DC plan assets are continuing to grow as more Canadian companies are shifting away from DB plans.
Shawn Cohen, a director of relationship management for MFS Investment Management, and Kristen Colvin, a director with MFS Institutional Advisors, spoke to BenefitsCanada.com about the evolution of DC plans in Canada and the United States.
Q. What can we learn from other jurisdictions?
Kristen Colvin: The advent of auto enrollment in the U.S. has certainly been very beneficial. The average participation rate in the U.S. is somewhere in the high 70%/low 80% range versus Canada, which is in the low 50% range. That’s where the U.S. was prior to the advent of auto enrollment. Auto enrollment has increased overall participation in DC plans.
The Pension Protection Act was in 2006 [which allowed plan sponsors to automatically enroll their workers in DC plans]. A year later, the Qualified Default Investment Alternative (QDIA) regulations came out and essentially the QDIA regulations allow for sponsors to choose one of three defaults to automatically enroll participants into target-date funds, balanced funds with some provisions or managed account products.
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Q. What’s stopping Canadians from saving?
Shawn Cohen: I think it’s not only what’s stopping Canadians from saving but why I think really anyone around the world doesn’t think of saving right away. It’s the immediacy of other issues for them. What’s preventing a better saving perspective? I think people just naturally don’t gravitate to decisions that are so far off. I think that presents an opportunity for the industry to bring more focus and I think one of the areas that we do see helping is the auto enrollment.
There are challenges for auto enrollment in Canada. And I think we just started to see government at various levels—whether provincial or federal—at least think about it. Alberta came out recently with some auto features for plan sponsors and although the regulations around it are not out yet, they now have legislation allowing auto enrollment. I think we’re going to start seeing the benefits of that.
The other thing that may help is the way Quebec has gone about it with the VRSP. I think you’ll see great benefits from that because it is mandating employers, of whatever size, to start offering auto enrollment plans to their employees.
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Q. What challenges do U.S. DC plans face?
Kristen Colvin: In the U.S., the average contribution rate is in the mid-7% range. And that would include both employer and employee contributions. Many plans using auto enrollment default their participants at a 3% rate. Popular academic research [suggests] that contribution levels need to be much higher than 3%. The next hurdles for us are auto increases: automatically increasing a person’s deferral amount on an annual basis. So default them in at 3% but then perhaps every year add a one percentage increase up to 10% or 12%. There’s no mandated level.
About half the plans in the U.S. use auto enrollment and auto increases are gaining traction as well.
Read: Employers adopt auto features
Q. Is there an optimum number of investment options for plan members?
Kristen Colvin: What I can say with certainty is that the number of options offered within DC plans has come down considerably from where it was in the 1990s. On average, you have somewhere between nine and 12 investment options being offered by a plan. That number was more than double that 10 to 15 years ago.
Shawn Cohen: And our experience from a Canadian perspective is following suit from the U.S. We are seeing more simplified lineups. We’re definitely trending that way. Our numbers may be slightly more than nine to 12.
Q. What should be the employer match for DC plans?
Shawn Cohen: The two most common are 50% or dollar for dollar. In terms of matching, I think one of the things we can do better is the match because that is what drives employee decisions from a contribution perspective. What we find is individuals will contribute only up to the matched amount and no more. I think it’s incumbent on plan sponsors to look at how they can use their match structure to incent more contributions. Design and matching can have a lot of influence from a member perspective.