A plan sponsor’s guide to help members navigate the DC wilderness when transitioning to retirement.

Plan sponsors and recordkeepers often focus on helping defined contribution (DC) plan members navigate the treacherous DC landscape during their accumulation years. But with the swell of baby boomers approaching retirement within the next decade, it may be time for plan sponsors to turn their attention to the next step: the payout phase. “Clearly, this is an area that will be a focus not just among DC recordkeepers, but among all financial organizations,” says industry expert Colin Ripsman. “I think, historically, a lot of the products that have been built for the pension market have been focused on the needs of defined benefit plans. Not as much focus has been placed on the unique needs of DC plans and, more importantly, the needs of DC members once they hit retirement age.”

What paths can plan members take to help ensure their future financial stability? And what tools will plan sponsors provide to help members find their way out of the DC forest? “Our experience is that many plan sponsors haven’t necessarily started to take the proactive steps to start addressing the volume of people who are going to be approaching this next phase,” says Michael Campbell, vice-president, marketing, Great-West Life, Group Retirement Services, in London, Ont. And the evolution of plan member communications has yet to reach that next level, says Janice Holman, principal with Eckler Ltd., in Toronto. “There’s been a slow, gradual evolution from making sure the member has sufficient information to manage their account to making sure there’s enough money actually going into the account,” she says. “I think the next step is going to be ‘How do we change that pot of money into an income?’ I don’t think plan sponsors are there yet.”

The DC market in Canada is still relatively young, with the bulk of its growth coming in the last 15 to 20 years. “We’re still of the mindset that the first big wave of DC retirements is still a decade away,” says Oma Sharma, principal and leader, DC consulting services, with Mercer, in Toronto. The U.S. market, however, is more mature and further along in thinking about the drawdown phase. “In the U.S., the possibility of inadequate retirement savings is more immediate, and we’ve recently seen regulators recommend things like automatic enrollment and auto-escalations,” says Sharma. “So, clearly, from a regulatory standpoint, there’s a keen interest in making sure strong guidance is provided on keeping DC plans healthy.”


What plan members choose to do with their savings at retirement depends on the specifics of the plan. Typically, they can choose from three options.

Annuity – Annuities allow members to take whatever lump sum they’ve accumulated at retirement age and turn it into a fixed set of payments over time. Most annuities are designed to be distributed over the employee’s lifetime, which removes some of the mortality risk.

RRIF or LIF – A registered retirement income fund (RRIF) converts a registered retirement savings plan into an income-producing vehicle, providing a periodic income while maintaining the tax shelter and accumulating interest on the remaining capital. A life income fund (LIF) is similar to a RRIF, except that it is specifically for individuals with locked-in pension money. Both vehicles require minimum withdrawals each year, but allow the remaining money to stay invested as long as the member wants.

Cash – Some plans (ones that are not locked in) allow members to take their accumulated assets out as cash.

While the choices for plan members in Canada remain fairly limited, the DC marketplace south of the border offers a wider range of group products. One such product is a variable annuity with a guaranteed minimum withdrawal benefit (GMWB). The GMWB offers a guaranteed minimum return on the annuity contract that can be accessed prior to death. For example, the GMWB wrapper might provide a minimum return of 6% per year, guaranteed even if the market value of the account drops and doesn’t recover. The idea behind this type of product is that it manages some of the longevity risk.

In 2006, Manulife Financial launched IncomePlus, the first GMWB product in Canada’s retail market. Since its launch, retail sales have reached $3.4 billion. Sun Life Financial launched a GMWB product of its own, called SunWise Elite Plus, in April 2007. The GMWB is an optional rider that can be added to both new and existing SunWise Elite contracts, with a minimum investment of $25,000 per policy. Desjardins Financial Security also offers a GMWB product, Helios, and Standard Life offers a performance annuity that combines a fixed and a variable income portion. “Those types of products are certainly getting a lot of press,” says Sharma. “Whether or not they’re going to take off and attract a lot of assets remains to be seen.”

GMWB products are touted as providing investors with guaranteed, sustainable income, but that guarantee comes at a price. “They are expensive,” says Sharma. “You have to gauge whether the benefit is sufficient to justify the additional cost of the wrapper.” Ripsman agrees. “I don’t think they’ve been built with an institutional focus. As a result, the guarantees are extremely expensive, to the point where they are not cost-effective for the average member.”

It’s still early days for these types of products in Canada, but “plan sponsors are guided by product availability,” says Sharma. “In terms of coming up with more creative products, I think that’s going to come.” Adds Stephen Lewis, consultant with Towers Perrin, in Toronto: “There are no noticeable trends at this point, but as the number of DC members approaching retirement increases, we expect the fee structures and services offered under these [plans] will become more competitive over time.”


For many plan members reaching the payout phase, determining what to do with their savings is confusing. “It’s truly unfortunate the level of anxiety plan members have around this decision,” says Blair Richards, chief executive officer of Halifax Port ILA/HEA. “We do what we can to relieve it, but we cannot eliminate it. There are still a lot of people who come to me and say, ‘Just tell me what to do’ and, of course, we can’t do that.”

But there are several things that plan sponsors can do—from education to plan redesign—to help prepare plan members. Here’s a look at a few.

1) Know your demographics – Every plan is unique. It’s important to understand your plan’s demographics and know not only how many plan members you have within 10 years of retirement, but also where those members are located geographically and what their average account balances are, says Campbell. Mike Still, senior consultant with Aon, in Toronto, agrees. “Providers are beginning to offer tools for plan sponsors to really get in and slice and dice what their membership is doing.”

2) Educate plan members – Most plan sponsors offer group retirement planning sessions targeted to members nearing retirement age. These sessions are intended to make members aware of the benefits they’ll receive from the Canada Pension Plan or Quebec Pension Plan, and the Old Age Security program. The sessions typically include an overview of annuities and more flexible payout arrangements such as RRIFs. Most recordkeepers also offer support for shopping the market to purchase an annuity, or are able to issue an annuity directly upon request. Plan members can often contact the recordkeeper’s call centre for answers to specific questions or to find out where to get additional information.


Should I Stay or Should I Go?

Plan members clearly prefer to stay with the same provider upon retirement. In Benefits Canada’s 2007 Survey of Capital Accumulation Plans, 71% of defined contribution and group RRSP participants said that they would prefer keeping their employee retirement investments with the same investment manager, rather than having to withdraw the assets and go somewhere else. That’s music to the ears of recordkeepers, many of whom have made rollovers a priority in their business models.

“Often, [recordkeepers] will have vehicles that mirror the investment options under the base plan and, in many cases, the fee levels will be slightly discounted from retail in order to induce this type of rollover,” says industry expert Colin Ripsman.

But do plan members stay with the same provider because it’s what’s best for their investments or because they just can’t be bothered with shopping around? Plan sponsors can play an intermediary role in helping plan members decide if they should stay or go. “At retirement, when members get option statements telling them what they can do, our experience is that they are very skewed towards keeping the money with that carrier. [The carriers] are trying to retain those assets,” says Janice Holman, principal with Eckler Ltd., in Toronto. “So I think a plan sponsor has a role there—to be an intermediary and outline the options for members.”

That intermediary role is particularly important if the plan sponsor has a legacy defined benefit plan from which the member may also be drawing benefits. “The member sometimes doesn’t have a complete picture of their plan when they go to retire,” says Holman. “I think the plan sponsor has a role to play in finding experts to help with that.”

Plan sponsors also need to pay more attention to teaching members how to project their account balances at retirement, based on what they’re doing today. “Members have to understand how to establish a reasonable target for a retirement income level and then be able to measure progress against that target,” says Ripsman.

Halifax Port ILA/HEA has had mixed results with educating plan members nearing retirement about their options. About a year ago, the company organized a formal, sit-down meal for plan members close to retirement, including two hours of retirement counselling. It issued 75 invitations, but only eight members showed up (six brought their spouses). “That’s one of the initiatives we came up with because we thought people needed it and would want it, but at the end of the day, we got a lot of bills and a great big F for success,” says Richards. However, he is philosophical about the ongoing need to communicate with plan members nearing retirement. “We’re down, but not defeated,” he says. “We long ago resigned ourselves to the fact that we have to keep hammering away at this…The problem is, how do you motivate them in their own best interests?”

Another area that deserves attention is helping members understand the potential impact of longevity. Thanks to advances in healthcare, people are living much longer. Someone who retires at 60 could potentially live to be 90, meaning that his or her retirement income will have to last 30 years. “I’m not sure many boomers have consciously considered this, or that they have a full appreciation of the impact that their lengthened life expectancy will have on the amount they need to save or on the amount they’ll be able to draw when they do retire,” says Campbell.

3) Provide retirement tools – Recordkeepers and consultants have a role to play in providing plan sponsors with better statements, software and other tools to help guide members and give them a sense of their projected benefits at retirement, says Ripsman. “There’s no recognition on the part of the plan member of what their balance means, in terms of a retirement income or the replacement ratio from their current salary,” says Still. “Recordkeepers and consultants are getting better at keeping members informed of whether they’re on track or not on track. Those kinds of tools are becoming more sophisticated.”

Communication materials and education seminars have also evolved over the years to address the importance of setting retirement goals. “The carriers are moving more towards lifestyle descriptions and visual materials so the member can relate it much more to a picture of what they want their life to look like, instead of a dollar figure,” says Holman. “It’s not trying to figure out the math; it’s aiming for a lifestyle, which is a lot easier to visualize.”

4) Offer financial advice – If you decide to offer access to financial advice for plan members nearing retirement, the question becomes: Who pays for it? Plan members will get a certain amount of information from the recordkeeper, but it’s clear that they could still benefit from independent third-party advice. However, they don’t really want to pay for it themselves.

“Quite a lot of the recordkeepers we talk to are making consultants aware that they do have arrangements with other financial institutions such as investment advisory-type firms,” says Still. “If a member is with one of the recordkeepers and they don’t feel they’re getting the advice they require, they can go to another firm through the recordkeeper where they would get full advice. And there would likely be some commissions or fees associated with that.”

5) Redesign your plan – If you’re not satisfied with the products available to your members at retirement or are concerned about adequacy of benefits, you may want to consider reworking your plan. “To a lesser degree, we’ve seen some redesign of pension plans in which you’ve seen the DC start to look more like a DB, in that the amount of the contribution match increases as you get older,” says Janet Rabovsky, practice leader, central Canada, investment consulting, with Watson Wyatt Worldwide. “It’s by no means pervasive, but what happens is, the longer you’ve been at the firm and the older you get, the more you’re allowed to contribute and the greater the match is.”

Helping DC plan members transition to retirement should be part of a plan sponsor’s overall HR strategy. “Retirement’s going to be a long period. If you’re going to be in retirement for 20 years, you need a lot of money,” says Sharma. “They’re basic messages, but I think plan sponsors would do well to think about those messages and hammer them home.”

Andrea Davis is a freelance writer in Guelph, Ont. andrea.davis@rogers.com

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the February 2008 edition of BENEFITS CANADA magazine.