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© Copyright 2000 Rogers Media. The following article first appeared in the December 2000 edition of
BENEFITS CANADA magazine.
Power to the people
Defined contribution plans offer the flexibility, portability and empowerment high-tech employees
demand. There are valuable lessons here for plan sponsors in more traditional industries.
By Adam Neal
The big question for management in the information technology (IT) industry is 'what's the competition
doing?' With new start-ups, mergers, acquisitions, technologies and wars for talent reported daily, plan
sponsors in this industry can't afford to lose any ground to competitors. One of the major challenges in
this sector is to develop and maintain plans that will attract, and hopefully keep, the best talent. A key
component of this strategy is the company-sponsored retirement and savings plan.
The majority of IT companies have chosen to go the defined contribution (DC) plan route, which encompasses
an assortment of programs, including group registered retirement savings plans (RRSPs), deferred profit
sharing plans, employee share ownership plans, money purchase pension plans and employee profit sharing
plans.
Defined benefit (DB) pension plans do exist in the IT sector, but they are becoming scarce. Most of the
firms offering them are either winding up or freezing their plans, requiring new employees to enter into a
DC arrangement with no DB option or adding DC provisions to supplement the existing DB program.
Quite simply, DB plans reward age and tenure and lack flexibility. Accordingly, they are not a good fit in
industries such as high-tech in which workers--even senior management--change employers frequently and
demand flexibility and portability in their investment vehicles.
There are other downsides to the DB plan for high-tech workers. In a DB program, a value or pension
adjustment is assigned to the benefit the employee earns on an annual basis. For young employees in
particular, this amount bears little or no relation to the actual amount of the pension earned. It also
reduces the employee's maximum RRSP contribution limit dollar for dollar.
When an employee leaves a DB plan before retirement age (assuming he is vested), he typically receives a
commuted value--usually much less than the pension adjustment calculated during his tenure--or he has the
option to leave his benefit in the plan for his distant retirement. If the employee has only been with the
organization for a short period of time, that benefit is likely to be minimal, to say the least. If he
takes his pension benefits out of the plan a pension adjustment reversal (PAR) is calculated. While this
restores RRSP room, it does not compensate for the investment income lost on money that could have been
earned in a DC plan.
On the other hand, if an employee chooses to leave his money in the DB plan, he does not receive a PAR or
gain any previously lost RRSP contribution room. This situation is compounded for high-income earners, who
dominate the IT sector and comprise the very group that the plan sponsor often struggles to keep. In most
cases, a DB plan leaves little room for contributions to a tax-sheltered RRSP vehicle.
AT&T CANADA
The lack of RRSP room was a real issue for Toronto-based AT&T Canada, according to the company's human
resources department. The company wanted to offer flexibility to employees, particularly high-income
earners looking to maximize their annual RRSP contributions. Employees had also stated that their tenure
with the company might be only a few years, and they recognized that the commuted value of their DB plan
benefit would not resemble what could have been contributed and earned in a DC plan.
As a solution, AT&T offered existing employees the option of commuting their DB benefit and
transferring it to the new DC plan, while giving the DC plan to all new employees. The conversion occurred
recently and employee response has been positive.
The AT&T scenario illustrates that the key to tailoring a plan to employees' needs is understanding the
workforce. According to HR professionals in the IT sector, the typical high-tech employee is an early
adopter of technology who is Internet friendly, highly educated, self-empowered and enjoys learning. Add to
this the typically short time these individuals tend to spend at each company and the generally high-income
level in this sector, and the DC plan is a good fit because it's portable, and most importantly, it enables
employees to manage their own retirement assets.
HEWLETT-PACKARD
Hewlett-Packard Canada gave employees the chance to convert from a DB to a DC plan back in 1995. Rick
Schwartz, director of compensation and benefits at the Missisauga, Ont.-based company, says employees
appreciated the ability to forecast their future savings and the calculation and projection tools were
popular. Approximately 90% of the members have converted.
On an ongoing basis, employees manage their finances through the Internet, a call centre or automated phone
lines. Schwartz says these tools demonstrate why the plan suits the high-tech sector and other industries
that employ technically savvy and self-empowered workers.
"In Canada, we're entirely white collar [compared to] say a Hewlett-Packard in Singapore which has a really
large manufacturing operation," says Schwartz. "It would be harder for a manufacturing line employee to
have My Yahoo [Internet engine] running and watching the markets and be intensely interested [in
their portfolio] on a daily basis."
NETSCAPE COMMUNICATIONS
Netscape Communications Canada Ltd. is another DC plan convert. The company recently decided to introduce a
DC program to align its Canadian employees more closely with those at Netscape's U.S. operations, and to
develop parity with the plan of its new parent, AOL Canada.
"Our employees are quite excited about the roll out of the new program," says Jim Terry, vice-president and
chief financial officer at Toronto-based Netscape Communications Canada. "They will enjoy having the
ability to control their program over the Internet, which is how all our internal communications are
currently managed."
FLEXIBLE TOOL
DC plans are a good fit for IT employees but they aren't a panacea. Unfortunately, the only way to escape a
pension adjustment is with an RRSP as the retirement savings plan.
One benefit of the pension adjustment, however, is that the amount is based on actual contributions. This
allows employees to see the proverbial bang for their buck and directly relate the lost value of RRSP
contribution room to the value of their account.
DC plans meet IT employees' needs largely because they deliver much sought after flexibility. In addition,
IT companies acquire and divest divisions and companies frequently, and the effect on DC plans is much less
onerous in these instances than with a DB plan.
It's up to the plan sponsor, however, to ensure that it selects a flexible service provider. The service
provider should offer a range of investment options, high-tech solutions such as online calculation and
projection tools and services that use the latest technology such as the Internet. Also look for
educational support and information that will fill the need for knowledge that is prevalent among IT
employees.
The advantages of DC plans can be applied to any industry with a well paid, valuable, mobile and
self-actualized workforce. Companies that employ these workers will find a similar fit between their
employees' needs and the DC program.
Adam Neal is director, national sales, with Toronto-based Fidelity Group Pensions Canada.
adam.neal@fidelity.com.
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