Early in the year, a client asked us “What would be the best DC plan?”
My first reaction was that the “best” plan would vary from one employer to the next, depending on the organization’s specific objectives. These objectives really should determine how your plan works, and ultimately, be used to measure the plan’s success.
Making objectives and design jive
Clarifying your objectives for your DC arrangement goes further than simply defining a “plan purpose,” as required by the Capital Accumulation Plan Guidelines. One could argue that the plan purpose serves more as a clarification of the limitations of the plan. For example, “The plan’s main purpose it to help participants in accumulating savings towards retirement,” which translates into “there’s no pension promise here”.
Objectives could be multi-faceted and determine how the plan should help the company achieve its corporate goals—without being explicitly communicated to plan members. Here are a few examples.
1. When the strategic objective of the plan is to attract and retain employees.
DB plans have long been seen as a great tool to achieve this, mostly because the value of the plan increases with length of service and better benefits those at older ages. Do employer contributions under your plan increase with service? Are they sufficiently high at later ages for your organization to attract more seasoned employees?
If you are using constant employer contributions throughout an employee’s career, perhaps a points-based employer match (where employer contributions vary according to points = age + years of service) would be a better way to go.
If employee flexibility is what you are looking for—for instance in consideration of a young or mobile workforce—then a range of employee contribution rates and vehicles (group RRSP and TFSA for example) would seem like the best approach. The TFSA offers some interesting design possibilities, but take-up from employers has been disappointingly low so far.
2. When the objective is to provide the most decent retirement income possible to participants, potentially using a somewhat paternalistic approach.
A plan sponsor at a recent industry conference was complaining about the low take-up rate from employees in their DC plan (around 50%). “What would be your ideal take-up rate?” I asked. “100%” the woman replied. “Then shouldn’t your plan provide for mandatory participation—or at least automatically enroll employees upon eligibility?”
Benefit adequacy (generating sufficient retirement income) represents an important aspect of their plan for a large portion of employers. Yet it hardly ever gets measured, even though it is entirely possible to model the plan and estimate what reasonable income replacement ratio ranges can be expected at retirement. Such an analysis can then be used to improve on plan design—which doesn’t necessarily mean increasing contributions—still with no guarantee of outcomes.
Are employees making the best of your plan?
You can have the best design for your objectives but if your participants do not use the plan effectively, the end results will be less than optimal. We find a lot of efforts are going towards monitoring investment option performance, but little towards monitoring plan members’ behaviour. Yet the latter may have much more impact upon the realization of your objectives.
Are members taking full advantage of employer contributions? Are they invested in an effective manner? Are they making use of your plan provider’s tools? Are they on track towards meeting their retirement goals?
Getting answers to these questions will provide useful input towards improving on your plan design, including changing the kind of investments available, if necessary, and preparing adequate targeted communications that will help address potential issues.
Keep an eye on things
A DC plan should not be static, but rather something that needs to be revisited regularly to ensure it is in line with your objectives, your employees’ needs and industry best practices, all which evolve over time. Make a point of scheduling regular reviews, and don’t be afraid of taking a fresh look to see if you still have the best plan for all involved.