A few years back, we held a session at the annual Avantages Montreal DC conference and asked the sponsor audience how likely they would get involved in helping DC members optimize their retirement income, post-accumulation. Sadly, only two out of the 50 or so sponsors present said they would. But it looks like things are changing.
A reality becoming too clear to ignore
The fear of increased fiduciary responsibility has kept most sponsors away from helping members past the accumulation phase of their group retirement and savings arrangements. Yet we are seeing more and more sponsors dip their toes in the water and get involved.
In a recent discussion with a client, members of the pension committee highlighted the following reasons for their change of heart.
- All the discussions around pooled registered pension plans (PRPPs) versus potential improvements to the Canada Pension Plan brought up a number of issues, including high fees for retail products and increased longevity; this made them wonder how their plan members were impacted.
- If DC is also to be implemented in their unionized environments, it needs to deliver better overall retirement outcomes so that unions “buy the concept.”
- The new CAPSA Guideline No. 8 is forcing them to at least give consideration to the payout phase (the new guideline requires sponsors to provide information on retirement income products that should assist “members in making informed decisions which strike a balance between protection from the risks inherent in various products and achieving target replacement rates”).
- A recent workforce planning exercise had them realize that a large number of employees were to retire in the next five to 10 years, largely on their DC savings; and
- Two of these employees happen to sit on the pension committee (which helps the idea move forward)!
Where to begin
Involvement can take many forms and does not necessarily increase fiduciary risks. Some simply represent good governance—and common sense. The brief list below provides a few examples of what you can do, in increasing order of complexity/involvement for the sponsor.
Ask your DC provider about the retirement transition services it offers — Retirement is a big business for all of them, and most have been gearing up to ensure they capture member assets at retirement by dramatically improving their offerings, some with a team of dedicated specialists. Better than throwing your plan members to the sharks—bring in a commissioned advisor, for example—and it’s free.
Bring in independent experts — Having someone explaining the ins and outs of retirement without any hidden (or not-so-hidden) agenda to sell products is probably the best service you can offer your plan members. I have given hundreds of retirement planning seminars in my career, and have repeatedly heard employers say that this is the only service that ever generated thank you emails and calls to HR on a regular basis. Unfortunately, it’s not free, but some arrange to pay for these through a governance account (out of the investment management fees (IMFs) paid by members).
Vet the products offered to members — Understand your provider’s retirement product offering to make sure it fits your member population. Special care should be given to any guaranteed minimum withdrawal benefit (GMWB) product if your plan makes it available: check that pricing makes sense, that members are not getting in too early so as to pay increased fees for longer than required, and make sure they understand it well.
Review your target-date solution — Target-date funds have greatly evolved since their introduction, gaining in sophistication and asset class diversification. Make sure your target-date approach is up to date, and check if the maturity date allocation (”to” versus “through” retirement) makes sense. Is the equity allocation too low for members transferring to a life income fund (LIF) at retirement? Maybe it’s time for a change.
Reduce your members’ fees during retirement — Retail product fees are simply outrageous and can severely reduce retirement income. “Orphan” group RRIF/LIF programs offered by all DC providers tend to offer lower fees and are typically sold with no commissions. But some large sponsors are able to negotiate even lower IMFs for their retirees from the DC provider. Some have also been able to negotiate reduced pricing on life annuities.
Reduce their fees and offer them great options — Another approach is to set up your own group RRIF/LIF as part of your contract, keeping your retirees’ assets under your umbrella, and possibly helping to maintain or get even lower fees for all of your DC members. This means possibly adding a different set of funds that are a better fit for retirees, but it increases your governance burden.
Pay them a pension right out of your DC plan — For DC pension plans, some jurisdictions allow LIF-like or variable-annuity-like benefits to be paid out directly from the plan. However, few sponsors (most in the public sector, such as universities) have embraced this opportunity due to extra system costs and governance requirements.
Obviously, legal requirements and recommended best practices such as those brought forth by the CAPSA Guidelines vary whether you have a DC pension plan or a simpler retirement savings plan. Nevertheless, most of the ideas described above can be applied in order to help your DC members optimize their retirement income, making you an employer of choice!