The combination of several innovations in defined contribution pension plan design can dramatically improve retirement readiness across income levels, according to a new report by Mercer.

Its annual retirement readiness barometer analyzed the impact of two key innovations — variable payment life annuities and exposure to alternative investments like private markets — alongside plan flexibility for early career savers, which it highlighted in last year’s report.

“This year’s barometer illustrates that innovation in DC is aligning to better support retirement and savings outcomes,” said Bernadette Chik, Mercer Canada’s DC leader, in a press release. “By offering flexible savings options, access to annuity-like solutions like [VPLAs] and broader diversification through alternative assets, employers can create a truly powerful DC retirement ecosystem.

Read: Employer matching key to supporting young workers’ retirement readiness: report

“This not only empowers their employees to save more effectively, regardless of their life stage or income, but also strengthens the overall financial well-being of the workforce and promotes a dynamic talent pipeline.”

The Mercer report analyzed two scenarios for early career employees. In the first, a Canadian worker was unable to fully benefit from their employer’s matching contributions since the start of their career because they had to prioritize other financial needs. During the accumulation phase, their investments lacked full diversification with only five per cent allocated to alternatives. And finally, at retirement, they didn’t have access to cost-effective decumulation options to convert their savings into a reliable income stream.

In the second scenario, the worker had access to a flexible employer-sponsored retirement plan from their first day with the company. The flexible plan allowed them to fully capture their employer’s five per cent matching contributions, even while they managed other financial priorities. In addition, their portfolio was diversified with a meaningful allocation (15 per cent) to alternative investments. And when they reached retirement, they had decumulation options, including the ability to turn their savings into steady income through a VPLA.

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“This scenario reflects a smarter DC ecosystem — one that improved retirement readiness for this worker by three years,” noted the report. “For higher earners, the impact is even greater, resulting in improved retirement readiness by as much as five or more years.”

Indeed, the report highlighted two main advances for DC plan members, including:

  • Recent updates to regulations, including around VPLAs, will help DC plan members benefit from longevity pooling to reduce the risk of outliving their savings; and
  • As target-date funds broaden their allocations into alternatives, plan members can increasingly access and benefit from a growth source that was previously available only to institutional and large investors.

“With both of these innovations, DC plan members maintain control and can tailor both their accumulation and decumulation experience for their financial journey,” said the report.

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