CAP sponsors may well wonder why some employees don’t embrace the opportunity to participate in these plans, leaving money on the table. This year’s CAP Member Survey delved into some of the reasons why employees do or do not join the employer-sponsored retirement plan, and what actions they take as members if they do enrol.
When making the decision to join their retirement plan, members consider a number of factors: age (48%), impact on take-home pay (39%), current savings (32%), government public pensions (23%), fluctuations in financial markets (20%) and levels of personal debt (18%). Nearly half (45%) who joined the plan later were motivated by the company match, while 40% realized it was “time to start saving.”
Looking at those who chose not to join their employer-sponsored retirement plan, one finding that really resonates with Becky West, associate partner, defined contribution practice leader, with Aon Hewitt, is the number of respondents who say they don’t know why (2%) or are not interested (19%). “It really becomes evident that there still seems to be a lack of understanding of retirement savings and investment strategies,” she says, adding that she was struck by the number who don’t know what would encourage them to join the plan or who are uncertain if they will ever join.
“From my perspective, we need to take a page from the defined benefit world and make employee participation in all employer-sponsored retirement plans mandatory and remove any investment decisions from the participants,” West comments. “CAPs are still in the development phase, and we don’t know all the issues we are going to face. To help mitigate these unknown issues, we need to focus more on plan design, on governance structure and on monitoring for the success of meeting the purpose of the CAPs. In a perfect world, I believe we need to take investment choice away from plan members and channel our collective energies into building robust investment solutions that are appropriate for members at all stages of their investment life.”
Auto-enrollment with an opt-out option could help to manage member engagement, says Anna Del Balso, associate vice-president, market and business intelligence, with Standard Life. This year’s survey found growing support among members for auto-enrollment: 78% in favour, with only 4% opposed. “There is a fine line between keeping members engaged and making sure they make the right decisions,” Del Balso explains. “With so much concern about debt repayment, we need to encourage financial planning to help people understand how to balance paying down debt with saving for retirement. We need to make it simple for them to join and simple for them to make their investments, then educate them along the way to ensure they gain the knowledge and confidence they need to make long-term decisions.”
Shawn Cohen, a relationship manager with MFS Investment Management Canada, agrees that auto features and, ultimately, making retirement plans mandatory are the way to go. Cohen also stresses the need for a cultural shift toward savings and investments. “One idea is the creation of flexible plan designs that accommodate more immediate needs by allowing a portion of employee contributions to go to a tax-free savings account that allows access while directing the employer and remaining employee contributions to a retirement vehicle. This might motivate younger participants to enrol earlier and develop a habit of contributing toward retirement. The industry has done a good job of trying to educate participants on various decision-making responsibilities, but the environment definitely has to shift. And, yes, that may mean taking some of the do-it-yourself responsibilities back from participants.”
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