Pension column: Greater simplicity for DC plans

DC plan members want simplicity in their investments

Encouraging plan members to set aside money for their future—and to invest those savings in a thoughtful way to grow them over time—is the great retirement savings challenge for plan sponsors. But one thing is clear: making it easy for members to save and invest removes a key barrier to success. Hats off to the DC plan sponsors that are doing just that. Through creativity, innovation and smart decision-making, there is a pronounced and measurable move to simplify the DC plan experience for members.

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Simplicity in Action
Sun Life Financial recently undertook a detailed analysis of capital accumulation plans (CAPs) in Canada. The data was drawn from Sun Life’s CAP database, which includes more than 5,000 plans.

The move to greater simplicity is startling: nearly half (46%) of plan members are choosing just one fund, with the vast majority selecting balanced funds, which have a fixed mix of stocks and bonds, or target-date funds (TDFs). In particular, the assets in TDFs—which are designed to automatically manage risk (i.e., by changing the asset allocation) for the plan member as he or she inches closer to retirement—have doubled in the past four years alone. In 2010, 10% of all new money was being directed to TDFs; by the end of 2013, it was 20%.

About 90% of the new plans in Sun Life’s book of business are adding TDFs. Of these, four out of five have chosen a TDF as the plan’s default investment option. The result is that Canadians who save through workplace vehicles are much better diversified in their investments now than they were 10 years ago, thanks to the growth of single-fund solutions.

Read: The future of target-date funds

Push for Participation
There are a couple of other encouraging trends related to saving for retirement.

First, while men have account balances that are about 40% higher than those of women, the gap is closing. Women’s account balances have been growing at a faster rate than men’s over the past four years—16%, compared with a growth rate of 13% for men.

Second, the impact of employer-matching contributions continues to drive engagement and participation. The majority of eligible employees must contribute 3% to 6% of their annual earnings to receive the maximum match. And almost 80% of plans for salaried employees include some amount of employer-matching contributions, whether full or partial. Plan member surveys and related research confirm that members see the employer match as the primary advantage of saving for retirement at work and place a high value on this benefit.

Of course, there’s still work to be done to encourage higher participation and contribution rates—and that remains the industry’s greatest challenge. Since almost one in four voluntary workplace plans for salaried employees has less than 50% participation, many employees continue to leave money on the table.

While a focus on investing is important in DC plans, the single most important factor in retirement readiness is joining a plan and saving at a meaningful rate consistently over one’s career. “Money in” is still the greatest determinant of “money out” in retirement.

Whether through more aggressive promotion of employer-sponsored plans and their value; the introduction of new or improved employer- matching contributions; or the effective use of “smart defaults,” such as making participation for new hires part of the employment contract, plan sponsors need to keep their foot on the gas to encourage greater savings and member participation.

Read: Auto-enrollment paying off

The appeal of TDFs

A key factor driving the growing use of TDFs is their simplified approach to investing and portfolio construction.

By design, the funds lead to a disciplined, professionally managed approach to portfolio risk-taking, with risk levels falling as the plan member nears retirement age.

TDFs replace the often complex task of portfolio construction with a simplified choice (the choice of an expected date of retirement) and provide automatic age-based rebalancing over time. They can be particularly appealing to less sophisticated or engaged investors looking for a streamlined portfolio choice.

Nadia Darwish is vice-president, market development, with Sun Life Financial’s Group Retirement Services.

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