With the snowballing shift from DB to DC pension plans over the last decade or two, Canadians have grown more accustomed to owning responsibility for their retirement planning. But retirement readiness is another issue. There’s still a big gap for most DC plan members between what they’ll need to retire comfortably and what they’ve actually accumulated.
Many DC plan sponsors are concerned and fear their employees won’t be ready to retire when planned. And this, employers feel, will have an impact on their business. Many are struggling to support the retirement readiness of their employees in traditional ways (e.g., account statements, newsletters and group meetings) that just aren’t working.
Adopt a risk-based approach
DC plan sponsors that realize they have a retirement readiness challenge typically don’t have a structured way to address it. While there’s no blueprint for every company and every retiree, a risk-based approach will help drive successful outcomes. But to understand and assess the risks inherent in DC plans, employers need to consider the following.
- Workforce management risk – Are employees going to be able to retire when they want to and when you need them to? How will delayed retirements affect employee engagement and health? What are the potential workforce planning and succession planning implications?
- Operational risk – Is there a strong governance process in place? Is the plan supported by effective communication and education strategies? Are vendors doing what they should be? Are you compliant and administering the plan accurately and efficiently?
- Financial risk – Are the investment funds performing as expected? Are the fees members are paying competitive? Are members aware of the impact investment risk might have on them? Are future severance costs being analyzed in case employees can’t retire as needed?
Align objectives and plan design
DC plan design typically focuses on competitiveness with too little attention to member outcomes and workforce implications. If the primary goal is to move the needle on retirement readiness, employers need to address a few plan design considerations.
- Does the plan’s contribution structure encourage optimal savings? A 2014 Towers Watson survey of DC plan sponsors shows most (58%) DC plans today have a minimum level of employee and/or employer contributions, and nearly three-quarters (72%) allow for employee voluntary contributions with an employer match. That leaves about one in four plans that still don’t permit employee voluntary contributions. And a significant percentage of plan members who are able to make voluntary contributions don’t contribute to the match threshold. Plan sponsors can have a big impact on employees’ financial well-being and retirement readiness by ensuring plan design and communication improve the likelihood of members maximizing their contributions.
- Do the plan’s investment options meet the diverse needs of members and facilitate effective investment behaviour? In recent years, many plan sponsors have streamlined the number of investment options available to simplify the choices for members (according to the recent Towers Watson survey of DC plan sponsors, the majority now offer between five and 14 funds). Many have also introduced target-date funds with diversified portfolios geared to specific retirement dates and automatic rebalancing to maintain the target mix. And some now offer both actively and passively managed funds that give members a choice of investment styles and fee structures. Plan sponsors need to evaluate the investment behaviour and sophistication of plan members and customize the range of investment options to reflect the composition of their workforce.
- How will plan members turn their DC accounts into retirement income? Plan sponsors have traditionally prioritized asset accumulation with little or no emphasis on decumulation (i.e., members draw an income from the retirement savings built up over their working lives). As a result, few members know how to shift from building savings to using them. The traditional options available to DC plan members—such as a life annuity or life income fund (LIF)—can be confusing and restrictive. At minimum, to confidently cross the threshold from working to retirement, members need to better understand the pros and cons of each of their options and how best to combine them for optimum flexibility, security and tax-effectiveness.
Progressive plan sponsors are beginning to look at the relatively new concept of allowing a variable income stream throughout retirement from the DC plan, now permitted or proposed in most provinces, including Alberta, B.C., Manitoba and Ontario. Similar to a LIF, members draw a regular income (subject to minimums and maximums) from their DC accounts while continuing to invest the remaining assets. From the members’ perspective, this solution mimics the concept of a lifetime employer pension while enabling members to continue accessing the DC plan investment options to which they’ve grown accustomed. What’s more, keeping retirees in the investment pool will inevitably result in more competitive investment management fees for all employees.
Communicate for optimal results
Most DC plan communication today addresses compliance and risk mitigation rather than improving member outcomes. Too often, it’s overly complex, passive and fragmented, relying too heavily on third-party provider offerings that aren’t aligned with a company’s objectives. It’s no wonder there’s low member engagement in retirement planning and sub-optimal retirement readiness.
Responding to the retirement readiness crisis requires a research-based behaviour change campaign. The DC plan risk assessment phase can and should include soliciting plan member views on a variety of fronts, including communication and education. Armed with this input, plan sponsors will be better positioned to develop a communication strategy that incorporates member behaviour change objectives, key plan sponsor messages, communication tactics and tools targeted to different audience segments, and success measures. Third-party providers (i.e., recordkeepers and fund managers) will continue to have to play an important role in the communication process, but plan sponsors need to be involved so the messages are clearly coming from the members’ employer. Given the increasing number of Canadians who will rely primarily on their DC plans for retirement savings, plan sponsors have a responsibility to support members in their quest for retirement readiness.
Using a structured approach that analyzes the risks (workforce management, operational and financial) of the DC plan, aligns plan design with sponsor and member objectives, fuels development of a customized communication strategy and measures outcomes is the best way to jump-start your company on the road to retirement readiness.
Karen Burnett is the leader of Towers Watson Canada’s defined contribution practice. The views expressed are those of the author and not necessarily those of Benefits Canada.