The Office of the Superintendent of Financial Institutions (OSFI) today issued a guidance note explaining its interpretation and expectations regarding investment options chosen by pooled registered pension plan (PRPP) administrators as the default investment option.
Member of a PRPP have up to 60 days to make an investment choice. If no choice is made, the investment option is selected by the administrator as the default option. While PRPP regulations say the default option “must be a balanced fund or a portfolio of investments that takes into account a member’s age,” definitions of what these are had not been provided until now.
In the guidance note, OSFI set out its expectations regarding the characteristics of these default options.
Balanced fund characteristics
“A balanced fund is an investment fund that offers a mixture of safety, income and capital appreciation. In order to provide both income and capital appreciation while avoiding excessive risk, a balanced fund holds a combination of equity and fixed income investments. A balanced fund typically has a target allocation of between 40% and 60% of its assets to equities and the remainder to fixed income investments,” says OSFI.
A balanced fund will be automatically rebalanced to maintain its target allocation to equities and fixed income. Returns earned by a balanced fund are not guaranteed and there may be periods of time in which the balanced fund has a negative rate of return, adds OSFI.
Target date funds
OSFI explains that an example of a portfolio of investments that takes into account a member’s age is a target date fund. “When a member of a PRPP does not make an investment choice, the administrator is expected to invest the member’s funds in a target date fund that reflects the member’s age or expected retirement date. A target date fund, like a balanced fund, invests in a mix of asset classes, including equities and fixed income. Unlike a balanced fund, the overall asset allocation of a target date fund will gradually adjust over time to reduce risk as the target date (generally the investor’s expected retirement date) approaches.”
OSFI specifies that the returns earned by target date funds are not guaranteed and may have periods of negative rates of return.
Communicating with members
OSFI underlines that after an employer enters into a contract with an administrator to provide a PRPP to its employees, employers must, as soon as feasible, be sent a notice to each employee that includes a description of the default option, indicating:
- its investment objective;
- the type of investment and the degree of risk associated with it;
- its top ten holdings by market value;
- its performance history;
- that its past performance is not necessarily an indication of its future performance;
- the name and a description of the benchmark that best reflects the composition of the investment option;
- the cost associated with the investment option, expressed as a percentage or a fixed amount; and
- its target asset allocation.
If the default option is a target date fund, OSFI expects that an explanation of the target date fund and an illustration of the glide path be included in this notice.
To read the full guidance note, click here.