Plan sponsors need to take a break from debating education vs advice. They should instead focus on proper plan design and member communication in reducing risk.

Running a business in today’s global economy involves dealing with challenges well beyond the risks associated with sponsoring a retirement program. There needs to be a balance between providing a valued benefit to your employees and protecting yourself against future liabilities. Proper plan design and communication are two essential steps that can alleviate some of the risk—yet they don’t receive the attention they deserve.

When considering plan design, plan sponsors should examine contribution levels, member participation and investment options. To begin with, a design that maximizes the accumulation necessary to produce a reasonable retirement income for the plan member significantly reduces sponsor risk.

An appropriate contribution level is also key for a plan member to retire with an adequate monthly income.

Participation is another important area of plan design. An employee who doesn’t join the plan, foregoing employer contributions and wholesale investment costs—is much less likely to have an adequate retirement income.

Investment options are another important component of plan design. Too many or too few investment options will cause problems. Yet, too few options and a plan member who doesn’t have an adequate return may claim a lack of choice hindered their ability to achieve the necessary rate of return. But if there are too many options, the plan member may claim the choices were too complex and confusing, leading to the wrong choice and jeopardizing retirement income.

Then there is the issue of locking in, which recent regulatory changes have failed to adequately address. There’s an old pension saying: “the bad thing about a pension plan is that the money is locked in; the good thing about a pension plan is that the money is locked in.” And plan members who fail to lock in could have insufficient savings down the road. According to figures recently released by Statistics Canada, between 1993 and 2001, the number of people who withdrew funds from their RRSPs increased 84%.

The need for communication is clear. It is important to develop a communication plan that has the simple goal of getting employees to join. A plan member then needs to understand the pension plan promise and that which is perhaps as important: what isn’t promised. The member needs to understand:

• the sponsor’s contribution commitment and the plan member’s contribution commitment;

• that a retirement amount is not being promised;

• the potential gap between what the plan will contribute to retirement and what is required;

• that additional savings and government benefits are likely needed to achieve a reasonable retirement income.


If there’s an area that gets an extraordinary amount of focus, it’s plan member investment education and advice. Debate about crossing the line from education to advice has become a staple topic over the years in any defined contribution discussion.

But it may be time to consider taking the pressure off the education process and reducing the risk associated with a lack of plan member investment knowledge. This can be achieved through more use of asset allocation funds, which could see a novice plan member achieve returns similar to an investment expert with minimized volatility.

The novice investor could have a sophisticated investment strategy that includes a mix of asset classes, multiple managers, optimization utilizing the efficient frontier, automatic rebalancing and periodic review and re-optimization— wrapped up in one unit value.

It’s important to help your employees achieve a comfortable retirement by sponsoring a plan. At the same time, risks associated with this effort need to be controlled. If you focus on participation and contribution levels, make sure your members understand the promise being made, and utilize simple investment choices, you can dramatically reduce risk.

Bill Kyle is senior vice-president, Group Retirement Services with Great-West Life, London Life, Canada Life in London, Ont.

For a PDF version of this article, click here.

© Copyright 2005 Rogers Publishing Ltd. This article first appeared in the April 2005 edition of BENEFITS CANADA magazine.


Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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