance of their investments—a best-of-both-worlds approach.

Another criticism of target-date funds is that they often come with higher fees than traditional mutual funds. That’s because they’re “funds of funds,” so the expenses compound. For example, say you buy a target-date fund made up of two funds that track major stock indexes and two funds that track bond indexes. You could simply buy those four funds yourself and pocket the fees your target-date fund manager charges.

But that approach forces an investor to become an asset manager, which defeats the goal of the simplicity of target-date funds. As Genyk notes, “What does that [fee] buy you? We take care of the asset allocation… the security selection, the rebalancing, the diversification.”

All those tasks take time, knowledge, and experience—qualities that most people simply saving for retirement don’t have.

You can also find inexpensive options. The cheapest may come from Evermore Capital, which launched Canada’s first target-date funds built from low-cost ETFs in early 2022. Its suite of funds, with target dates ranging from 2025 to 2060—come with a management fee of just 0.35%. The total cost, including underlying ETF fees and trading fees, comes in at well under 1%. 

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