The Auto Route

While not all of these households include members of group retirement savings plans, are employers that offer such programs doing all they can to ensure that employees are saving what they need? This issue is largely focused on capital accumulation plans (CAPs), including defined contribution (DC) pension plans, group registered retirement savings plans and deferred profit sharing plans, given their increasing popularity as well as the uncertainty of the benefit they will provide on retirement.  

With respect to CAPs, initiatives designed to educate employees and encourage them to save more for retirement have been focused on three areas: increasing membership in the plan (where membership is optional) and the benefits of the plan itself; maximizing contributions (for contributory plans); and making the right investment choices.

However, despite considerable effort on the part of many CAP sponsors, member involvement remains low in terms of actively monitoring investment options, increasing contribution levels and even joining the plan. Small wonder that in some parts of the world, plan sponsors have basically given up on the idea of engaging the majority of their plan members and are concentrating instead on making decisions for them that will provide a better retirement income.

Global Uptake
Automatic features—auto-enrollment, auto-escalation of contributions and auto-investment decisions in the form of lifecycle or target date funds—are becoming increasingly popular in the U.S., thanks to the 2006 Pension Protection Act. A Hewitt Associates survey conducted in the U.S. at the end of 2008 indicated that 51% of the 150 mid- to large-size employers polled offer auto- enrollment in their plans, up from 41% in 2007. In addition, 77% offer target date funds, while only 66% did so a year ago. More than half (53%) also offer some form of contribution escalation in their DC plans.

While not as prevalent in the U.K. as in the U.S., plans in which members have to opt out (i.e., auto-enrollment plans) increased from 17% to 24% between 2007 and 2008, according to results from Hewitt’s annual U.K. DC survey. In addition, participation rates are significantly higher for plans with auto-enrollment versus plans in which members have to opt in (88% versus 50%).

In the U.K., sponsors of plans with auto-enrollment have also found that most members do not select their investments and instead rely on the default fund. For this reason, target date funds are the most utilized default investment option, with approximately half of the plans surveyed offering them. The use of target date funds either as the default or on a self-directed basis is high when they are offered in a group plan, with approximately three-quarters of members investing in these funds.

Information on the current prevalence of auto features in Canadian CAPs is hard to come by. Informal discussions with several large recordkeepers (Great-West Life, Manulife, Standard Life and Sun Life) conducted in February 2009 reveal that a very small percentage of plans in Canada offer true auto-enrollment and/or auto-escalation features—likely less than 1%. And the fact that so few CAPs offer these features has nothing to do with product availability. All of these recordkeepers stated that they would be able to program their systems to incorporate plans with either of these features.

As far as auto-investment goes, target date funds emerged in the Canadian marketplace in 2005, a dozen years after their first appearance in the U.S. Each of the large recordkeepers and some of the mid-size recordkeepers now offer at least one target date series, and that number is increasing.

With the growing prevalence of auto features in plans elsewhere in the world, it is safe to assume that some Canadian plan sponsors will follow suit. However, before jumping on the auto route, they should consider whether or not it really is the best road to take to retirement income adequacy for plan members.

Legislative Challenges
There are some barriers to incorporating auto features into Canadian CAPs. With respect to auto-enrollment, an issue arises if the plan requires member contributions, which would normally be made through payroll deduction. Employment standards legislation prohibits such deductions unless the member consents or there is some sort of court order or other legal authorization. 

To accommodate this requirement, some plan sponsors are making auto-enrollment consent forms part of a standard package of materials that they provide to new hires and/or non-participating employees. In order to take full advantage of the company match, employees must sign and submit a consent form agreeing to contribute a specified percentage of pay to the savings program. If they don’t want to be part of the plan, employees can check off the “no” option on the form. Experience has shown that, typically, 15% to 20% of non-participating employees end up joining the plan as a result of this strategy. This form may also incorporate an escalation formula, obtaining consent to auto-escalate at specified points.

Minimizing Responsibility
One of the primary arguments against incorporating auto features into CAPs is that doing so removes some of the plan sponsor’s accountability for engaging members in the plan. Members, for their part, have less incentive to play an active role in saving for their own retirement.

In an ideal world, all plan members would join their employer’s retirement program as early as possible, increase their contribution levels over time and make rational decisions about their investments. However, this isn’t the case, as data from the 115,000 employees participating in the latest Best Employers in Canada study clearly indicate. Here are a few key findings.• Less than half of employees believe they are currently saving enough for retirement.

• Even at organizations with high overall engagement levels, barely half of employees feel they are taking full advantage of their employer’s retirement/savings plan.

• When asked if they are comfortable with the level of investment risk that they are assuming in their organization’s retirement/savings plan, 56% of employees at high-engagement employers answered yes—considerably more than those at other organizations. However, 22% of employees at high-engagement organizations stated that they do not know if they are comfortable with that risk.

These numbers are in spite of the best education and communication efforts of plan sponsors, including the 50 Best Employers in Canada of 2009. So it’s not surprising that some organizations are concluding that the end justifies the means and that, in order to ensure a certain level of retirement income adequacy for plan members, auto features are the way to go.

Members that are engaged in the plan may still have the option of making their own contribution and investment determinations. However, even when a retirement program includes auto features, this doesn’t mean that the sponsor is relieved of responsibility for plan communications and, possibly, for some level of retirement savings education.

The fact that pensions are currently a hot topic means that plan sponsors have a perfect opportunity to address members’ concerns. In a December 2008 Hewitt Rapid Response survey, 59% of CAP sponsors reported that they had discussed or would discuss the impact of the current economic environment on retirement plan savings with their members.

Semi-automatic Versus Fully Automatic
One silver lining of the recession may be an increased awareness on the part of Canadians generally—and plan members specifically—of the need to set aside a larger nest egg for retirement. This could mean that plan sponsors won’t necessarily have to incorporate all available auto features into the plan in one fell swoop.

For example, plan sponsors may be successful in recruiting employees to join the retirement program without resorting to auto-enrollment. However, in order to ensure that contributions stay high and investments remain appropriate over time, the sponsor may still want to incorporate auto-escalation and auto-investment features.  

The auto route may seem to be the path of least resistance. Many plan members will be delighted to pass on their retirement savings decisions to someone else. And some plan sponsors would be happy to introduce auto features and lessen their feelings of responsibility to ensure the adequacy of members’ post-employment income. But is this passive approach really the best response to plan member apathy?

The answer lies in finding the appropriate balance between member engagement and retirement income adequacy. For some plan sponsors, however, the balance will surely tip in favour of automatic features.

Zaheed Jiwani leads the DC investment consulting team and Dianne Tamburro is a senior investment consultant with Hewitt Associates in Toronto.
zaheed.jiwani@hewitt.com
dianne.tamburro@hewitt.com

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