But as Thuli’s example illustrates, volatility can have catastrophic consequences if the market swings against you at the point of your retirement - or at any point at which the member requires a benefit to be paid.
Those members were protected from market volatility even though the fund invested in volatile assets such as equities. The downside was that employers carried a lot of the risk and had to pay fund benefits even when the company was not profitable. This was replaced by defined contribution funds, which provide little protection to a member’s retirement savings in the face of unforeseen events.
By declaring a return that is focused on the long-term return expectations of the portfolio , smoothed bonus funds ensure investors are certain of the value they’ll receive when they retire or exit the fund.