Canadian regulators and plan sponsors can look to the U.S. for ways to solve many of their capital accumulation plan(CAP)challenges, according to panelists at the ACPM National Conference taking place this week in Charlottetown.
As defined contribution(DC)pension plans have evolved from a supplemental savings vehicle to the primary employer-sponsored retirement plan in the U.S., plan sponsors have taken steps to help their members achieve an adequate income in retirement, said Matthew Smith, managing director of retirement services at Russell Investments. In particular, he said employers have used “soft compulsion” to increase member enrolment.
Smith cited the results of a 2007 Hewitt survey showing that 36% of U.S. plan sponsors already automatically enroll their employees. Of those who don’t automatically enroll their employees, 55% are very or somewhat likely to do so in 2007. Similarly, 31% of plans already offer automatic contribution escalation, while 42% are very or somewhat likely to do so in 2007.
And U.S. policymakers have also done their part to help motivate plan sponsors to take these actions. The Pension Protection Act(PPA), passed last year, provides plan sponsors with fiduciary relief for auto enrolment, for auto contribution escalation and for using more appropriate funds as the default option.
“Employers are feeling more empowered to automatically put their employees in the DC plan when they’re hired,” said Smith, adding that the default option in the plan becomes much more important when members are being enrolled automatically. As such, more and more plan sponsors—40% according to a 2006 study—are turning to lifestyle or target date funds as their default option.
Canada on the other hand, has been slower to adopt some of these initiatives, said Zaheed Jiwani, head of DC investment consulting with Hewitt Associates. He pointed out that target-date funds weren’t available in Canada until 12 years after they appeared in the U.S. Since they were first brought to Canada in 2005, the number of plan sponsors using target date funds has climbed to 19%. “We’re probably going to see this number shoot through the roof,” he said.
As for auto enrolment, he noted that significant barriers prevent Canadian plan sponsors from implementing the strategy. While the PPA in the U.S. provides fiduciary protection for plan sponsors who implement auto enrolment, there is no equivalent legislation in Canada. The CAP Guidelines, which provide the industry standard for CAP sponsors, don’t even mention auto enrolment, and plan members are required to fill out a form in order to enrol for their DC plan, making auto enrolment more difficult.
Similarly, the contribution maximums governing DC plans in Canada are lower than those in the U.S. and limit plan sponsors’ ability to automatically escalate member contributions.
Jiwani said Canadian policymakers need to address these shortcomings and provide more incentives for employers to adopt these autopilot features. “The CAP guidelines were a first step,” he aded. “We need DC legislation in Canada. We don’t have it.”
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