Defined contribution (DC) plan sponsors face a catch-22 when it comes to offering retirement education. Whether they offer it or not, employees could potentially raise the hue and cry—with legal counsel in tow.
But the education issue worries some consultants. There doesn’t seem to be enough of it—or, rather, enough of the right kind. And in this current market downturn, education is important because plan members need to understand what they should and shouldn’t do when the markets plummet.
Certainly, it’s been a tough year for DC plans. The 2008 Top 50 DC Plans list had 18 plan sponsors with negative returns—last year, there was only one. And while many plans have enjoyed double-digit returns in the past, this year, many plans’ returns were in the single digits.
Going Long Term
Most plan sponsors have not been receiving panicked calls as a result of these single-digit— sometimes negative—returns this past year. However, Zaheed Jiwani, senior investment consultant with Hewitt Associates, says there are always a few members who will overreact. “They’re reading the news and reacting to what they’re hearing.”
So what should plan sponsors be doing to keep these members calm? “Plan sponsors should be giving the message, ‘Don’t panic; revisit your investment profiles and follow the discipline of the investment process that’s in your member education kits,’” says Greg Hurst, principal and national DC practice leader with Morneau Sobeco.
“We try to encourage them to look long term instead of phoning every month to find out what [the plan] did,” says Susan Service, director, pensions and investment, with the University of Victoria Pension Plan (No. 15 on the Top 50 DC Plans list).
Service says she and her team have reminded plan members not to become accustomed to the double-digit returns they’ve seen in the past. “We’ve been saying, ‘Don’t keep expecting this, don’t keep expecting this.’” Last year, the plan made 2.7% after expenses. This year, to the end of June, it showed a loss of -0.52%. “Not results that we particularly like,” says Service, “but that was what we had been warning members to watch out for.” Indeed, some members may hold unrealistic expectations of what their plans will achieve. In Benefits Canada’s 2008 Survey of Capital Accumulation Plan Members, 78% of those with a formal financial plan hoped to achieve an average annual rate of return of 21%—a finding that may be attributed to plan members’ knowledge of the excellent returns of Canadian equities in the past.
Similarly, in 2007, the Saskatchewan Pension Plan (No. 40) posted a return of -0.3%. “Barely negative,” says Kathy Strutt, general manager with the plan, “but it was our first negative return since we started in 1986.” While Strutt says she has received a few calls, most of the plan members understand that a pension plan is a long-term investment. “A lot of it is, ‘What happened? What did you guys do?’ [Then] you explain the market and what’s going on.” But Strutt knows that the current market is not just a one-time incident. “We’re not out of this by any means,” she says. “The average of 10% return isn’t, in the short term, going to be happening. Part of what we’re having to do is to manage the lowering of expectations of growth.”
When the Public Employees Pension Plan in Saskatchewan—No. 1 again this year on the Top 50 list—introduced new funds last year, it also stressed the long term. “When we rolled out the new funds, we did talk to everybody about taking a long-term view,” says John Hallett, assistant director of pension programs with the Public Employees Benefits Agency. “[And not to] panic over the short-term reactions.”
The University of British Columbia (UBC) Faculty Pension Plan (No. 6) takes a similar approach. “We send out a newsletter with the quarterly member statements advising how the funds are doing,” says Cheryl Neighbour, executive director, operations, with the plan. “Most of the faculty are very comfortable with the trustees’ investment strategy. Even though the rate of return is less than it was the previous year, they have heard from the plan over the years that it isn’t always going to be a banner year,” she says.
