Matching employer contributions in capital accumulation plans are as close to free money as employees can legally get.
“You’re not changing your risk — because the money goes to the same fund it would otherwise — and you’re getting two-times the return,” says Eric Monteiro, senior vice-president of group retirement services at Sun Life Financial Inc. “You cannot possibly find, no matter how hard you look, an investment that is as effective.”
And yet, the Association of Canadian Pension Management estimates around 40 per cent of employees in this country fail to take full advantage of their employers’ match for defined contribution pension plans, group registered retirement savings plans, tax-free savings accounts and deferred profit-sharing plans, leaving nearly $3 billion on the table every year.
The financial world is full of these types of paradoxes — in which ordinary people appear to be acting against their own interests, according to Kelly Peters, most recently the chief executive officer of behavioural science consultancy BEworks Inc.
“The science of nudging is about understanding the gap between our real and experienced lives and these perfect flawless avatars that don’t exist in reality,” she says. “Once you see where the bugs are in the code, you can start working on hacks that will help bridge that gap.”
In the realm of CAPs, this approach has led to the development of features such as automatic enrolment, automatic escalation of contribution rates and default funds, each of which provides a lever for plan sponsors that want to set their members on the road to better retirement outcomes.
“For companies that aspire to be seen as the best managed, it’s not just good pay that makes them a good company,” says Peters. “It’s nudging employees to do the right things, not just for their present selves, but also for their future selves.”
Sun Life’s own experiment with auto features for its employee pension plan confirmed its support for the concept, after participation rates soared to 95 per cent among new hires. “It’s one of those few things in business life where it’s win-win-win,” says Monteiro. “Society wins, plan members win and plan sponsors win.”
However, many employers seem to be subject to some of the same inertia that inhibits their employees’ financial decision-making. Only about half of Aon’s plan sponsor clients have implemented automatic features in their CAPs, even though a much larger proportion support the idea, according to Nadine Tabet, associate partner in Aon’s wealth solutions practice.
“The reason why uptake is low is because the legislation in Canada does not make it easy,” she says, noting each province has its own rules concerning the levels of consent required of an employee before joining a plan or changing their contribution level.
Faced with the prospect of an auto features-enabled CAP that treats members differently depending on their location and seniority or a uniform automatic CAP design with built-in compliance risks across jurisdictions, Tabet says many pension plan sponsors prefer to stick with their existing non-automatic options.
In the U.S., the landmark 2006 Pension Protection Act took care of employer concerns about conflicting laws by confirming that federal legislation concerning 401(k) plan auto-enrolment supersedes any state-level prohibitions on withholding wages without consent from employees, as long as workers are given advance notice and an opportunity to opt out.
Meanwhile, in the U.K., plunging workplace pension coverage prompted the government to roll out auto-enrolment reforms that forced most of those without an existing plan to opt out, rather than opting in to company plans. Beginning in 2012 with only the country’s largest companies, the phased-in program has since expanded to almost all employers, resulting in the auto-enrolment of more than 10 million employees.
The Secure Act 2.0 — currently before the U.S. Senate after passing the House of Representatives with bipartisan support — would go even further if signed into law, by requiring employers to automatically enroll new employees in 401(k) plans with a pre-tax contribution level of three per cent that must rise by one percentage point each year until it reaches at least 10 per cent.
Canadian regulators have been less bold in comparison. A decade ago, Alberta followed B.C.’s lead in enacting almost identical pension law provisions, each of which indirectly enable the use of automatic features: first, by allowing employers to make pension plan membership a condition of employment; and second, by mandating the inclusion of contribution requirements as part of the plan text, along with an assurance that the provincial superintendent accepts texts that provide for auto-escalation.
In November 2021, the Financial Services Regulatory Authority of Ontario offered its own back-handed endorsement of auto features in DC plans, confirming in a technical interpretation that the province’s Pension Benefits Act “does not prohibit” their use in plan design. However, the regulator ducked the issue of employee consent, advising employers to seek legal advice on how their auto features may interact with Ontario’s Employment Standards Act, which deals with deductions from wages.
All of these Canadian efforts are “half-measures,” says Marianne Nguyen, a member of the ACPM’s national policy committee and program director of decumulation at Sun Life. “It’s not truly automated features because there are still steps behind the scenes that an employer needs to follow.”
According to Nguyen, there are no jurisdictions in Canada where a plan sponsor can automatically enrol an employee in a CAP and increase their contribution without their express consent, which usually occurs via employment contracts that make membership in the plan mandatory for new hires.
Reducing red tape
While Sun Life has the financial and administrative resources to adjust its onboarding processes to enable auto features in its CAPs while also ensuring legal compliance, it’s a different story for small- and mid-sized employers, especially in the midst of an uncertain and volatile economy.
“It’s a big burden, which might make them unwilling to make the wholesale design changes that are necessary,” says Stephanie Kalinowski, pension and benefits lawyer at Hicks Morley Hamilton Stewart Storie LLP who also chairs the ACPM’s national policy committee.
Even then, making membership in an auto features-enabled CAP a condition of employment raises the prospect of a two-tier workforce, since existing employees will have to remain outside the plan or ineligible for auto-escalation without giving further consent to the changes. “It’s unappealing to have differential treatment between new employees and existing ones and it’s too cumbersome to administer plans for two different groups,” says Kalinowski.
In 2020, the ACPM wrote to Ontario’s Ministry of Finance, asking it to smooth the way for plan sponsors to adopt auto features by amending the ESA and PBA in such a way that employers are explicitly authorized to deduct employee contributions from payroll automatically when workers are given advance notice and an opportunity to opt out.
The ACPM also recommended that the legislative changes apply to all CAPs, rather than just DC pension plans, in order to account for the increasing popularity among plan sponsors of alternatives such as group RRSPs, DPSPs and TFSAs.
In recent months, the association reiterated its position in a further letter to Ontario’s Ministry of Labour, as well as in submissions to government-initiated reviews of pension legislation in both Alberta and Prince Edward Island.
Ontario “is committed to reducing regulatory red tape, including with respect to employment standards and pension plan administration,” said Scott Blodgett, a spokesperson for the province’s Ministry of Finance, in a statement to Benefits Canada. However, he also alluded to the FSRA’s recent guidance as he noted automatic features are allowed under the current legislative framework. “The government is reviewing the ACPM’s proposal.”
Nguyen and her ACPM colleagues are hopeful their increasingly intensive lobbying effort will yield legislative change in at least one province, setting off a domino effect across the country. “In the pension policy world, we see Ontario, Alberta and B.C. tend to move in tandem. When we see any big public policy changes — for example, with solvency funding — those tend to be some of the provinces that are first to lead.”
At Aon, Tabet is in full support of the ACPM’s efforts. Still, she warns that reversing the onus on employees — to opt out of CAPs rather than opting in — increases the pressure on plan sponsors to make appropriate choices on their behalf.
“They have to take a lot of care and diligence to design the default options for contribution rates and investment strategy. It has to be well designed, well governed and well communicated.”
Michael McKiernan is a freelance writer.