Replacement income levels generated by capital accumulation plans (CAPs) increased to 64% in the fourth quarter of 2013, according to Eckler’s Capital Accumulation Plan Income Tracker.
This continues a trend of seven consecutive quarterly increases in the replacement income ratio. The increases have been driven largely by improved equity markets and annuity rates, factors beyond the control of CAP members. However, evidence suggests that plan members and sponsors continue to ignore the importance of contributions—the one factor within members’ control.
According to data from the Canadian Institutional Investment Network, average employee contributions to DC plans hovered between 4.2% and 4.6% of annual income between 2007 and 2012, with employers contributing between 4.5% and 5.6% of employee income during that time period.
Employee contributions to group RRSPs between 2008 and 2012 (no 2007 data exist) ranged from 3.8% to 4.6%, with employers contributing 3.8% to 4.3%. In both cases, contributions trended up slightly for a year or two, before retreating marginally.
“In a low-yield investment environment, coupled with increasing member longevity, the traditionally accepted retirement savings target of 10% is not enough to produce an acceptable replacement income for the average person,” says Janice Holman, a principal in Eckler’s Toronto office. She adds that both plan members and sponsors need a better understanding of the impact of contribution rates on replacement income levels.
Increasingly, plan sponsors have offered their members access to calculators that can help illustrate the impact different contribution rates and investment return scenarios can have on their retirement income.
However, she points out that these are useful educational tools only if members take the initiative to use them, which most members don’t do.
“For the small percentage of members who do use a calculator, it may be a one-time event,” Holman says. “In an ever-changing economic environment, these tools need to be revisited on a regular basis so members continue to be aware of whether their contribution levels are sufficient to support their retirement goals.”
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