With group retirement plans aimed at helping members avoid risks and achieve their savings goals, defined contribution plan sponsors are uniquely positioned to step up and take a more active role in managing risk, said Christine van Staden, regional vice-president of group customer and national accounts business development at Canada Life, during Benefits Canada‘s 2023 DC Plan Summit.
The manageable risks include plan availability, access to plan information and professionally managed investment funds, she added, while the unmanageable risks include high inflation, volatile markets and plan member complacency. “Even though these are risks that plan members have no control over, they do impact members’ savings, and that means we should think about how to find new — and more — ways to influence positive outcomes.”
It’s important to look at closing the gap between manageable and unmanageable risks, as well as shifting more unmanageable risks to manageable ones, said van Staden. “While we don’t set the interest rates and we don’t have a crystal ball, there’s a role that we can play to help mitigate and protect our members from the impact of those risks — essentially, shifting that balance.”
On the unmanageable risk of high inflation, Elisha Ribeiro, Canada Life’s national director of group customer, recommended plan sponsors ensure their investment lineups include options like real estate and inflation-linked bonds. In addition, she noted that, if investments are well-diversified when equity markets slump, bond markets can help offset any losses.
“Unfortunately, with this economic cycle, both have been down. This has only happened three times since the 1930s. Market risks impact everyone, some more than others depending on when they need to draw on their savings or start drawing an income.”
On the unmanageable risk of volatile markets, Ribeiro noted plan members in the accumulation phase need to understand their personal risk and tolerance — and that they’re in it for the long haul. “Consider offering members an all-in-one default solution like asset allocation funds. If members are invested in portfolios that already take into account risk characteristics of the fund, they won’t be as likely to make emotional decisions, they won’t be impacted by volatility and they’ll stay the course.”
And on plan member complacency, van Staden highlighted DC plan design options like automatic enrolment and escalation, as well as defaulting to the maximum contributions. “We absolutely need to start seriously considering building these rules into our plans.”
For example, one of Canada Life’s largest DC plan sponsor clients adopted auto-enrolment to increase member participation. In 2015, it had a 72 per cent participation rate with members auto-enrolled to receive a base employer contribution. Members could then choose to contribute up to four percent, which was further matched by the employer.
The employer created an education campaign to help members see the value of the plan, using targeted communications to encourage more members to contribute on an optional basis. Later in 2015, it implemented auto-enrolment, changing the optional member contribution default from zero to a maximum of four per cent, thus increasing the employer match.
The results speak for themselves, said van Staden, noting plan participation across all optional contribution rates increased to 95 per cent within the year. And it has been sustainable — in 2023, participation is up to 98 per cent. “It’s an amazing example of the positive effects of implementing auto-enrolment, default to the maximum, member-optional contribution and also a very creative example of employer match.”
For all plan sponsors, she said, knowing they’re doing all they can to minimize risks and provide members with education, ensure fund lineups include products that adjust to volatility and consider plan design changes such as automatic features will help members more effectively save for retirement.
Read more coverage of the 2023 DC Plan Summit.