For a huge number of canadian employees, retirement planning remains something of an oxymoron.

After all, recent reports confirm that a disturbingly high percentage of Canadians expect to fund their retirement through lottery winnings.

The lottery factor notwithstanding, financial retirement planning has become a hot topic these days. Extended life expectancies, the proliferation of defined contribution (DC) plans, and the threat of litigation have prompted more and more employers to review the quality and type of financial information they provide to members.

There are a number of reasons for organizations to help employees plan for retirement. Even the most generous pension plans are unlikely to meet all the retirement income needs of employees--even long-service employees. A 2% defined benefit (DB) plan will only replace 70% of an employee's earnings after 35 years of continuous service (even less if members bump up against the Canada Customs and Revenue Agency tax limits). Employees should be made aware of this early on and often.

Done well, retirement planning programs can support business literacy initiatives in the organization, particularly for employers sponsoring DC plans. The principles of investment and contribution, rates of return and inflation are the same ones used to describe productivity, return on investment and other metrics found on balance sheets.

Taking business literacy to an extreme, one financial services organization out west converted its DB plan to a DC plan, in part, to enhance members' understanding of investment principles. The rationale was simple: before employees could realistically advise clients on capital accumulation and investment strategies, they needed to put their money where their mouths were.

Strong retirement financial planning programs can also help organizations retain increasingly scarce talent. Unless employees fully understand the nuts and bolts of their pension program--including things like portability and tax-effectiveness--it is extremely difficult to convey the value of the plan (and the value of the total compensation program as a whole). That's particularly true for organizations committed to DB programs.

LEGAL LIABILITY

Perhaps the most compelling and self-serving reason for effective retirement planning is the threat of legal liability. There is a growing concern among Canadian sponsors of DC plans that account balances will fall well short of members' retirement needs and projected values used to persuade many employees to transfer from a DB plan--particularly in light of recent market performance. There is an equally large concern that these same plan members will look to plan sponsors via the courts to make up the shortfall.

For prudent Canadian sponsors, the best hope for relief lies in ongoing retirement financial planning. Obviously, sponsors must meet their fiduciary obligations, select and monitor their investment managers and demonstrate good governance. But they also need to equip individual plan members with information and tools to make informed decisions--they need to communicate to employees.

While disclosure involves the transfer of information, communication is an active process intended to influence members' attitudes, perceptions and behaviours. In simplest terms, effective communication will motivate individual plan members to better understand the organization's retirement program, including tax implications, how it integrates with government and personal savings programs as well as their retirement needs and income gaps, if any.

To be truly effective, financial planning programs need to address the needs of distinct audiences and to reinforce the compensation philosophy of the organization. Ideally, an effective financial planning program begins with member input.

Much to the surprise of management at one large manufacturing facility, for example, the overwhelming majority of workers on the shop floor indicated that they prefer to receive pension and benefits information online. The same members indicated that they were highly unlikely to attend a group presentation because it would be too generic to be meaningful.

Whether the information is delivered online, on paper or face-to-face, it has to be compelling. In most cases that means real-time, interactive and personalized.

The real key to an effective retirement financial planning program is to start sooner rather than later. Six months before retirement--even five years before--is too late. The whole idea of retirement planning is to avoid nasty surprises and leave the employee with enough time to take action.

Whether your organization provides a DB or DC pension savings arrangement, retirement planning should be an integral part of your communication efforts. It's good sense, and good business. BC
 

David Howe and Paul Harrietha are partners at Eckler Partners Ltd. in Toronto. dhowe@eckler.ca and pharrietha@eckler.ca.

There is a growing concern among Canadian sponsors of DC plans that account balances will fall well short of members' retirement needs--particularly in light of recent market performance.