The DC age

Regulators from the pension, insurance and securities industries came together with various DC plan stakeholders to design what will likely become a valuable blueprint for the regulation of money purchase pension (MPP) plans, group registered retirement savings plans (RRSPs), employee share purchase plans and other DC plans.

The regulators have addressed long-standing concerns in the plan sponsor community with their efforts. And while we do not have a final set of regulations passed into law yet, many employers and providers are breathing much easier than they were at this time last year, in anticipation of a harmonized environment in the future.

This development comes at an important time as the DC market continues to grow in Canada. Both employers and employees have come to see the considerable advantages offered by these plans. A study conducted by Greenwich Associates in 2001 predicts that DC assets will exceed defined benefit (DB) pension assets in Canada by the start of the next decade, although growth this year is relatively flat due to market performance.

Among those pension funds examined by Greenwich, 70% of assets were in DB plans and 30% in DC. The organization estimates that by 2011, the breakdown will be 40% DB and 60% DC. Participation in DC plans has grown from 74% in 2000 to 80% in 2001.

It was also noted that new employees are often offered the DC alternative in firms where both plans are in place, further supporting the projection of increased growth in DC assets.

The most recent edition of the Canadian Defined Contribution Plan Directory, published by Rogers Media Inc., shows the greatest growth in the DC market is in the wholesale trade and service industries. In the wholesale sector alone, there are no less than 380 DC plans in Canada, representing 132,160 active members as of June 30, 2000.

Collectively these plans hold $3.1 billion in MPP assets and $562 million in RRSPs. There are 227 plans in the service industries. They represent 87,242 active members, $4.5 billion in MPP assets and $564.5 million in group RRSP assets. Remarkably, these totals reflect the plans in just two industry sectors.

One of the fundamental philosophies behind DC plans is, of course, the potential shift in certain responsibilities onto individual plan members. In fact, the opportunity to move to a less paternalistic role was a decisive factor for many former DB plan sponsors in switching to DC plans, as well as for many employers who have chosen to supplement ongoing DB offerings with a DC component.

DC plans encourage greater personal responsibility for retirement among plan members, while reducing the likelihood of risk for the sponsor. Although the initial proposals from the Joint Forum left room for interpretation around this issue, subsequent discussions between industry stakeholders and regulators appear to be heading towards a resolution that should be reflected in the new regulatory system. The evolving landscape appears to be creating a more sponsor-friendly DC environment.

Implicit in this re-assignment of responsibilities is the capability within DC plans for employees to make their own investment decisions. This helps individuals plan for their own retirement.

The emergence of self-direct options in some DC plans marks a further evolution in individual responsibilities. This is not a new type of plan, but rather it is a scenario in which the member has virtually complete discretion over his or her investment options.

An edition of the Institute of Management and Administration DC plan newsletter published late last year quoted Theodore Benna, president of the U.S.-based 401(K) Association, as saying that 25% of all American plan participants would have access to self-direct options through their company programs within five years.

Benna also predicted that this will increase to 100% in 10 years. It is expected that similar trends will develop in the Canadian market although one would anticipate that demand might fluctuate with equity market performance.

While expanded options bring more choice, choice must be provided responsibly and in conjunction with adequate education programs, access to investment information and possibly access to financial planning and advice. The responsibility for this cannot rest solely on the shoulders of the member but must be shared with the sponsor who has introduced this wide universe of investment options.

While the diversification of options within DC plans provides working Canadians with more investment alternatives, individuals do not necessarily have the savings discipline or ability to make appropriate financial decisions.

There is a concern today that many Canadians are, in fact, saving too little. For example, many Canadians have significant unused RSP contribution room. Many Canadians also fail to participate in voluntary DC programs where the employer is offering a matching contribution.

Gone are the days when the average Canadian might maintain a zero credit balance aside from their mortgage. In today's world, an individual is usually faced with managing numerous debts and increasing tax obligations while trying to maintain a comfortable lifestyle. Debt management vies dollar for dollar with the need to save for the future.

We are also living longer than ever before. Canadians once had to plan for perhaps 10 years of retirement, but today they can expect to live well into their 80s and even 90s due to improvements in nutrition and healthcare. This changing environment means that members face radically different financial requirements compared to the previous generation. These issues are a challenge for responsible plan sponsors.

While some will argue that these challenges further strengthen the case for DB plans in Canada, the opposite is actually true. The increased personal control of the DC plan allows the member to tailor contributions and investments to suit his or her personal needs. Now more than ever, members need a variety of highly accessible tools to help them exercise this control in a knowledgeable and confident manner.

Canadians should enjoy a dignified retirement in this new age in part because of the empowering support they receive from government, educators, the financial services industry and their employers--all of whom they, in turn, support. A move in the opposite direction--toward the continuation of paternalistic retirement plan arrangements--would take away from plan members the opportunity to control and direct their own future financial well-being.

For plan sponsors, this means increasing employee awareness of asset allocation models and educational materials. It also means providing sufficient access to both registered and non-registered DC plans so that members can proactively accumulate tax sheltered as well as non-tax sheltered savings.

This range is required to properly address the full spectrum of plan members' needs. There is no one financial solution that will fit all needs, so it is important to have flexible alternatives within all DC arrangements.

In many cases, DC plans initially emerged as an alternative for employers overburdened by DB plan regulation. But they are now also the best possible plans for employees. When properly structured, DC plans empower individuals and assist them in their overall financial planning with investment options, beneficial tax treatments and the cost savings inherent in a group plan.

The challenge for plan sponsors in this new age of retirement planning is threefold. First, they must provide a variety of solutions, including registered and non-registered plans. Second, they must diversify across investment options.

Third, and perhaps most critical of all, they must increase awareness among plan members about the need to save, the use of educational tools and the availability of information and advice provided by the sponsor. In meeting these challenges, plan sponsors will usher in the DC age in Canada. BC