With current capital accumulation plan (CAP) participation rates typically around 55% to 60% in Canada, plan sponsors continue to search for ways that inspire employees to save enough for retirement. Some are automatically enrolling new employees in workplace retirement savings plans.
But the number of participants in a plan isn’t the only number that counts. Enrolling in a CAP may mean employees are starting to save early. But in many cases, they’re still not saving enough. Many plan members start at the default contribution rates set by employers––typically 3% or less—and never or rarely increase their payments. Even with decades to build up, such small contributions won’t add up to a comfortable retirement income. One possible fix for this inertia is auto-escalation of contribution rates.
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Accepting auto-increases
It’s an idea largely untested in Canada. Oma Sharma, partner and defined contribution consulting leader with Mercer, says that none of her Canadian clients have chosen that route yet. But she views auto-escalation as a good way to nudge forward members who aren’t maximizing their savings opportunities.
Contributions could be increased by 1% per annum until members reach a desired level—such as the 10% recommended by the National Association of Government Defined Contribution Administrators, Inc. Or the default contribution rate could simply be set higher—ideally between 4% and 6%—and members would be required to take action if they want to contribute less.
“Both approaches actually exploit member inertia, as many members will simply accept the higher contribution rates,” says Sharma.
Auto-escalation can be built right into retirement plans. “Plan sponsors can either get members to agree to automatic increases or build [the increases] into the plan dynamic,” says Tom Reid, senior vice-president, group retirement services, with Sun Life Financial. “Some members might pay attention but forget to increase their contributions, so this takes the guessing out of it.”
Auto-escalation can also be timely. Jeff Aarssen, vice-president, group retirement savings, sales and marketing, with Great-West Life, likes that auto-escalation of contributions boosts members’ savings as they draw closer to retirement. “Anything the industry can do to help make those decisions easier––whether it’s auto-enrollment, making meaningful contributions supported by auto-escalation or getting plan members into reasonable investment choices like target date funds––would only assist all stakeholders involved to help members achieve retirement income adequacy.”
Automatically bumping up contribution rates may not boost employees’ engagement levels in their CAP plans, but it has the desired effect: greater momentum for retirement savings. Engagement may follow as balances build.
Sonya Felix is a freelance writer based in St.Catharines, Ont.