How rethinking plan design can address retirement readiness

Many Canadians are looking forward to retiring someday, but with the rising cost of living and increasing life expectancy, many are also uncertain whether retirement will arrive anywhere near the age they expect.

When employees are worried about funding retirement, they delay it. In turn, employers face mounting costs, either from pay differentials with younger replacement workers or from an increased burden on the health-care programs that older workers use more heavily.

Instead of feeling helpless in the face of this changing reality, employers can proactively address the issue by rethinking the design of their entire retirement savings program. Addressing long-term retirement readiness can help younger employees avoid the pitfalls facing older workers today.

Read: Holistic retirement thinking: Integrating public, private pensions

These adjustments can also lead to increased participation in group programs and a stronger position for the company in a competitive labour market. The top three trends are:

1. Flexible group savings plans: Group registered retirement savings plans with a deferred profit-sharing component are becoming increasingly favoured by plan sponsors. 

Employers can give employees even more flexibility on their contributions by going one step further. Today, Canadians can save money towards any financial goal by contributing to a group tax-free savings account with an employer match in a long-term vehicle, such as a DPSP, where the employer shares profits with employees.

This approach offers flexibility over the employee’s funds while allowing for restrictions on withdrawals and retention inducements on the employer-contributed component.

Read: Plan sponsors urged to take advantage of innovative pension plan design to mitigate risks

Group RRSPs and DPSPs have become so popular that, combined, they now outnumber defined contribution plans four-to-one, according to the 2018 CAP Suppliers Report by Benefits Canada and the Canadian Institutional Investment Network.

2. Reduced investment choice: It’s becoming more clear that having a nearly unlimited number of investment choices in the plan actually prevents members from making sound investment decisions. For the last several years, plans have been reducing their investment menus to offer only a few relevant choices, with an increased effort to include a passive/index option due to market trends and lower fees.

3. Reduced eligibility periods: In the past, companies used to require that employees wait out the first year of employment before joining a group savings plan. But the workforce is so competitive today, some companies have been waiving eligibility times to attract talent.

In plan design, the key is to listen to what employees want. If older employees aren’t able to afford retirement, how will younger employees fare with the same plan? If younger employees are skeptical of the value of the savings plan, why wouldn’t a plan sponsor change some key elements to attract talent?