As the defined contribution pension industry continues to mature, employers are considering ways to improve them by introducing elements of defined benefit plans, an industry expert told an event on Wednesday.
In fact, plan sponsors are looking at how they can provide for the “DBification” of defined contribution plans, said Idan Shlesinger, managing partner at Morneau Shepell Ltd., during a panel discussion on the future of group retirement programs at an event hosted by TD Asset Management Inc. in Toronto. While defined contribution plans have traditionally focused on providing a savings vehicle, there have been gaps when it comes to ensuring they provide effective retirement income, he noted. As a result, employers are focusing more on plan shortcomings, what their objectives are and whether they’re meeting them. “We are seeing plan sponsors asking these questions,” said Shlesinger.
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“The investment perspective is probably the biggest sea change that we’re seeing,” he added, suggesting plans have moved away from the assumption that more choice on fund lineups is good. Too much choice, according to Shlesinger, can lead to paralysis, especially when plan members typically aren’t experts on investments.
The result, he noted, is an effort in some cases to reduce the role of the plan member in favour of more defaults in plan design that still provide the ability to opt out. When it comes to investments, for example, plan sponsors are looking to simplify their fund lineups and remove any overlaps, said Schlesinger.
When it comes to adopting more of a defined benefit approach, decumulation is an obvious concern. Jeremy Evanson, a partner at Morneau Shepell who also spoke on the panel, noted the issue of employees retiring with “huge sums of money but . . . lacking great options,” including when it comes to dealing with their investments.
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“Big questions and small mistakes can lead to almost catastrophic circumstances,” he said, noting the impact of higher investment fees when people retire. While group-style decumulation options are emerging as employers consider solutions such as registered retirement income funds, some plan sponsors are still leery of the responsibility, Evanson noted. Shlesinger, however, noted he has seen a change in mindset among the legal community towards the notion that not acting on some of those issues may be a legal risk to employers.
But for the third panellist, TD Asset Management relationship manager Rebecca Middleton, the focus for the small- and mid-size employers she tends to work with is more on how they can help employees financially through company contributions to vehicles such as registered retirement savings plans. “I don’t think they’re thinking that long term in terms of decumulation,” she said, noting group RRSPs tend to also be a good vehicle for helping employees boost their financial health through education and awareness.