Poor employee turnout at information meetings, a high proportion of members with default investments, and limited use of plan features(particularly matching options)persist at worrisome levels. We’ve also realized most members just don’t understand lump-sums as they relate to future income streams; we’ll need to help them make that connection.
There is a distinct disconnect between the importance employees say they attach to pension plans and their willingness to take action within those plans. In SEI’s 2004 DC member study, 67% of respondents said their pension plans made them feel valued by their employers and 39% indicated they’d leave if the plan were no longer offered. While those results suggest high interest, Sun Life Financial’s 2004 study of trends in DC plans, The Road Ahead, found 44% of plan members invested in default fund options.
While there may be a host of reasons members don’t become active participants in their plans, these five emerge regularly:
Lack of interest: Retirement seems too far off to be a pressing reality and planning tools are too complex to provide meaningful information.
Misplaced confidence: Some employees believe having a pension plan translates into having sufficient retirement income.
Cash flow priorities: Particularly among younger participants, paying student loans and mortgages often takes priority.
Fear of discovery: Employees may be afraid of taking stock for fear they’ll get an unpleasant answer they don’t want to face.
This fifth one, while new, is gaining momentum: I’ll have to keep working when I retire. TD Waterhouse found 25% of survey respondents expected to work part-time in retirement while 8% expected to be holding full-time jobs.
Helping members select appropriate investments and projecting the lumpsums they need to accumulate isn’t generating widespread understanding. A 2003 IPSOS Reid poll showed 28% of people were unable to specify what lump-sum they’d need to fund retirement and 35% believed $250,000 or less would suffice. Clearly, the connection between total savings and the annual income it generates isn’t a concept that’s easily understood.
Armed with this knowledge, how do we help employees shape a realistic picture? How do we engage more employees sooner to bring expectations and reality more closely into line?
BOOSTING AWARENESS
Awareness prompts action. Helping employees gain a good understanding— that’s personally relevant— shows them ‘what’s in it for me.’ With that specific knowledge, they’re more likely to take action if they don’t like the result.
As an industry, we also need to shift our focus from investment selection to retirement planning. Changing our focus will help members make the connection between the amount they need to save and the income it will provide.
How can we do this?
• Encourage members to use planning tools to measure their progress. To do this well, we have to offer tools that are easy to use and that deliver information members can understand.
• Make use of financial planners who can deliver illustrations or estimates to help members understand what their plans will provide.
• Give plan members ongoing estimates of annual retirement income based on actual contributions and investment choices they make within the plan.
Plan sponsors who help members understand the annual retirement income they are building can reduce the risk of employees suggesting they didn’t know where they’d end up at retirement.
The more clearly plan members understand the reality of the retirement income their plans can help them generate, the sooner they’ll appreciate the opportunity. And the greater the likelihood they’ll take effective action to move their realities into line with their expectations.
Mike Collins is vice-president, Canadian Pension Operations, Manulife Financial in Waterloo,Ont. Mike_Collins@manulife.com
For a PDF version of this article, click here.
