Session 8 – Reality Programming Comes to Retirement Planning: Market Volatility Survivor
The amazing race turns a new corner toward income adequacy.
By Barry Noble, Vice-president, Distribution, and Nancy Campbell, Assistant Vice-president, Marketing, Group Savings and Retirement Solutions, Manulife Financial
In the Canadian context, CAPs are quite young. These plans didn’t come into favour until the 1980s, so their evolution is remarkable. But it’s even more remarkable to consider how quickly the view of plan members has evolved.
In the early ’80s, experts suggested that members wanted control of their retirement savings and were rejecting DB paternalism. However, a U.S. study by Ameriks and Zeldes in 2004 showed that more than 70% of members did not change their asset allocation during the period between 1987 and 1996. Does that sound like members embracing control? The emergence and popularity of asset allocation and TDFs show that members are prepared to cede control to professionals with expertise.
Early CAP designs typically included fund lineups of 10 choices or fewer. In the ’90s, beliefs about funds changed, and “more is better” became a rallying cry. Fund lineups exploded to include dozens of managers and sometimes more than 100 funds.
Yet in studies assessing the effects of choice, behavioural finance experts confirmed that too much choice is immobilizing. Faced with excess fund choice, members opted to make no choice at all or chose more conservative options. This reality check caused the industry to reduce the number of options in fund lineups.
As tools such as interactive voice response phone systems and the internet gained popularity, the industry hypothesized that members would use these resources to embrace education. But in the most recent Benefits Canada CAP Member Survey, more than 60% acknowledged that they hadn’t spent enough time planning for retirement. A U.S. study by Choi offers a perspective on why: 100% of employees leaving an education session said they would join the plan, but only 14% took action and enrolled. Of the members who did not attend, a scant 7% joined the plan.
An interesting question to layer over these observations is how did members react to the recent economic turmoil? While a U.S. study by T. Rowe Price confirmed an increase in fund transfers and phone calls, the volumes stayed within historical norms. Does this lack of response demonstrate an informed and purposeful lack of panic—or is apathy simply working, for once, to the members’ advantage?
Engaging members has been the industry focus for some time, but their seeming apathy during the most dramatic economic crisis since DC plans were introduced shows that engagement remains an uphill battle. While educating members is vital, it’s time to shift the focus to their most important consideration: income adequacy.
As relics from this time capsule show, members don’t want control, don’t want to make choices, won’t make the time to plan and simply aren’t that into retirement planning. But then, why would anyone imagine that these things would thrill the average plan member?
Shifting the industry focus to retirement income adequacy will make a difference. Making changes through plan design features—auto-enrol, auto-increase and different default investments (elements that are central to U.S. industry reform)—will help members do a better job of building an adequate retirement income. And giving members a clear view of the retirement income that they are building will help more Canadians to retire with an adequate income. BC
Continued on the next page…
Session 9 – Winning in the Long Run
Asset allocation strategies for DC plans.
