The grasshopper spent the warm months singing away while the ant worked to store up food for winter. When winter arrived, the grasshopper was dying of hunger, and, upon asking the ant for food, was only rebuked for its idleness.

This fable is used to teach the importance of saving, but it misses the point. Did the ant save enough or too much? Did the grasshopper enjoy the summer and still manage to subsist in winter by scrimping and relying on social support? Capital accumulation plan (CAP) members face this very dilemma, since CAPs focus more on saving and investing than on retirement income. A retirement income planning tool, then, can help to overcome this challenge by translating accumulation into future income.

The first step is to determine the income target. Conventional wisdom calls for replacing 70% to 80% of income in retirement. Recent analysis demonstrates, however, that for many, the neutral retirement income target may, in fact, be substantially lower after the retiree adjusts for expenses that diminish or disappear in retirement. These expenses typically include mortgage costs, childcare, taxes, retirement savings and employment costs.

Once the income target is established, most tools have the same basic functionality. However, progressive plan sponsors should consider whether a few less common but very powerful features should be present in the tool offered to their employees

Comprehensiveness: To ensure that maximum value is derived from a planning tool, the tool must be comprehensive, reflecting DB and DC programs, including closed plans, as well as entitlements from previous employers and other savings arrangements.

Expert Opinion: A critical assumption in any projection is the rate of return. Many tools will ask the user to input this key variable, though we know that very few non-experts can provide a realistic assumption. The best tools use expert insight and the actual investments chosen to determine a realistic rate of return, without ever asking the question.

Transparency: Presenting a single projection will mislead users into believing that results are known and that specific action will guarantee success or failure when, in fact, we know that results are extremely uncertain. The best tools simultaneously display a range of scenarios. This approach educates the user and assists with investment decisions that may impact pessimistic and optimistic scenarios differently. More importantly, this approach won’t mislead your employees and put you at unnecessary risk.

New and improved tools are in development. In the future, expect enhanced use of technology, both from an accessibility standpoint and in the form of integrated tools. Ultimately, employers must consider what they’d like their tools to achieve and how they should be used. However, tools should always be engaging and should spur employees to take action.

Idan Shlesinger is managing partner, capital accumulation plan services, with Morneau Shepell.

Get a PDF of this and other coverage from the DC Plan Summit.

Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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