This is Part 1 of our annual survey of CAP members.
Employers that provide capital accumulation plans (CAPs) to help employees save for retirement may want to double check on their plan members’ perceptions of retirement readiness. This year’s CAP Member Survey—which, for the first time, included questions for plan sponsors—found a significant gap between sponsors’ and members’ beliefs and expectations.
A growing number of plan members (50% compared with 46% in 2013 and 40% in 2012) feel they are financially prepared for retirement, and 70% of plan sponsors believe that their average employee is in a good position for retirement, based on his or her stage in life. Considering the responses to other questions in the survey, both members and sponsors may be overly optimistic about members’ current retirement readiness.
The gap between what plan sponsors and employees think, in terms of financial preparedness for retirement, is one of the key areas that need to be addressed, says Anna Del Balso, associate vice-president of market and business intelligence for Standard Life. “It is very important that sponsors define the objective of the plan and make the employees aware of what the employer is willing to provide as a pension plan. As well, sponsors need to better understand where their own employees are in terms of financial preparedness and what their needs are so they can adapt communication plans to address those specific needs.”
On one level, plan members’ expectations are becoming more realistic: they plan to retire later (at 63.3 years of age, on average), they expect to actually have 58.4% of their current annual income in retirement, and they expect to have saved $709,201 by retirement.
“It’s a challenge for many members to understand how much is enough to save for retirement, and I’m glad to see a connection between what they are saving and what they will need in retirement,” says Colin Ripsman, a principal at Eckler Ltd.
“With about $700,000, they could expect an annuity of between $40,000 and $50,000, and, together with government benefits— especially with a second income— I think that is a reasonable level.”
This year’s survey also shows a significant increase in the number of CAP members (71% versus 60% in 2012) who are confident that their employer-sponsored retirement plan will provide the amount of money they expect in order to meet their financial objectives for retirement. Although few (30%) say they have a formal, documented financial plan that outlines at what age they will retire and the amount of money they need to retire by that age, 62% believe they are currently on track to meet their targets. Members expect a 12.9% return on their investments year over year (down from 14.3% in 2013) and an average rate of return of 17.8% over the long term until retirement. They also say they are currently achieving a 13.7% rate of return on their investments—a jump from 10.8% in 2013 and 6.3% in 2012.
The apparent gap between the confidence people have that they will have enough money in their plans to retire, the percentage of income expected at retirement and what members are actually accumulating in their plans could lead to potential problems for sponsors down the road when members’ expectations don’t meet the results at retirement age, says Ripsman. “I see a potentially huge workforce issue where people can’t afford to retire but want to be gone a long time ago. It’s important for plan sponsors to manage expectations—and, more importantly, to change behaviours and remove some of the mismatches in terms of expectations of results.”
Members’ lack of confidence shows that simply offering a CAP isn’t enough to prepare employees for retirement, says Michelle Chusan, director, retirement programs & communication, with Hudson’s Bay Company. “We need to show that investing in the plan has advantages such as low fees that ultimately produce higher balances and greater retirement income. We also need to explain company matches and encourage them to take advantage of that. By making it relevant and easy for them to understand, we can increase their confidence.”
Get a PDF of the full report.