2014 CAP Member Survey: Plan risks and the employer’s role

This is Part 2 of our annual survey of CAP members.

CAP sponsors may be encouraged to see that member satisfaction levels remain high, both with their plans (88%) and with the performance of the plans’ investments (87%). But some of the other findings of the 2014 CAP Member Survey should raise eyebrows about the potential risks related to sponsors’ and members’ different views on each other’s responsibilities.

On the positive side, the majority of plan members (69%) and non-members (54%) would support auto-enrollment in their employer-sponsored retirement plan. And a growing number of members (64% compared with 49% in 2013) support the implementation of auto- escalation of contributions (increasing contributions over a specific timetable unless a waiver form is signed).

“We know in the U.S., these types of auto features positively impact retirement readiness,” says Rod Smith, director, client services, central region, group retirement services, with Great-West Life. “Encouraging legislative change in Canada to promote these features would have a tremendous impact on retirement income adequacy— and, based on the results of the CAP Member Survey, it looks like Canadian workers are ready to support this approach.”

Less encouraging, however, is the 63% of plan members who believe that if they don’t make their own investment choices, employers have the responsibility to ensure their contributions are invested properly. More than half (54%) say their employer is responsible for ensuring that the investment choices they make are the “best choices for them,” and 66% trust that the employer’s default investment will provide them with adequate funds for their retirement. Meanwhile, only 46% of sponsors agree that the default option should provide an adequate long-term return for the member, while 27% say the default option should be a conservative choice that will not lose money.

A significant percentage (42%) of members also believe that, ultimately, their employer has a responsibility to ensure that they will retire with enough funds to live at an acceptable standard of living. “As a plan sponsor, I cringe to see that so many members believe we have a responsibility to ensure they will retire with enough funds,” says Larry Ketchabaw, manager of benefits for Unisource Canada. “There are three components of retirement [the employer- sponsored plan, government plans and personal savings], and it seems we are probably not doing a good enough job to make people understand that we are only one part of it and that they have a bigger responsibility.”

Most CAP sponsors acknowledge their responsibility to explain to plan members the consequences of making bad investment choices (71%), to explain to new members the consequences of not making
an investment choice (79%) and to provide employees with tools and resources to help them make sound decisions regarding their employee retirement plan (95%). But only 64% of sponsors agree they need to ensure that plan members are using a vehicle that will provide adequate returns for an adequate retirement.

The potential gap between expectations and reality presents a significant risk to plan sponsors, says Janice Holman, who leads the DC consulting group at Eckler Ltd. “The biggest risk with a CAP is when someone gets to retirement, is disappointed and considers their course of action to make up the gap. Yet 27% of sponsors are still in the capital preservation camp, which is scary because we know that capital preservation investments are not going to lead to adequate savings and that 66% of members believe the default fund will provide them with adequate funds for their retirement. Sponsors face three risks: a business risk when people can’t retire at their chosen time, a legal risk if enough employees come together to form a class action and a reputational risk to the organization.”

Strong support for an automated solution from both members and sponsors is fantastic, Holman says, adding “that’s what’s going to get us there.” But she is concerned that only 79% of plan sponsors feel the need to communicate the consequences of not making investment choices, since that’s a CAP Guidelines requirement.

Holman also expresses worry that only 61% of plan sponsors are concerned about the liability of providing financial advice to members. “I would be very careful about what I was doing in terms of a plan sponsor providing direct advice,” she warns. “If you look at the court cases that we’ve had in Canada, they mostly stem from communications and misunderstandings.”

Get a PDF of the full report.