A majority of Canadian employers with DC plans say retirement readiness has become a major issue for their employees and for their organizations.
A Towers Watson survey finds 72% of Canadian DC plan sponsors believe retirement readiness is currently a top issue for their plan members, and 74% believe that retirement security will become a more important issue in the next three years.
“Ensuring employees are able to retire when they are ready allows organizations to plan an orderly transition of their workforce,” says Karen Burnett, Towers Watson’s Canadian DC business leader.
“While some progress has been made, and a vast majority of plan sponsors indicate that they plan to take action to improve retirement outcomes, employers will need to develop targeted strategies for the key components that support retirement readiness—plan design, investment structure and employee communication.”
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The survey notes the most common plan designs include mandatory employer and/or employee contributions and plans with an employer match.
Fifty-eight percent of employers offer plans with mandatory employee and/or employer contributions, and of those, 72% provide for matching employer contributions. However, only 7% of plan members contribute above the matching threshold.
“While mandatory contributions will ensure higher participation rates, in order to boost retirement readiness, employers should look at ways to educate their employees about the impact of contributing beyond what is required to receive the company match,” she adds.
The survey shows employers are also taking action on the investment front.
In an effort to make DC plans more accessible for members, close to half (43%) of Canadian plan sponsors have streamlined their investment options in the last five years, with 90% of sponsors offering 19 or fewer investment choices. Plan sponsors are also beginning to reconsider their premixed fund options, with 67% of plan sponsors offering target date funds (TDFs).
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“Plan sponsors often inquire about the average number of funds the typical plan offers. However, sponsors should focus on quality and clarity rather than the number of funds,” says Marcus Turner, a senior investment consultant at Towers Watson. “Aligning investment structure with participant needs and plan objectives should always be the top priority. To achieve this, some larger plan sponsors are beginning to consider higher-level customization that includes custom TDFs as well as custom risk funds.”
While sponsors appear to be embracing the concept of customization when it comes to investment structure, there is still work to do when it comes to communication. Despite the sentiment that retirement security is important, only 6% of survey respondents believe their employees know how much they need to save for retirement. This suggests room for improvement in education and outreach.
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If plan sponsors are going to improve retirement readiness, they should adopt a targeted and comprehensive approach, Burnett says, adding that a good place to start is to analyze participant segments to understand member characteristics such as life stages and risk tolerances.
“Sponsors should also consider seeking input from their plan members—something only 20% of sponsors have done in the past five years,” Burnett concludes. “Armed with this information, sponsors can establish a customized and effective strategy that encompasses all aspects of plan design, investment structure and employee communication.”