2009 DC Plan Summit Report: End Transmission

Enter the market crash and the recession. For a while, you’re online every day, anxiously watching your savings evaporate. Then you become so discouraged that you stop looking. Forget about retiring soon—now you wonder if you’ll ever be able to retire.
It’s a frightening reality that DC plan members may find themselves with inadequate retirement income. However, there’s one upside to this economic downturn: the importance of retirement savings has come into clearer focus. And it’s been a wake-up call for DC plan members and sponsors alike, since both have roles to play.

That’s what we explored in our 10th annual DC Plan Summit in Mont Tremblant, Que., in February. We brought together plan sponsors, consultants, insurers and money managers to explore the issue of engagement: why it’s important, how to get members more involved and how to handle the members you just can’t engage.

Attendees discussed timely DC topics such as the balance between engagement and income adequacy; the benefits and pitfalls of target date funds (TDFs); the new tax-free savings account (TFSA); managing risk; and smoothing the retirement transition.

Highlights of the DC Plan Summit and summaries of the presentations are provided on the following pages. (For the full agenda and presentations, go to www.hfconferences.ca/dcplan.)

Rules of Engagement
One major issue up for debate was how employers can best help members to achieve retirement income adequacy. And the answer may mean rethinking the concept of engagement.

High engagement may not necessarily be the right objective, and having engaged plan members doesn’t mean they must actively make all of the decisions themselves, noted Zaheed Jiwani and Mazen Shakeel, senior consultants with Hewitt Associates. Certain actions that plan members often take—such as chasing performance and making inappropriate withdrawals—can harm their future savings outcomes. “When we think about engagement in terms of employees making active decisions, that doesn’t mean they will actively make good decisions,” Shakeel added.

Striking the right balance between plan design and member behaviour is important, agreed Sue Reibel, senior vice-president, group retirement solutions (Canada), with Manulife Financial. She said certain wealth accumulation drivers—such as participation rates and contribution levels—often get short shrift next to investment concerns.

Referring to a recent Manulife survey, she noted that CAP governance committees spend only 10% of their time getting members to join the plan early versus 37% selecting and monitoring investments—yet they said joining early was a more important factor.

Perhaps a change in mindset is needed. “We call ours the management pension investment committee,” one plan sponsor added. “Maybe we need an employee engagement committee.”

Diversity and Diversification
However, engagement isn’t a one-size-fits-all solution. The keynote speaker, Dr. Linda Duxbury, a professor at the Sprott School of Business at Carleton University, outlined the multi-generational workplace today—including veterans through to Gen Y—and the impact on HR programs and DC plans. Emphasis on work/life balance, career development, talent management and reward and recognition that meets the needs of a varied workforce will become increasingly important, she said, adding that flexibility is key.

However, while your plan members may be diverse, their investment portfolios may not be. For example, said Diane Garnick, investment strategist, Invesco Distribution U.S., with Invesco Trimark, members often fail to consider the industry they work in when they make investment decisions, which can lead to overexposure to a particular sector. “The truth is, particularly for young people, their largest asset is their earning power. And their largest asset has tremendous industry exposure.” Employers may exacerbate the issue by providing compensation that is heavy in company stock and options.

Jeff Snyder, director of financial services with Ford of Canada, agreed, noting that company stock had been Ford’s plan default for years. “That worked out very well until earlier this decade. “Fortunately, we did make a change…it may take a long time to recover if you had stayed highly exposed to automotives, so that was a great move for us.”

Manic Markets
When the markets take a nosedive, even the most engaged DC plan members suffer. But, according to Alan Daxner, executive vice-president with McLean Budden, investors shouldn’t panic during such crashes. “They’ve happened before; they’ll happen again.”

Daxner looked at historical market bubbles—from “tulip mania” in the 1600s to the tech bubble in the late 1990s—to help us understand last year’s real estate meltdown and its effects on DC investors. He also reinforced the importance of the member’s time horizon to retirement and stressed that fear shouldn’t stop people from investing in equities. “Equities are critical to long-term savings. They will outperform bonds over time,” said Daxner, adding that “equity markets are a lot less risky than they were six months ago, and there will be a lot of active opportunities moving forward.”

Will the new TFSA be a popular vehicle for these opportunities? As a savings option, it will likely be attractive to a wide range of Canadians, said Michael Campbell, vice-president, marketing, group retirement services, with Great-West Life. However, he advised employers to consider the retirement program’s purpose and the company’s corporate philosophy before proceeding. “If you have an existing non-registered plan, it’s probably not a stretch to implement a TFSA because you’ve already made the decision that you understand members are going to be using it for casual savings.”

Employers that do decide to offer a TFSA should carefully consider the investment options and their impact on members at both ends of the income spectrum, Campbell added. They should also keep in mind that it is still a capital accumulation plan and, therefore, is still subject to the CAP Guidelines.

Not Engaged
No matter how hard you try to engage your members, there will always be some who are apathetic. So what’s a plan sponsor to do?

TDFs are one option. “There’s an irony about having lifecycle fund [providers] talk on the theme of engagement,” said Peter Chiappinelli, senior vice-president, investment strategy and asset allocation, with Pyramis Global Advisors, a Fidelity Investments Company. “Because we’re trying to get the disengaged.”

But TDFs have their pitfalls, too. Chiappinelli identified five common mistakes relating to TDFs. And the No. 1 issue relates to engagement: assuming that members understand basic investment concepts such as buy low, sell high and dollar-cost averaging.

Lack of understanding may lead members to make inappropriate decisions. For example, he said, actual withdrawal rates in DC plans are higher than the industry typically assumes. “The asset allocation has to be sensitive to the drawdown factor. Make the wrong assumption about that and you could come up with the wrong asset allocation.” The result: members could outlive their retirement income.

Risk Fix
And that’s just one of many risks that DC plan sponsors face. However, Claude Leblanc, senior vice-president, group savings and retirement, with Standard Life, suggested that good governance and a robust investment platform will go a long way toward managing such risks. “Plan design, investment selection, member enrollment and participation, communication and setting expectations—all those aspects need to be considered.”

The investment platform can also play a significant role. Leblanc said plan sponsors should consider an investment program that includes a controlled investment process, wrapped in a codified governance structure, to protect against the whims of plan members and to help them ride out the downturn. “The main thing is to design a way to mitigate the risk of exposure in up markets and down markets.”

Canadian investors, in particular, may have a greater need for less risky solutions. Duane Green, senior vice-president, institutional investment services, with Franklin Templeton Institutional, argued that Canadian investors tend to be more risk-averse and that plan sponsors should keep this in mind when selecting a target date product. “At the end of the day, we’ve all met different investors or plan members who have no problem with risk in picking their investment choices and selecting different investments within their plans. But ultimately, as soon as they start to lose money, that’s when they panic.” For this reason, he said, plan sponsors should include target risk, target date and tactical management elements in the solutions they offer.

Failure to De-accumulate
All of these products and strategies may help members reach retirement successfully, but what happens after they retire? Colin Ripsman, vice-president with Phillips, Hager & North Investment Management Ltd., argued that the DC industry should focus more on the de-accumulation phase. He called for more innovative solutions to address the entire retirement investment continuum—for example, lifecycle funds with glide paths that extend well beyond retirement and offer flexible income options. “It allows members to balance their need for income maximization and income security in retirement.”

There’s also a need for solutions to help with the transition, said Claude Accum, senior vice-president, group retirement services, with Sun Life Financial. Interestingly, although the retirement transition can be a source of anxiety for members, it may have a positive effect on engagement. “Overall, you see rising evidence of strong engagement as people get toward the retirement zone.”

According to Sun Life’s Unretirement Index (a 2008 survey), about half of pre-retirees recognize that they may have to adjust their retirement expectations—for example, working after age 65. But while some are working longer out of economic necessity, for others, it is a lifestyle choice. “Employees might be ahead of the industry in looking for transitional or phased working arrangements in retirement,” added Accum. “That has implications for pension and benefits programs.”

When it comes to helping plan members retire successfully, the DC Plan Summit attendees agreed: there’s no easy answer. But one solution may lie in rethinking retirement and the relationship between member engagement and income adequacy. “If your engagement strategies aren’t getting your employees to the point where they can afford to retire,” Shakeel confirmed, “it’s time to make a change.”

Alyssa Hodder is editor of Benefits Canada.
alyssa.hodder@rci.rogers.com

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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.