Toronto-based PŮR Investing Inc. says personalized risk-based target date funds would improve investment outcomes for the 80% of Canadians who are not members of a public sector pension plan.

In a research paper published in the Rotman International Journal of Pension Management, PŮR offers strategies for making retirement investing easier, more effective and more personalized than anything currently available in the defined contribution pension universe.

PŮR says RRSP investors, DC plan participants and those considering the proposed Pooled Registered Pension Plan (PRPP) program can benefit.

“We believe most people would welcome a reliable income in retirement similar to what a civil servant’s defined benefit pension provides” says Mark Yamada, president and CEO of PŮR Investing Inc., the paper’s co-author.

“Obviously individuals and their employers have to fund the plan rather than taxpayers, and there aren’t any guarantees. However, simply targeting a level of replacement income and having professionals managing their investments would be welcomed by many who are currently required to do it themselves.”

Government plans pay annual retirement benefits equal to about 70% of an employee’s average best three or five years of employment income, Yamada explains.

“We started with the target date or lifecycle fund and developed strategies to make it better. These funds automatically become more conservative as retirement approaches, making them an easy one-decision choice for investors,” says Ioulia Tretiakova, director of quantitative strategies for PŮR, and lead author of the report. “However, they all fall short in dealing with market risk and personal goals.”

PŮR’s solution was to switch the target date funds to risk-based from age based using a “dynamic glide path strategy”. This strategy assumes less risk if progress relative to the goal is ahead of target and more risk if one needs to catch up.

Based on 40 years of 9% annual contributions, using historical returns, PŮR determined that personal risk-based target date funds have a 97% frequency of replacing 70% of income for a minimum of 20 years in retirement. Age-based target date funds with a “fixed equity glidepath”, offered by such firms as Fidelity, Vanguard and T. Rowe Price, have only a 52% frequency of achieving the same results.

PŮR says that through technology, a personal target date fund for each plan member is possible, making the approach suitable not only for group and individual retirement plans but also for the modern worker who is likely to move through a series of jobs and employers before retiring.