Employees nearing retirement have a big decision to make: what to do with their workplace savings. Do they have an efficient drawdown strategy? Plan sponsors need to prepare their employees for a smooth transition from saving to spending their retirement income. Employees need access to the appropriate tools, education and menu options that will help them reach their retirement goals. And the DC industry has an obligation to ensure that the framework is in place to support the aging workforce.

Retirement readiness is one of the biggest issues facing the industry today—and it’s not without challenges. With fewer than three in 10 Canadians expecting to be retired at age 66, says the 2014 Sun Life Unretirement Index, an abundance of research points to the fact that employees are not feeling prepared for retirement. And the strain this puts on Canada’s workforce—and economy—is significant.

Mature workers offer employers many advantages; however, delayed retirement has significant implications for workforce management and succession planning. Think of the wage differentials between a 66- and 26-year-old employee or the increased healthcare and other benefits costs. One of the primary reasons for sponsoring a retirement savings plan is to attract and retain talent. And it has proven itself to be an effective tool.

Read: Decumulation strategies

Today, with more than three in five Canadians expecting to work past 65—doing so because they need to not because they want to—plan sponsors must continue to support plan members as they transition to retirement. This will not only help them feel less stressed but also help them be more productive if they feel valued. And valued employees are more engaged and loyal—and also more likely to become brand ambassadors for the pension plan.

Many of the challenges facing employees during accumulation are the same as those in decumulation: lack of investment knowledge, apathy, market risks and lack of planning. At retirement, new risks become evident, such as outliving retirement savings, the erosion of purchasing power due to inflation and unforeseen expenses such as healthcare costs.

A major challenge facing Canadians reaching retirement is their current debt load. A recent CIBC poll found more than two-thirds of Canadians ages 55 to 64 currently hold debt, which includes mortgages. High debt levels, especially for pre-retirees, put even greater pressure on their decumulation strategy.

Read: Focusing on decumulation

Another factor influencing retirees is the outdated registered retirement income fund (RRIF) rules. When the federal government modified the RRIF withdrawal rules in 1992, the mandatory minimum withdrawal rates may have made sense: the government was deficit-ridden and looking for cash, average long-term bond yields were 8.5%, and life expectancy was considerably shorter. Today, with bond yields averaging 3.1%, investment returns are significantly lower and longer life expectancies mean RRIF holders are facing serious erosion of their savings in their later years.

All DC stakeholders need to ensure a proper framework is in place to help plan members transition from savings to retirement spend-down.

Plan sponsors can address some of the most basic needs simply by communicating differently. By acknowledging the many issues around financial literacy, regardless of age, employers have an opportunity to engage plan members in a way that tries to get them to take positive action. The growing cohort of older plan members desperately needs more pre-retirement education. There needs to be greater discussion on how to balance the complex and competing objectives of decumulation menu options, including risk protection, access to capital and investment returns.

Read: Why DC plan sponsors should care about decumulation

Investment managers continue to develop a suite of innovative product solutions to help members fulfill their retirement goals. They can partner with DC providers and administrators to ensure members have the services and tools they need to make informed decisions.

Regulators are helping to set expectations with the recent release of CAPSA’s Guideline No. 8, which states that plan administrators “will provide information regarding all the retirement products available to members with respect to the payout phase.”

Establishing a robust retirement program that supports plan members as they transition from retirement savings to retirement spending requires commitment. Plan sponsors and members, investment managers, consultants, plan advisors and regulators all have an important role to play in helping to create an efficient decumulation framework for members.

Lori Landry is chief marketing officer and head of institutional business with Sun Life Global Investments. The views expressed are those of the author and not necessarily those of Benefits Canada.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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