In the post-financial crisis world, perhaps plan sponsors can forgive DC plan members for wanting to hide their savings under the mattress. Slow GDP growth, volatile equity markets and eurozone fears could be considered good reasons to keep money out of the markets.
According to a report by the Certified General Accountants Association of Canada, DC plan membership nearly doubled from 14% to 27% in the period from 1991 to 2006. However, this may have more to do with an increase in auto-enrollment features than with member initiative. In fact, a separate survey conducted by Aon Consulting and FEI Canada in 2008 showed that the majority (64.5%) of respondents have DC plans with auto-enrollment of employees.
While elements such as auto-enrollment and low-risk default investment funds might initially bring employees into their plans who might otherwise not get involved at all, plan sponsors can do more to engage members and help them take responsibility for their savings without seeming too paternalistic.
Dream a little dream
In order to get members to take greater ownership of their savings, plan sponsors need to understand their employees’ retirement dreams. “The best way to show people why they need to save is to provide a lifestyle projection,” says Claude Leblanc, vice-president, business development, group savings and retirement, with Standard Life. Speaking with them and understanding their needs and wants would “show them, at different points in their lives, the kind of lifestyle they want and give them the chance to project themselves into the kind of dreams they would like to accomplish when they will be out of the workplace.”
The next step is to establish a financial road map that will allow members to understand the amount of money they will need based on the date of their desired retirement and the type of return they will need to retire comfortably, notes Leblanc. “Once that [plan] is done and they have a vision, the first thing you have to do is to put [those variables] into retirement planning tools where they can set their retirement [amount]. Based on various scenarios, [members] will understand how to discipline themselves on how to save enough money and invest appropriately.”
But even when plan members have visualized those dreams and determined their projected savings, the reality is, it’s hard to get them to actually do the work. “We have found it very challenging to engage members in taking responsibility in the decisions that come along with participating in a DC plan,” says Cara Bourdeau, pension and benefits consultant with Western University. “If we cannot change that reality,” she wonders, “how can we work with it?”
Western’s strategy was to make various gradual changes to the plan, such as switching the default option from a money market fund to a balanced growth fund (with a 70/30 equity/bond split). “The board felt that was really in keeping with an appropriate default for a long-term investment horizon,” Bourdeau adds. While she concedes that members may still need further encouragement, she says the new default allows them to save more appropriately than in the past, when plan members’ assets were sitting in money market funds for years.
“We have confidence that, even though markets are volatile, it’s an opportunity for people to be buying low in the market. [They] now have many more years to continue to [make] decisions about their investment mix as they approach their retirement. It does buy us some time to achieve that.”
Get the message across
To be successful, plan messages must be targeted to the right group of both members and managers that assist members with questions. For example, in many cases, members will go to middle management for help with their pension questions sometimes before they approach HR, according to Daphne FitzGerald, chief operating officer of Capital G Consulting.
As a result, specific information that can answer members’ questions and concerns needs to be at the fingertips of middle managers, notes FitzGerald. “When you do a lot of planning, you realize there are a lot of different audiences and messages at different levels and a lot of tactics you can use to get your message across.” She says the plan must be looked at in its entirety so that it is easy to administer and, therefore, easier for managers to explain (e.g., having a careful design with the right investment options, creating a culture in which employees are taking responsibility, etc.).
FitzGerald adds that getting people together in a room for meaningful presentations, rather than just sending emails and paper communications, is a big part of that process. “When people are fearful or have concerns, you have the right people in the room who can give advice and talk about their worries and fears. You’ve got an expert right there who can talk to them.”
Customization is also becoming an important part of the communications arsenal. For its part, Western University is redesigning its in-house workshops to focus on demographics, says Bourdeau. “Previously, the workshops were conducted by topic. People didn’t know which workshop was the right one for them,” she explains. “So either they would come to the same ones [by accident] or you’d have someone who was 25 showing up to the retirement income fund workshop, which was not a good use of their time.” That’s why the workshops are being redesigned to “take [members] down to the basic level” and recognize the challenges of financial literacy. Also, workshops will be conducted online so that members can interact with their own plan choices and see how their decisions affect their retirement.
Leblanc agrees, adding that employers should recognize the demographic makeup of their group. With a young employee population, employers can design a basic approach with a generic asset allocation model without age or lifecycle considerations in mind, but members may invest more in equity because they have more time to recover based on market cycles. If you’re facing members who are closer to retirement, you should have a more conservative mix, and your plan will work differently.
The bottom line
In the end, nothing motivates and engages employees more than money in their pockets. A case in point is Magellan Aerospace, which provides a 4% company or not they choose to contribute to the DC plan themselves.
“Most people say, ‘It hardly affected my pay at all. How do I put more in?’” It’s a baby-step approach that shows employees they can actually afford to contribute more than they think.”
The idea, notes Jo-Ann Ball, vice-president of HR with Magellan, is to encourage employee contributions above and beyond the employer contribution. Ball says that for those employees who say they can’t afford it, the company—through one-on-one meetings and education sessions—encourages them to try contributing just 1% of pay to see how that affects their bottom line. Of the 273 people in the DC plan, only eight do not contribute to the voluntary portion, she says.
“Most people say, ‘It hardly affected my pay at all. How do I put more in?’” It’s a baby-step approach that shows employees they can actually afford to contribute more than they think, she explains.
The trick, she adds, is to break down the math into what it looks like on a micro level. For example, an employee who makes $50,000 a year would be putting away $500 a year at the 1% rate. Divided by 26 pay periods, that equals about $19 per pay, or $1.37 per day. Once taxes are accounted for, the grand total at a micro level is very small—about the cost of a cup of coffee. “Once [employees] saw that the numbers worked for them, they put even more [into the plan],” Ball comments. As an added incentive, Magellan provides a 50% match of employee contributions, up to a maximum of 5% of pay.
One of the keys to success, as the Magellan example shows, is the ability to “convert numbers into lifestyle,” says Leblanc. When savings are aligned with spending capabilities (which are directly correlated with an employee’s stage in life), a plan sponsor can create a DC plan that provides enough flexibility to make sure members can save enough to reach their goals.
Other tips for plan sponsors include having meetings on company time (which will increase engagement, according to FitzGerald) and holding one-on-one discussions (also on company time) so that people can articulate their frustrations outside of a group setting, which can eliminate some retirement savings anxiety. Adds Leblanc, training and information sessions can also be provided via the Web or YouTube, which engages younger members to learn about their options and provides the convenience of learning whenever and wherever they want.
Overall, notes Bourdeau, it’s important to look at the bigger savings picture as a journey. “We recognize that many members don’t know what they don’t know.” But approaches such as equipping middle management with the right information, providing employees with a road map based on their own needs and wants, and encouraging small incremental savings that hopefully lead to larger contributions all play a role in engagement. And when plan sponsors provide a holistic approach to savings and position the pension plan within a larger planning context, members will have the tools and capabilities to take responsibility for their personal savings and meet their future retirement expectations.
Joel Kranc is director of Kranc Communications. joel@kranccomm.com
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