Whether it’s a group registered retirement savings plan (RRSP) or another type of defined contribution plan, simplicity is often the best route when deciding how to invest contributions.

Simplicity can take the form of a “less is more” mutual fund line-up: An overabundance of fund choices can lead to indecision, and unless you throw yourself into the inner workings of a typical mutual fund, it can be overwhelming to decide how to invest.

The default investment may be the best choice, as long as it’s not inappropriate, like a low-yielding money market mutual fund or a high-risk fund based on speculative investments.

The default is usually one of two choices: an asset allocation fund or a target-date fund. Each one has its strengths and weaknesses, which are worth examining in detail.

Asset allocation by risk tolerance

Long-term, an investment portfolio’s best way to balance risk and reward is to diversify, mixing stocks, fixed-income instruments (bonds), cash, real estate and other investments.

A typical asset allocation fund works the same way: it diversifies investments based on an individual’s risk tolerance.

Many providers will give participants a questionnaire to determine the level of risk they are comfortable with taking on. An individual retirement saver within a group retirement plan might be considered Conservative, Moderate, or Aggressive, with variations between each risk level.

Each of these asset allocation funds would be static or unchanging unless or until the individual participant chooses to scale their risk exposure up or down, which they should as they approach retirement.

Here’s a hypothetical investment asset allocation fund lineup:

  • Aggressive: 85% stocks, 15% fixed income and cash
  • Moderately Aggressive: 70% stocks, 30% fixed income and cash
  • Moderate: 60% stocks, 40% fixed income and cash
  • Moderately Conservative: 45% stocks, 55% fixed income and cash
  • Conservative: 30% stocks, 70% fixed income and cash

One drawback to asset allocation funds is while they do an excellent job in matching an investor’s risk profile, they aren’t updated automatically — if you have 90% in stocks and 10% in bonds at age 25, you probably aren’t likely to want that same level of risk tolerance when you’re 65.

Targeting asset allocation based on age

That’s where target-date funds come in. Targeted to your projected retirement age, these funds gradually scale down risk exposure over time.

Here are some hypothetical portfolios for different retirement dates:

  • Target retirement date 2060: 90% stocks, 10% fixed income and cash
  • Target retirement date 2050: 85% stocks, 15% fixed income and cash
  • Target retirement date 2040: 80% stocks, 20% fixed income and cash
  • Target retirement date 2030: 65% stocks, 35% fixed income and cash
  • Target retirement date 2020 (already retired): 30% stocks, 70% fixed income and cash

The key is that these funds automatically rebalance over time as the target retirement date approaches — the same individual who has 90% allocated to stock funds at roughly age 25 will have less than one-third allocated to stocks at retirement age without having to rebalance his or her portfolio.

The target-date funds model works great for investors who want to “set it and forget it” for their retirement savings.

For those wanting a more active role in their investments, asset allocation funds offer more flexibility—some younger investors may not want to hold 90% of their portfolio in stock, and some older ones may not want to keep half of their investments in fixed income instruments.

Contact your HUB Group Retirement Advisor for more information on investment choices for your RRSP or defined contribution plan.