A third (33 per cent) of Canadian employers have mandatory participation in their group retirement savings plans, according to Sun Life Financial’s new report on capital accumulation plans.
The report, which uses data from Sun Life’s proprietary CAP database of about 5,000 group savings plans, found that mandatory participation is more common in the public sector, such as universities, and least common in the technology industry.
“In some cases, depending on the level of paternalism, the employers want their employees to have some level of savings for retirement,” says Mazen Shakeel, vice-president of market development and group retirement services at Sun Life. “In other cases, where you might see higher turnover, employers feel less of an obligation to force employees in.”
Whether mandatory or not, employers are also moving towards shorter waiting periods before enrolment, with more plans moving to immediate participation when an employee joins an organization or at some point within their first three months. “You’ve kind of got them as a captive audience when they join and you want to get them enrolled as early as you can,” says Shakeel. “It probably will drive higher participation levels.”
Plan participation is essential to ensure employees save properly, Shakeel notes. If an employee doesn’t join the plan, they may not be able to ever retire. “From an employer perspective, that could mean they stay in the workforce well into their 60s or 70s in some cases . . . It does provide some challenges for employers that are looking for an orderly transition of employees in and out of their workforce if there are folks that can’t afford to retire. Maybe they’re productive, maybe they’re not. Maybe they’re healthy, maybe they’re not. But it’s the employee choosing rather than the employer choosing.”
Almost 80 per cent of plans for salaried employees include some amount of employer-matching contribution, according to the report, while about one in five plan sponsors automatically contribute to a CAP without requiring employees to contribute. For instance, some plan sponsors that have recently moved from a defined benefit to a defined contribution plan may contribute whether or not the employee does, says Shakeel.
“So they’re providing some sort of transition for employees by providing usually a relatively low level of contribution but something nonetheless to ease the pain, if you will, and also make sure all employees have some level of retirement savings,” he says.
Employees are also saving more in both defined contribution plans and other savings vehicles such as tax-free savings accounts: the report found plan members saved an additional nine per cent in 2015, though it notes some of that can be attributed to wage inflation.
The report also points to target-date funds as a way to help plan members invest their retirement assets. It notes that five years ago these funds represented seven per cent of CAP assets invested with Sun Life. Today, that number has grown to 22 per cent.
“Investing in a target-date fund doesn’t solve all of your problems,” says Shakeel. “Investing in the 2020 fund won’t necessarily allow you to retire in 2020 if you aren’t saving enough. And so it’s important for employers to look at their investments at the same time as they’re looking at participation rates and saving rates. . . .”
He also notes plan sponsors must do the same due diligence on these funds as on their other investments, and consider other options if certain funds don’t meet their expectations.
The report also found women are saving less than men, possibly due to lower wages, though Shakeel notes the rise of target-date funds may neutralize this trend. Another challenge is the “disturbingly low” account balances of many employees in their 40s, 50s and 60s.
“It’s never too late to change but if somebody in their 50s only has $100,000 saved for retirement, they’re going to be working a long time,” he says.