But is it good enough?
The first big wave of workers retiring with defined contribution pensions may still be more than 10 years away, but plan sponsors are increasingly taking action to ensure members get the most from their plans, according to a new study.
The study, North American Defined Contribution Plans: Where are they headed? by Mercer Investment Consulting, found more than one-half of Canadian plan sponsors (52 per cent) offer plan members access to a financial advisor, with another 10 per cent likely to add the service within the year.
Nearly half (48 per cent) provide call centre access for counselling and education, and 29 per cent enable employees to get assistance online.
The investment education of members has improved greatly in the last three or four years, said Oma Sharma, a defined contribution pension expert with the Toronto office of Mercer Investment Consulting.
Sponsors now have a greater appreciation for the importance of education and a better understanding of what constitutes useful assistance for members. In the past, some sponsors took the position that by providing a lot of choice they could avoid being challenged on the suitability of any one choice.
“One way to manage risk was to just provide access to as many funds as they could and then leave it to plan members who couldn’t say they didn’t have any choice,” she said.
Fortunately, that attitude is disappearing. With the release of the new Guidelines for Capital Accumulation Plans (see side bar), it’s clear plan sponsors have a responsibility to make sure investment options are suitable, she added. “There is no point in offering employees 100 options, if they can’t differentiate between them,” she said.
Many members uncomfortable about investing
Communication with members through face-to-face seminars has improved, with most providers offering at least one group session per year.
Sponsors are also surveying members more to see how well their needs are met. They are also improving web-based tools to better explain investing and investment principles and provide more information on fund performance, for example.
“These solutions are definitely improving, but there is always room for improvement because there are a lot of members who simply don’t feel comfortable making investment decisions,” said Sharma.
It has long been speculated by many pension industry experts that DC plan sponsors run the risk of legal battles down the road if under-educated plan members make poor investment decisions and find they are unable to retire because of inadequate savings.
The Mercer study revealed that in the United States, many plan sponsors are moving beyond education to give members direct and specific investment advice. That is not the case in Canada.
Insurance companies are the most common providers of group retirement services and in most cases offer plan members access to financial advisors and call centres for investment education and counselling, but stop short of offering specific advice.
No safe harbour
In the U.S., so-called safe harbour provisions mean employers can provide investment advice, as opposed to just education. The concern in Canada is that, without similar legal protections, employers that offer individual advice about specific investment strategies, risk ending up in court to face charges that the advice resulted in inadequate pension savings.
Because offering specific advice is deemed a risk, plan sponsors can only hope to get members comfortable making decisions for themselves, Sharma said. “That is easier said than done.”
It’s hard to say why regulators in the U.S. have been quicker to give employers more protection, she said. But it could be because more American sponsors have had DC plans for longer. In other words, more DC plan members are closer to retirement and the concerns for plan sponsors are looming larger. In contrast, the first real wave of D.C. retirements in Canada is likely still 10 or 15 years away, so the need for reform doesn’t seem quite so urgent, she said.
Nevertheless, there are opportunities for Canadian sponsors to help members manage risk and improve savings.
Sponsors should be monitoring how well members are doing. They can’t do so on an individual basis; but by reviewing performance by grouping, such as age band, they may gain some insight into investment decisions.
“(A review) might reveal younger workers are investing a little too conservatively, while older workers are being a bit too aggressive,” she said. In cases like that, the employer will have to alter communication and education to remind younger workers they should be looking more at equities, while for older workers it’s wise to move more of their savings into bonds.
Employers can’t rely on providers for education
Some sponsors are doing more to educate DC plan members, but there is still much room for improvement, said Peter Gorham, a partner in Morneau Sobeco’s Ontario pension practice. “I think the great majority (of sponsors) are falling short.”
Many sponsors simply rely upon the service provider. The assumption is that the provider is taking care of member education so it isn’t a concern for the employer, he said. Providers may be offering education, but that does not mean members are actually being educated.
“Many service providers have a lot of educational material that is quite good, but the only way it seems to get into employees’ hands is if the employer plays an active role in putting it there,” he said.
There may also be a need for a fundamental shift in the focus of employee education away from investing and toward retirement planning, he said.
By just providing education about investing, members get a good sense of what they can possibly make, but they still have very little idea of what they need to retire, he said. In a survey of DC plan members by Morneau Sobeco, respondents were asked how much they would need to save to provide an annual income of $20,000 in retirement. There were four possible answers to choose from. “Only about 15 per cent got it right,” he said. “The vast majority don’t have a clue what their goal is.”
Reviewing rules of thumb
There is a rule of thumb in retirement planning that if someone wants to retire at age 65, he needs to be saving about seven to nine per cent of income per year. If he wants to retire at 60, savings need to be closer to 11 to 13 per cent.
In meetings with plan sponsors this rule often comes up, and people running the plan are surprised to hear it, he said. “I see people madly writing these things down like they have just received a really valuable piece of information. This is information that they ought to know and it is clearly the case they don’t.”
On the other hand, one of the more popular rules of thumb shouldn’t be considered a rule at all, he said.
Many people believe that their retirement income should be as much as 70 per cent of their working income. It’s not clear why that number holds such resonance in retirement planning, he said.
The ratio for retirement income depends on how much the person was making while employed, he said. If someone is only making $40,000 he’ll need a retirement income of about 90 per cent of that. A person making $100,000 will be able to get by on 60 per cent of that during retirement, he said.
New guidelines on DC education
A voluntary checklist
Earlier this year, the Canadian Association of Pension Supervisory Authorities approved the final version of the Guidelines for Capital Accumulation Plans (CAP).
The guidelines apply to defined contribution plans and other tax assisted savings plans that permit members to make investment decisions among two or more options. While the guidelines are voluntary, CAPSA urges all plan sponsors to meet them by Dec. 31, 2005.
The guidelines cover most aspects of setting up, running and terminating a plan, including a number of recommendations around providing investment information and decision-making tools for plan members.
Costs associated with basic investment information or decision-making tools should be structured so that there is no disincentive for members to use them.
To decide what types of information and tools to provide members, sponsors should consider:
•the purpose of the plan;
•the types of decisions members must make;
•the cost of information and decision-making tools;
•the location, diversity and demographics of the members; and
•members’ access to computers and the Internet.
Information and tools provided should focus on retirement planning, but need not address the entire financial circumstances and planning needs of members.
Members should also be provided with investment information to assist in making investment decisions within the plan. Examples include:
•glossaries explaining terms used in the investment industry;
•information about how investment funds work;
•information about investing in different types of securities (equities, bonds);
•information regarding the relative level of expected risk and return associated with different investment options;
•product guides; and
•performance reports for any investment funds offered in the plan.
The sponsor should also provide plan members with investment decision-making tools to assist the members in making investment decisions, such as:
•asset allocation models;
•retirement planning tools (if applicable);
•calculators and projection tools to help members determine contribution levels and project future balances; and
•investor profile questionnaires.
CAP sponsors may choose to enter into an arrangement with a service provider, or refer members to a service provider that can provide members with advice about their investment decisions. In those cases, the sponsor should establish criteria for selecting the service provider. Among the factors to consider are:
•any real or perceived lack of independence of the service provider relative to other service providers, the CAP sponsor and its members;
•any legal requirements that individuals must meet before they can provide investment advice; and
•any complaints filed against the advisor or the advisor’s firm and any disciplinary action taken.
The study, North American Defined Contribution Plans: Where are they headed? by Mercer Investment Consulting, found more than one-half of Canadian plan sponsors (52 per cent) offer plan members access to a financial advisor, with another 10 per cent likely to add the service within the year.
Nearly half (48 per cent) provide call centre access for counselling and education, and 29 per cent enable employees to get assistance online.
The investment education of members has improved greatly in the last three or four years, said Oma Sharma, a defined contribution pension expert with the Toronto office of Mercer Investment Consulting.
Sponsors now have a greater appreciation for the importance of education and a better understanding of what constitutes useful assistance for members. In the past, some sponsors took the position that by providing a lot of choice they could avoid being challenged on the suitability of any one choice.
“One way to manage risk was to just provide access to as many funds as they could and then leave it to plan members who couldn’t say they didn’t have any choice,” she said.
Fortunately, that attitude is disappearing. With the release of the new Guidelines for Capital Accumulation Plans (see side bar), it’s clear plan sponsors have a responsibility to make sure investment options are suitable, she added. “There is no point in offering employees 100 options, if they can’t differentiate between them,” she said.
Many members uncomfortable about investing
Communication with members through face-to-face seminars has improved, with most providers offering at least one group session per year.
Sponsors are also surveying members more to see how well their needs are met. They are also improving web-based tools to better explain investing and investment principles and provide more information on fund performance, for example.
“These solutions are definitely improving, but there is always room for improvement because there are a lot of members who simply don’t feel comfortable making investment decisions,” said Sharma.
It has long been speculated by many pension industry experts that DC plan sponsors run the risk of legal battles down the road if under-educated plan members make poor investment decisions and find they are unable to retire because of inadequate savings.
The Mercer study revealed that in the United States, many plan sponsors are moving beyond education to give members direct and specific investment advice. That is not the case in Canada.
Insurance companies are the most common providers of group retirement services and in most cases offer plan members access to financial advisors and call centres for investment education and counselling, but stop short of offering specific advice.
No safe harbour
In the U.S., so-called safe harbour provisions mean employers can provide investment advice, as opposed to just education. The concern in Canada is that, without similar legal protections, employers that offer individual advice about specific investment strategies, risk ending up in court to face charges that the advice resulted in inadequate pension savings.
Because offering specific advice is deemed a risk, plan sponsors can only hope to get members comfortable making decisions for themselves, Sharma said. “That is easier said than done.”
It’s hard to say why regulators in the U.S. have been quicker to give employers more protection, she said. But it could be because more American sponsors have had DC plans for longer. In other words, more DC plan members are closer to retirement and the concerns for plan sponsors are looming larger. In contrast, the first real wave of D.C. retirements in Canada is likely still 10 or 15 years away, so the need for reform doesn’t seem quite so urgent, she said.
Nevertheless, there are opportunities for Canadian sponsors to help members manage risk and improve savings.
Sponsors should be monitoring how well members are doing. They can’t do so on an individual basis; but by reviewing performance by grouping, such as age band, they may gain some insight into investment decisions.
“(A review) might reveal younger workers are investing a little too conservatively, while older workers are being a bit too aggressive,” she said. In cases like that, the employer will have to alter communication and education to remind younger workers they should be looking more at equities, while for older workers it’s wise to move more of their savings into bonds.
Employers can’t rely on providers for education
Some sponsors are doing more to educate DC plan members, but there is still much room for improvement, said Peter Gorham, a partner in Morneau Sobeco’s Ontario pension practice. “I think the great majority (of sponsors) are falling short.”
Many sponsors simply rely upon the service provider. The assumption is that the provider is taking care of member education so it isn’t a concern for the employer, he said. Providers may be offering education, but that does not mean members are actually being educated.
“Many service providers have a lot of educational material that is quite good, but the only way it seems to get into employees’ hands is if the employer plays an active role in putting it there,” he said.
There may also be a need for a fundamental shift in the focus of employee education away from investing and toward retirement planning, he said.
By just providing education about investing, members get a good sense of what they can possibly make, but they still have very little idea of what they need to retire, he said. In a survey of DC plan members by Morneau Sobeco, respondents were asked how much they would need to save to provide an annual income of $20,000 in retirement. There were four possible answers to choose from. “Only about 15 per cent got it right,” he said. “The vast majority don’t have a clue what their goal is.”
Reviewing rules of thumb
There is a rule of thumb in retirement planning that if someone wants to retire at age 65, he needs to be saving about seven to nine per cent of income per year. If he wants to retire at 60, savings need to be closer to 11 to 13 per cent.
In meetings with plan sponsors this rule often comes up, and people running the plan are surprised to hear it, he said. “I see people madly writing these things down like they have just received a really valuable piece of information. This is information that they ought to know and it is clearly the case they don’t.”
On the other hand, one of the more popular rules of thumb shouldn’t be considered a rule at all, he said.
Many people believe that their retirement income should be as much as 70 per cent of their working income. It’s not clear why that number holds such resonance in retirement planning, he said.
The ratio for retirement income depends on how much the person was making while employed, he said. If someone is only making $40,000 he’ll need a retirement income of about 90 per cent of that. A person making $100,000 will be able to get by on 60 per cent of that during retirement, he said.
New guidelines on DC education
A voluntary checklist
Earlier this year, the Canadian Association of Pension Supervisory Authorities approved the final version of the Guidelines for Capital Accumulation Plans (CAP).
The guidelines apply to defined contribution plans and other tax assisted savings plans that permit members to make investment decisions among two or more options. While the guidelines are voluntary, CAPSA urges all plan sponsors to meet them by Dec. 31, 2005.
The guidelines cover most aspects of setting up, running and terminating a plan, including a number of recommendations around providing investment information and decision-making tools for plan members.
Costs associated with basic investment information or decision-making tools should be structured so that there is no disincentive for members to use them.
To decide what types of information and tools to provide members, sponsors should consider:
•the purpose of the plan;
•the types of decisions members must make;
•the cost of information and decision-making tools;
•the location, diversity and demographics of the members; and
•members’ access to computers and the Internet.
Information and tools provided should focus on retirement planning, but need not address the entire financial circumstances and planning needs of members.
Members should also be provided with investment information to assist in making investment decisions within the plan. Examples include:
•glossaries explaining terms used in the investment industry;
•information about how investment funds work;
•information about investing in different types of securities (equities, bonds);
•information regarding the relative level of expected risk and return associated with different investment options;
•product guides; and
•performance reports for any investment funds offered in the plan.
The sponsor should also provide plan members with investment decision-making tools to assist the members in making investment decisions, such as:
•asset allocation models;
•retirement planning tools (if applicable);
•calculators and projection tools to help members determine contribution levels and project future balances; and
•investor profile questionnaires.
CAP sponsors may choose to enter into an arrangement with a service provider, or refer members to a service provider that can provide members with advice about their investment decisions. In those cases, the sponsor should establish criteria for selecting the service provider. Among the factors to consider are:
•any real or perceived lack of independence of the service provider relative to other service providers, the CAP sponsor and its members;
•any legal requirements that individuals must meet before they can provide investment advice; and
•any complaints filed against the advisor or the advisor’s firm and any disciplinary action taken.
