This is Part 3 of our 6th annual survey of CAP members.
Read Part 1: Engaging employees
Read Part 2: Increasing understanding
Read Part 4: Exploring new communications
The good news is that CAP members generally appreciate the role they play in attaining adequate retirement income. The bad news? Most just aren’t there yet.
Members of employer-sponsored retirement savings plans seem to have more realistic expectations about their retirement savings now than in the past—however, a strong grasp on reality isn’t consistent across the employee population.
As in previous years, the most recent survey shows that the vast majority (82%) of plan members are satisfied with their employee retirement plan. While that is good news for plan sponsors, the degree of satisfaction has eroded somewhat, with only 23% “very satisfied” compared with 30% last year. Nearly four in five (78%) say they are satisfied with the performance of their investments in their retirement plan, with 18% of that group being “very satisfied.” Younger plan members ages 18 to 34 (83%) are more likely to be satisfied with the performance of their retirement plan investments than middle-aged (76%) and pre-retirement-aged (78%) members.
Yet despite high satisfaction rates, 40% of plan members are “not very” or “not at all” confident that their employer-sponsored retirement plan will provide the amount of money they expect from it in order to meet their financial objectives for retirement. This response has increased steadily since 2006, when only 21% expressed a lack of confidence. Younger plan members (67%) are more likely to be confident than their older counterparts (57%), and two-thirds (65%) of plan members making at least $60,000 a year are more confident than those in lower-income brackets (57%).
“Communication seems to be key, since the survey shows that if education is frequent and the content is interesting, members are more satisfied and confident,” says Anna Pagliuca, vice-president, customer experience, with Standard Life. “Of course, younger members have more confidence because they have a longer period of time to contribute to the plan, and people with a higher income are more confident because they are contributing at a higher level. We need to target education and communication to different segments—young versus older, high income versus lower and women versus men—to make sure we get closer to each member’s particular needs.”
Brett Marchand, vice-president, distribution, group retirement solutions, with Manulife Financial, says effective communication is key to the success of any plan. The survey shows that members who are knowledgeable and engaged, work with an advisor, have a financial plan and actively monitor their accounts have more achievable expectations. “They are more confident about reaching their goals, and the goals they have are far more realistic,” Marchand adds.
More than half (52%) of the plan members surveyed took no actions with their employee retirement plan over the past year. Among those who did, 18% increased the amount they contribute, while 4% decreased their contributions. Other actions included changing investment options or rebalancing the mix (16%), maximizing the company match (15%), using information provided by their employer to make investment decisions (7%) and making a withdrawal from the plan (7%). The vast majority (84%) of those who took action over the past two years expressed satisfaction with the overall results of those actions. Just under one in 10 (8%) respondents voluntarily joined their employee retirement savings plan during the past year.
“As an industry, we talk a lot about investment returns. But we aren’t as clear about the contributions going in, and that’s where the focus has to be,” says Janice Holman, a principal with Eckler Ltd. “I’m curious about the big drop-off in the number of people who said they used information provided by their employer to make investment decisions. It’s gone from a high of 30% in 2006 to only 7% the past two years. It’s hard to know if it is pure disengagement or if the increase in the use of target date funds has created some of the disengagement, at least with regard to the investments.”
Similar to past years, plan members expect the highest percentage (29.8%) of their retirement income to come from their DC plans or group RRSPs. While up slightly from 2010 (27.1%), this year’s response is a far cry from the 49.9% cited in 2008. Members put more emphasis on government retirement programs such as the Canada Pension Plan or Old Age Security (23.5% in 2011 versus 17.4% in 2008), and they also expect a higher proportion from investments in real estate (7.3% versus 2.1% in 2008).
Nearly all (92%) plan members expect—at the very least—to be able to live independently and pay their bills during retirement. Only 8% said they expect they will need to receive financial support from their family and/or friends once they retire. Nearly half (44%) of plan participants acknowledge that they will have to be careful with their funds in order to live independently and pay their bills, while another 35% said if they are careful, they should be able to do some travelling or other things that they don’t regularly do now. But 14% said they expect to be able to do whatever they want in retirement without any serious financial concerns.
Once again, those who have a written financial plan (18%), have an advisor (18%) or can be described as very knowledgeable about their retirement plan and investment concepts (19%) are more likely to believe they can do whatever they like when they retire. But female plan members are more likely than males (47% versus 41%) to say that if they are careful, they should be able to live independently and pay their bills during retirement. Not surprisingly, plan members with the highest level of personal income are the most likely to say they don’t expect any serious financial concerns in retirement.
Yet despite these expectations, only 51% of plan participants believe they are currently on track to meet their targets for the amount of money they need to save. Only 11% said they are “definitely” on track, compared with 40% who said they are “probably” on track. Those closer to retirement (transition phase) are more likely to believe they are “on track” (69%) than those still building their investments (accumulation phase, 46%).
This year’s survey also shows a gap between plan members’ expected rate of return on their investments year over year (average 12.9%; median 8.0%) compared with the actual rate of return they are currently achieving (average 10.1%; median 6.0%). Those with higher knowledge levels (very knowledgeable, 12.2%, versus not at all knowledgeable, 15.7%) and engaged plan members (11.9% versus 14.7%) report a lower expected average rate of return than others.
“I don’t believe that most people have a good sense of whether or not they are on track, and they don’t understand what to do to make sure they are on track,” says Gord Lewis, vice-president, consulting, with Proteus. “When you look at expectations, more than 18% of those surveyed this year have increased the amount they contribute to the plan, yet 40% say the plan isn’t going to pay them enough. The survey also shows that the most important thing members want information about is investment returns. So plan members have this odd notion that their funds are going to grow on investment returns—when, in reality, the fastest way to grow their savings is to throw more money into it. As an industry, we need to drive this point home to plan members.”
The fact that members now anticipate lower returns on investments than in the past may indicate that the current economic climate has made them more realistic, suggests Marc Poupart, general manager of pensions and retirement programs with Hudson’s Bay Company. “But it amazes me that they are still looking for investment information when they aren’t really doing anything of value with it,” he says. “Most members don’t even want to know what their expected pension payout will be, and if you try to show them, they don’t want to see it. But they need to consider this in determining if they need to take action, such as save more.”
Auto-enrollment and auto-escalation are often cited as the best strategies for getting members into a plan early and making sufficient contributions to provide adequate retirement income. And there appears to be support for these strategies: 63% of plan members and a similar proportion of non-members (62%) support auto-enrollment, while six in 10 (60%) participants would support auto-escalation. “We need to continue to advocate for auto-services,” stresses Marchand. “We need to expand access to retirement education and appropriate retirement advice that isn’t a one-size-fits-all solution. The approach has to be right for each member, although that is tough to deliver on a very basic level. Legislators and recordkeepers need to consider plan design changes to support better decisions. Mandatory participation rules, locking-in requirements, withdrawal restrictions and streamlined investment options would all prove effective.”
Get a PDF of the 2011 CAP Member Survey.