Imagine a scenario where an employee can’t afford to opt into their company’s defined contribution pension plan because of debt. Regardless of whether it’s a mortgage, student loan or credit card debt, the employee has more urgent short-term priorities, so saving for retirement is being pushed to the back-burner.
How can employers ensure they’re talking to their staff about debt, as well as the various options available to help them think about saving for the future, despite these short-term barriers?
When plan sponsors are helping their employees navigate the choice between paying off debt and saving for retirement, it’s important for both parties to consider whether an employer match is offered.
Even with student debt, it can still make sense for an employee to save for retirement, says Tom Reid, senior vice-president of group retirement services at Sun Life Financial. “When you contribute to your retirement savings plan, if you’ve got an employer match for your $1,000, you might be getting a $1,000 return or a $500 return. So you’re getting a 50 per cent to an 100 per cent return just for making a contribution. It’s kind of hard to match that financial leverage in a debt repayment program.”
Laurie Campbell, chief executive officer of Credit Canada Debt Solutions, agrees the employee match is an important factor. “The one thing is, if you’re in a [workplace] pension plan, you’re . . . getting usually around 50 per cent for free — the employer kicks in 50 per cent and you kick in 50 per cent. So we encourage that individuals take advantage of that as much as possible while trying to pay down their debt.”
It’s also important for employees to have the proper tools and education to help them make the best decision around their savings choices, says Joseph De Dominicis, vice-president of integrated well-being solutions at Morneau Shepell Ltd.
“For example, you might have a savings plan offered by your employer that you can invest as you like, but if you’ve got credit card debt that you’re paying 12 per cent on, it probably makes sense to direct some of your savings to pay down that debt. It’s hard to know without looking at your full picture, but employees need to understand those trade-offs and have tools to help them optimize their decisions.”
Not mutually exclusive
Paying off debt and saving for retirement don’t have to be mutually exclusive. New programs and options for plan design are starting to emerge to help employees with both their long- and short-term savings goals.
In 2018, Great-West Life Assurance Co. introduced a student debt repayment program that allows plan members to add money to pay off their debt while employers match the payment in a retirement savings vehicle.
“If you think about the problem that many of these people might face if they must pay down student debt — that’s a requirement — but then they’re not really left with any money to put towards their savings; they don’t get either the match or the main dollar contribution,” says Ryan Weiss, the company’s vice-president of product and experience.
“The difference for this program is, instead of requiring me, as an employee, to put my own money into retirement savings, it actually will recognize my repayment of the student debt as that contribution and then the matching element the employer gives goes into the retirement savings account.”
Indigo Books & Music Inc. currently offers this program to its employees. Where staff provide evidence they’re making student debt payments, the employer matches up to three per cent in the company’s deferred profit-sharing plan.
Uptake in the new program has been amazing, says Kate Beckett, vice-president of total rewards and human resources technology at Indigo. “Just being able to help employees saving for retirement while paying down their debt puts them ahead of the game. Then once they’ve paid down their debt and they see that they’ve been able to save, we know they’re likely to keep saving. And that’s why this program is really important to us.”
Discussing personal finances continues to be a stigmatizing issue, whether in the workplace or more broadly, notes Beckett.
A 2019 survey by Credit Canada Debt Solutions found a third of respondents cited personal debt and bankruptcy when asked which money topic they least like to talk about. And a 2018 survey by the Canadian Payroll Association found 47 per cent of respondents said they’d be uncomfortable talking about debt with a colleague or a peer.
Employers can take measures to make employees more comfortable discussing both short- and long-term financial priorities. One option is plan design, such as the student debt repayment program, says Beckett, noting Indigo also introduced a tax-free savings account in June 2019 to help employees save for the short term.
The organization also puts a focus on financial education, through communications resources, an employee and family assistance program and by hosting a financial wellness month.
“We get our statistics back from our EFAP provider around what the popular items are that people are searching for and debt is certainly high on that list,” says Beckett. “So we would advise our [human resources team], and also the leaders in the field, to make sure that they’re reinforcing that those tools are available to people.”
When Indigo introduced the program, it didn’t know how much interest to expect, says Beckett. It started by calculating the eligible population between ages 22 and 35, believing this group comprised the bulk of people with student debt. In reality, however, people from all ages and points in their career signed up for the program.
“I don’t know how many people are coming forward from different [financial paths],” she says. “We just make sure we have the tools and education available for people and we don’t assume where people are coming from.”
Yaelle Gang is editor of the Canadian Investment Review.