![Contribution levels play larger role for DC plan members](https://www.benefitscanada.com/wp-content/uploads/sites/7/2012/09/money-cnd-analysis.jpg)
Individual investment strategies have less of an impact on DC members’ replacement income than plan contributions and interest rates, according to Eckler’s Capital Accumulation Plan Income Tracker (CAPit).
“There’s no question members should pay attention to their CAP investment choices and whether a particular investment strategy is suited to their needs,” says Janice Holman, a principal with Eckler. “But the numbers show that other factors, including contribution levels, have a bigger and more predictable impact on replacement income over time.”
The CAPit shows how four different investment strategies—conservative, balanced, aggressive and lifecycle—would impact a member’s replacement income ratio.
While each strategy dipped and recovered to different degrees from 2006 to 2013, they all resulted in the member’s replacement income ratio ending at roughly 62% on Sept. 30, 2013.
CAPit tracks a member who is assumed to have made annual contributions of 10% of income starting at age 40.
If the member had made annual contributions of 8%, the replacement income ratio at the end of September would be 10 percentage points lower. By increasing the contribution to 12%, the ratio would be about 10 percentage points higher.
“It is vital for plan sponsors to ensure members are contributing to a CAP at an appropriate level, either on their own or with the benefit of a company match,” adds Holman. “Plan oversight should include closer scrutiny of those things members can control, such as their contributions and withdrawals. Members also need a better understanding of the income their balance can realistically provide.”
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