While plan sponsors across the country are retreating from DB arrangements that are costly to the bottom line in good times—and even more so in economic downturns such as those we’ve faced over the past decade—more and more are looking to DC as an alternative retirement savings option for their employees.
According to the 2011 Towers Watson Global Pension Assets Study of the world’s 13 leading pension markets, global DC assets have grown at a rate of 7.5% per annum over the past decade compared with just 2.9% annual growth for DB assets. Yet Canada lags behind. The country’s DB/DC asset split in 2010 was 95%/5%—far behind the leader, Australia, at 19%/81%.
Statistics Canada figures show that the number of members enrolled in DB plans dropped from 4.6 million in 2006 to 4.53 million in 2010, while DC membership rose from 893,403 in 2006 to 961,845 in 2010. While the journey remains long and slow, most industry watchers agree that plan sponsors and members need to start preparing for a new pension reality.
For DC plan sponsors, this means drawing up a road map for success. Investment choices, member engagement, retirement realities and de-accumulation options are all touch points on that map, and they need strong consideration to ensure that both DC plan sponsors and plan members are comfortable staying the course, according to Oma Sharma, a partner with Mercer Investment Consulting. “If you’re not spending a ton of time governing your DC plan well and members end up wiping out in a year like 2008/2009, it really causes you to sit up and rethink the risks—and what you should be doing to ensure that, given what you’re spending on your DC plans, you’re getting some credit for that significant spend and you’re doing the best you can to ensure good outcomes for plan members.”
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2008 was certainly not kind to Canadian DC plans. Benefits Canada’s 2009 Top 50 DC Plans Report showed that 45 had returns in the red at the end of 2008, with the average return at -17.1%. But last year’s report revealed that 2009 was a clear bounce-back year, with just two showing negative returns and total assets up an average of 16.4%.
There’s more good news in this year’s Top 50 DC Plans Report. While the number of plans posting negative returns has crept up a little, to four, 24 plans reported double-digit increases in asset value as of Dec. 31, 2010, and total assets increased by approximately $2.0 billion.
These figures suggest that those Canadian plan sponsors already charting the DC path are doing some things right. Sharma says the CAP Guidelines have provided plan sponsors with a fairly thorough “road map on regulatory expectations,” and this guidance is allowing them to build plans that members are buying into.
“Sponsors have pretty good knowledge now, relative to 10 years ago,” she comments. “They’ve been given clear marching orders that they’re expected to use appropriate due diligence in the selection of vendors and funds, and to ensure that members are properly supported. Everyone gets that now.
The question is, How do you execute around all that?”
Executing on the investment side has meant a stronger focus on pre-built solutions, which are appealing to DC plan members with limited financial knowledge or time to tend to their portfolios, according to Tom Reid, senior vice-president, group retirement services, with Sun Life Financial. “Pre-built investment solutions have actually been the fastest-growing investment mandate within our platform,” he says. Given that many plan members simply want to decide how much of their income they are going to put away in a retirement plan and not worry about how to make that money grow, these types of more passive choices fit the bill.
“Many members have no experience managing their own assets,” says Janice Holman, a principal with Eckler Ltd. and leader of the firm’s DC consulting group. “So this removes part of that for them and makes it easier to get them thinking about how much they need to contribute and what it’s going to look like as an income, rather than focusing on all of the investment basics that they’d need to be able to create and manage their own portfolios.”
Of course, those investments still need to offer returns that will allow members to meet the ultimate pension goal: ensuring that they build an adequate level of income for their retirement years. Ideally, these investments will also take into account that a member’s income level and ability to save will fluctuate over the course of his or her career. Enter target date funds (TDFs), in which a member chooses a calendar date that is close to his or her retirement target and the fund’s asset allocation and rebalancing are taken care of based on the time horizon.
You have to periodically ask yourself, ‘Would my decision still be the same, given the funds that are available to me now?’ You have to keep re-evaluating the quality of your program relative to what is available in the market.
Holman says most plan sponsors that have conducted investment reviews in recent years have chosen to add TDFs. “They definitely appeal across all sectors and plan sponsors, so as soon as the opportunity is presented, they are included in the plan—generally at the expense of other funds, usually balanced funds.” She adds that TDFs also work for an increasing contingent of new plan sponsors that are choosing to launch their DC arrangements with a small core of investment options that can be added on to later, rather than starting with a larger number and subsequently removing the ones that don’t appeal to members.
According to Sharma, the ease with which TDFs match members’ investing needs over the long term has prompted a growing number of plans to use them as their default investment option. “Early adopters of TDFs added them as an option but didn’t force members to invest in them,” she explains. “More plan sponsors are now using those funds as default investments, and some are moving a step further and saying, ‘We’re going to re-enrol our entire member population.’”
But investments such as TDFs aren’t the only choice. Active, more complex investment choices can still play a key role if the situation is right, says Reid. “It really depends on the needs of the plan sponsor, the ability of the sponsor to oversee the investment choices and the level of financial sophistication of plan members.”
And, as anyone who’s comfortable behind the wheel knows, the route mapped out for you is rarely the only option—or the best one. “New products are coming to market all the time,” Sharma advises. “You have to periodically ask yourself, ‘Would my decision still be the same, given the funds that are available to me now?’ You have to keep re-evaluating the quality of your program relative to what is available in the market.”
Focus on the horizon
For plan sponsors on the DC journey, a key consideration is keeping members’ eyes on the road—no matter what’s happening on the sidelines. When members aren’t engaged, even the easiest investment choices can be ignored.
Holman says a growing number of plan sponsors are realizing that the old ways of communicating to members are no longer effective. Instead, sponsors are opting for more targeted and specific strategies, such as attempting to reach out to members at different milestones in their lives (e.g., marriage, the birth of a child or the projected retirement date). Other key communication targets are when employees join the company and before they become eligible to enrol in the plan.
“Employees have short memories. If the plan has a two-year eligibility period, information provided during the orientation period will be long forgotten by the time they qualify to enrol. A better strategy is to eliminate the eligibility period altogether or, barring that, develop an ongoing marketing plan for new hires so they understand the benefits of participating in the plan,” explains Holman.
At The University of Western Ontario (No. 4), the plan’s communications strategy is designed around this reality: outreach starts when new members meet with financial planners to be educated
on the plan provisions and investment options, and it continues for the duration of their life in the plan through activities such as lunch-and-learn sessions on investing and annual member meetings. Enrollment is mandatory for all full-time faculty immediately upon hire, according to Louise Koza, the institution’s director, HR (total compensation).
Koza says the plan’s members—including 5,500 active and 1,200 terminated with funds still in the plan—have gained a heightened understanding of financial concepts in recent years and appreciate the ability to engage with financial planners about investment decisions. “In general, members are more aware of the nastiness of the markets and how much a stock market collapse can affect their retirement plans. They’re also more aware of how global events affect their results.”
The notion that targeted and ongoing communication strategies are more expensive is a misconception, according to Holman. While she says that at first glance, it might be cheaper to implement a generic communication strategy, any cost savings would be negated by the lack of results. Instead, it may simply be a case of spending the same budget in a different way. For example, Holman explains, a plan sponsor could budget for a comprehensive enrollment package and an annual seminar—or, for the same money, take 30 minutes to sit down one-on-one with each new member and go over plan specifics. “That is probably more effective, and the member can run on autopilot for a while thereafter, versus continually sending out information that may not be getting through to members at all.”
But what you say is at least as important as how you say it, explains Claude Leblanc, vice-president, sales, group savings and retirement and government relations, with Standard Life. He says it is not enough simply to advise members to join the plan, choose an investment and set a contribution level if it means their earnings won’t match their retirement goals. “The mechanics of how to adjust your contributions to make sure you’re not losing sight of your target is, I think, the biggest piece of communication that needs to be reinforced.”
Almost home
Any useful road map must help guide users to their desired destination. For DC plan members, that destination is retirement.
If anything positive came from the crushing blow that the 2008 economic downturn dealt to Canadians’ savings and investments, it was a renewed emphasis on ensuring that people have the necessary tools to build sufficient retirement income. “At all levels of government, and throughout the industry, it’s amazing how sustained the discussion has been,” says Reid. “It’s very encouraging, because I think there was some concern that when the markets recovered to pre-2008 levels, it would dissipate. But it’s got legs, and it continues to be hotly debated.”
As provinces have moved away from legislated mandatory retirement, Reid says the concept of phased retirement has begun to receive attention. Regulations in some provinces allow employees with phased retirement arrangements to continue contributing to an employer’s pension plan while also supplementing their reduced working income by drawing a percentage of what they’ve saved in the plan. Reid says he expects that more provinces will regulate this arrangement— especially since it holds benefits for employers facing an aging employee demographic and eventual labour shortage. “It allows you to keep a wider and deeper talent pool,” he explains.
Another issue that is receiving attention as more of the working population moves closer to retirement is Canada’s lack of variety in de-accumulation options for DC plan members. According to Leblanc, the changing face of retirement—in which people are living longer, expect to lead an active post-work lifestyle and may require increasingly expensive healthcare treatments for various conditions—means that new DC drawdown products need to take these factors into account.
“Retirement is not consistent,” he says. “You may need to have enough money for long-term care needs, you may need to cover health expenses that aren’t covered in Canada, and you’ll want money just to enjoy and have fun with. The products that will support these various stages may be different.”
Sharma echoes Leblanc’s thoughts. But she adds that while some in the industry are beginning to train an eye on developing innovative options, compared with DB assets, DC plan assets in Canada are still “just a drop in the ocean.”
“It’s chicken and egg. When the market represents a small size of opportunity, there isn’t the impetus to develop new products and to compete in that area of the market yet. But it’s coming.”
Neil Faba is associate editor of Benefits Canada. neil.faba@rci.rogers.com
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