You’ve decided to launch a defined contribution pension plan for your employees, but you don’t know where to begin. What’s the answer? How do you decide what’s right for your organization? Let’s take this step by step.
Step 1: Purpose
The first step is determining the intention and objectives of the retirement program. In other words, why are you doing this? Is the intent to provide your employees with a long-term financial benefit that will improve retirement readiness, or will the plan be offered as a means of attracting and retaining talented individuals?
Whatever your reason is for sponsoring a plan, setting one up isn’t a straightforward task — it requires planning and proper execution. An understanding of your employee demographics, turnover and compensation package will help you design a plan that meets your objectives and allows you to measure its success over time. Keep in mind, defined contribution plans transfer investment risk from employers to employees, but they don’t absolve sponsors of their fiduciary responsibility to the beneficiaries of the plan.
Step 2: Plan design
There are a number of plan design options to take into consideration. For instance, you must determine if the plan will be mandatory, contributory or non-contributory; who is eligible to join the plan; if there will be a waiting period; and what the contribution formula will be. All of this information will be documented in the plan texts.
Step 3: The statement of investment policies and procedures
The statement of investment policies and procedures is a mandatory document for any registered pension plan and is filed with the regulator. This document formally delineates your pension governance structure by establishing roles and responsibilities, conveying the investment philosophy, determining the objectives and policies for the investment of assets, and satisfying other requirements of the regulator. It’s reviewed at least annually and is periodically updated as necessitated by changes in regulation and best practices.
Step 4: Record keeper
Record keepers maintain member records and are the custodians of plan assets. The important question is: how do you differentiate the services they provide and select the right one for you? It’s recommended that plan sponsors follow a formal procurement process, which affords the opportunity to ask questions tailored to the plan’s expectations of services and other elements of plan administration, including plan registration. Record-keeper relationships are typically long term and, like any long-term relationship, selecting the best match shouldn’t be underestimated; your members’ happiness depends on it.
Step 5: Onboarding
Effective communication will be key in how smoothly this process progresses. First, you should notify employees of the plan as soon as you confirm your plan design. The advance notice will allow time for employees to review their financial situation and be prepared for questions during the remainder of the onboarding process.
Education sessions led by representatives of your human resources team and the record keeper are a very effective way to set the stage for successful onboarding and greater employee engagement. During these sessions, employees will learn about the specifics of the plan, including the contribution formula, investment options and the support available to them, all of which will be clearly summarized in the member booklet.
The enrollment process may be either paper-based or via an online interface. At this point, the member takes control and sets the contribution level, selects the investment options that are most appropriate for their profile and designates a beneficiary.
Your plan is now ready for contributions. Make sure your payroll procedures are aligned with the record keeper. Remember, you have the fiduciary obligation to remit contributions on time.