Session 6 – Autopiloting Your CAP
What Canada can learn from other countries that have implemented auto features.
By Jeff Aarssen, Vice-president, Distribution, Group Retirement Services, Great-West Life
The stubborn problem of plan member inaction continues to challenge plan sponsors and contributes to plan members not achieving their retirement savings potential. Automatic CAP features—such as auto-enrollment and auto-escalation of contributions—impose saving as a default. Do the benefits outweigh the potential pitfalls? Canada can learn from other countries’ experiences.
Member inaction can occur because members aren’t comfortable making the decisions required by a CAP. During their years in the plan, members face a number of decisions, such as how much to contribute, how to allocate assets to investment choices, if portfolio rebalancing is required, whether to make catch-up contributions to stay on track and, as they approach retirement, what to do with the funds they’ve accumulated.
The group retirement industry has developed a wide range of tools and resources to help members with these decisions. Yet according to the 2009 Benefits Canada Survey of CAP Members, 59% of members reported that their understanding of their plan is less than “very good.” Receiving information isn’t the same as understanding it, and lack of understanding can lead to member inaction.
Auto-enrollment
One possible solution for this inaction is auto-enrolling employees. In the U.S., auto-enrollment is part of the 2006 Pension Protection Act (PPA) and has yielded significant improvements in DC plan participation rates. According to EBRI/ICI and LIMRA, in 2007 (after the act was introduced), plans with auto-enrollment reported 87% participation, compared with a 66% participation rate in 2005 for plans without auto-enrollment.
Despite the benefits, auto-enrollment raises some communication and consent considerations. Before an employee starts work, the employee should be made aware that plan participation is automatic and that opting out is available. Frequent, clear communication will help ensure that members remain informed. And despite a plan sponsor’s efforts to point out the value of saving for retirement, some employees will choose to opt out. In a U.S. study by Deloitte, 12% of employers saw an increase in opt-outs in 2009.
Auto-enrollment isn’t a panacea. In Australia, a LIMRA study found that plans that offered auto-enrollment but allowed members to choose a low contribution rate experienced a decline in savings.
Auto-escalation
To provide adequate retirement income, there must be a combination of sufficient contributions over time and investment growth. By automatically escalating member contributions, a CAP can reduce the impact of insufficient contributions.
The same Deloitte study found that auto-escalation is offered in 42% of U.S. CAPs. Most (65%) of these employers implement the increase by 1% of salary per year until a predetermined maximum percentage is reached. Payroll deductions require consent, and plan sponsors offering auto-escalation can choose between obtaining member consent every time the contribution escalates or, upon hiring, getting consent to an escalation schedule.
Canada can learn from the success of the PPA in the U.S. and how members benefit from features such as auto-enrollment and auto-escalation. The current debate about whether Canadians are saving enough for retirement suggests that considering auto features for CAPs is a very timely concept. Consideration should also be given to the design of a 401(k)-type of Canadian group RRSP. As well, Canadians could benefit from a new national set of rules that recognizes the distinct nature of CAPs, encourages their creation and enhances the well-being of working Canadians. BC
Continued on the next page…
Session 7 – Communicating Retirement Plan Information in the Age of Social Media
It’s not the medium, it’s the message.
