One, as Harry Nillson crooned in his classic breakup song, can feel like the loneliest number.
At the end of working life, many retirees with defined contribution pension plans can be left feeling alone and confused — cut off from their plan sponsors and pension administrators and sent out with their savings accounts into the retail retirement market.
The Co-operators Group Ltd. has long engaged its DC plan members in the accumulation phase, but it’s also focusing on decumulation by offering a new in-plan option, says Michael Dodd, the company’s director of pensions, treasury and shareholder services.
“We think that’s a difficult point in the past with employees [asking], ‘What do I do with the money? Who do I talk to for advice?’ It’s been a bit of a pain point for some of our members [and] we think this gives them another option that will be a little less stressful for them to stay in the plan they’ve been with throughout their career with Co-operators and we think that’ll be a plus for them.”
The new decumulation option, which was set to launch in early December, offers variable benefits payments. With legislation now passed in several provinces — including British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec and Nova Scotia — allowing for variable benefits in DC plans, Dodd expects more employers will start offering these options to members in the next few years.
In Ontario, which passed regulations allowing the option in early 2020 — plan sponsors that opt to allow variable benefits accounts can permit plan members to move the entirety of their DC plan savings to the account or members can choose to allocate some savings to the account while moving the remainder to an annuity or another option.
To help plan members of all ages and stages make the choice that’s right for them, the Co-operators is offering virtual advisors to help instil “confidence in what they want to do in retirement,” says Dodd.
Heard it through the grapevine
Even before retirement, the Co-operators’ members have options. The company’s DC plan has two contribution options — in the first, employees put in six per cent and the employer adds a 7.5 per cent match, while the second sees staff contributing five per cent and the employer matching at 6.5 per cent.
The main investment option is a balanced fund, with Canadian, international and U.S. equities plus a fixed income component. The Co-operators also offers members four different risk tolerance allocations, “so if you want to be 80 [per cent] equity, you can be; if you want to be 80 [per cent] fixed income, you can be; and then we have a few other options in between,” says Dodd.
The DC plan design aims for simplicity, he says, adding that this approach, plus the generous employer match, has made the plan popular with employees. Staff eventually have to join the plan depending on jurisdiction, but many opt in early.
“There’s been some good word of mouth about our plan at Co-operators, so younger people are encouraged by the senior people to get into the plan,” says Dodd. “We know some of our employees are our best proponents.”
When the organization’s in-plan decumulation option launches this month, the Co-operators will communicate the details, including making it clear that, while it isn’t mandatory, members who choose to keep their money in the plan will receive economies of scale they won’t get by themselves.
From there, members who opt to stay in the plan will choose their investment option, select either a life income fund or registered retirement income fund and then tell the plan administrators their annually minimum withdrawal rates. Their account will be updated annually with any retirement credits.
Papa do preach?
Zaheed Jiwani, a principal at Eckler Ltd., says decumulation is the next logical step for employers whose DC plans and member bases are both maturing.
Several long-term factors have accelerated the interest in decumulation alongside a rise in paternalism among DC plan sponsors, he says. For example, Canadians are living longer and so their retirement savings must last longer. Plus, the ongoing decline in defined benefit plans and an uptick in DC membership is leading to more responsibility being put on individuals. Layered on to those factors is low financial literacy around decumulation and the ongoing uncertainty wrought by the coronavirus pandemic.
While Dodd started looking into decumulation well before the pandemic, he says employees are looking to their employers more than ever to guide them through the entire retirement path. “From the employer point of view, we think [offering in-plan decumulation] does make us a little bit more paternalistic in the eyes of our employees and I think that’s a good thing.”
More money, less problems?
When it comes to in-plan decumulation, both Dodd and Jiwani say the biggest benefit to plan members is paying lower fees. For employers, the more money that stays in the plan, the better.
“We believe they’ll pay much lower fees by staying within our plan at retirement as opposed to taking their money to a retail scenario as an individual, so that will translate to extra years of income, dollar for dollar,” says Dodd.
Of course, like Nilsson’s many maudlin songs remind listeners there’s often dark clouds just over the horizon even on sunny days, Dodd admits there are some potential challenges for plan sponsors to consider before launching a decumulation option. One concern is the possible difficulty of staying in touch with retirees — but when there’s money involved, retired plan members are likely to be highly motivated to ensure their contact information is up to date, he notes.
The Co-operators did a lot of research in advance of the launch, which assuaged fears about taking on more legal risk, adds Dodd. “If you have a DC plan, you’re already taking the risk on, offering variable benefits within the plan is not that much more of a risk.”
Along with its plan administrator, the organization has put about three years of planning and research into the introduction of its decumulation offering. Dodd is confident it’s the right move and encourages other employers to consider taking the plunge. Ultimately, he says, being one of many is better than going it alone for both retirees and plan sponsors.
“We think [plan members’] retirement income will be stretched further into retirement, so that’s a big benefit . . . [and] we’ll retain assets in an already popular plan that will be enhanced from the employees’ point of view, so we really think this is a win-win scenario for everybody.”
Melissa Dunne is the managing editor of Benefits Canada.