As a solution to employee inertia, many plan sponsors with defined contribution arrangements are looking at setting automatic features as their plan’s default option.
When the Royal Bank of Canada redesigned its DC plan in 2012, it introduced auto-enrolment for all new plan members following a six-month waiting period. Before the change, employees had a two-year voluntary window during which they could opt into the plan and were defaulted in after 24 months, says Tim Mark, the bank’s senior director of North American pension and savings.
“Employees don’t always pay attention to pensions right away, as we know, and when they do finally turn their attention to pensions, to find out that they were automatically enrolled as soon as they were eligible is just a much better experience than finding out that they could have enrolled years earlier but were only defaulted after a certain point.”
At the University of British Columbia, membership in the faculty DC plan has always been mandatory, with employees contributing five per cent from day one and a 10 per cent employer match, says Orla Cousineau, the university’s executive director of pensions.
“The design of the plan is to take care of people and to not require choice, so it’s mandatory participation. And then we’ve got what we think is a very good default investment option — a balanced fund that’s managed by a board of trustees — with over 80 per cent participation.”
With DC plan sponsors continuing to grapple with how to ensure their members are adequately preparing for retirement, which automatic features are they considering?
Tom Reid, senior vice-president of group retirement services at Sun Life Financial, says simplifying plan enrolment and contribution processes through automatic features will be critical to the success of retirement savings plans, especially in an environment where Canadians are leaving an estimated $3 to $4 billion on the table by not maximizing their employer match.
About 30 per cent of Sun Life’s plan sponsor clients use auto-enrolment without an opt-out provision, he adds, noting one of the main advantages of employer-curated default features is the removal of “tyranny of choice,” which can unnecessarily complicate the enrolment process.
Plan sponsors are also defaulting members into a certain investment vehicle, such as a target-date fund, and into a savings rate that provides the maximum employer match, says Reid.
Automatic escalation is another default feature that’s growing in popularity. It helps with the issue of whether plan members are contributing enough to meet their retirement needs. “You start off at a lower contribution rate — maybe early in your career you’ve got student debt to pay down, or you’ve got housing considerations or other financial priorities,” says Reid. “But over time, in partnership with your employer, we would nudge you to a higher contribution level, one that maybe gets you on a better track to save enough for your retirement.”
While making these processes automatic is a key step to improving member outcomes, it’s also an essential part of continuing to engage with employees to ensure they revisit their retirement savings plans after their initial enrolment.
Digital outreach using tools and apps is often a centrepiece, says Reid, because they allow plan sponsors and record keepers to frequently check in with employees, and to nudge them about making maximum contributions or updating beneficiary designations.
But while automatic features may go a long way to helping address issues around member inertia, they’re not the ideal solution for everyone, says Rosalind Gilbert, associate partner in retirement and investment consulting at Aon.
For other types of capital accumulation plans, such as group registered retirement savings plans, it can be complicated to implement default features for existing employees due to employment contracts or collective agreements. However, for new employees, plan sponsors can build these elements into employment letters and future collective agreements in accordance with employment standards law, says Gilbert.
As well, while the U.S. enacted the Pension Protection Act of 2006 to allow for auto-enrolment and auto-escalation, and the U.K. began phasing in mandatory auto-enrolment in 2012, the biggest barrier to these processes in Canada is provincial pension legislation, which varies by jurisdiction.
In Manitoba, enrolment in registered pension plans is compulsory for full-time employees, but the provision doesn’t apply to other types of CAPs, such as group RRSPs. Both B.C. and Alberta have brought in legislation permitting plans to provide mandatory enrolment as part of an employee’s terms and conditions of employment or auto-enrolment, with a right to opt out within a certain timeframe. And Ontario allows for mandatory membership in a registered plan, with the ability for members to opt out due to religious beliefs.
Regardless of legislative moves, Reid expects technology and artificial intelligence — through the use of mobile enrolment and virtual coaches, for example — to ultimately move the needle on automatic features more quickly.
“Not to say we wouldn’t love the legislation to change — we think it should, the way it has in the U.S. — but I think that will take a lot longer.”
Helen Burnett-Nichols is a freelance writer based in Hamilton, Ont.