New trends in transitioning to retirement.
Planning for retirement is a psychological and emotional journey. For many, it is also a source of anxiety—especially when it comes to the adequacy of their retirement nest eggs. With greater reliance on DC plans and other wealth accumulation instruments, there is greater market risk for retiring individuals. Healthcare and long-term-care costs continue to escalate faster than wages and inflation. Longevity has been increasing at a remarkable rate, and few pre-retirees understand the implications that they may outlive their money.
There is a general perception that plan members need to be more engaged in their retirement and savings plans. In fact, members are engaged, but what are they telling us? And how should plan sponsors respond? Studies of approximately one million members, conducted by Sun Life Financial in 2008, show that the average member reaches out to the provider about four times a year. However, when you examine member engagement more closely and correlate the level of activity with age, you can see that the most engaged people are at opposite ends of the spectrum: the new hires and those ready to retire.
Engagement is high for new entrants in the workforce as they join the company pension plan; however, it falls quite dramatically after age 30 and then climbs again after age 50. This latter group is carefully increasing its planning and readiness for retirement. The 2008 LIMRA study of Canadian employees’ retirement planning and savings reports that two-thirds of Canadians age 55 and older have done some planning or extensive planning for retirement.
Furthermore, if you study pre-retirees who are using DC plans as their primary retirement vehicle (with account balances over $100,000), they are in full planning mode for retirement, making heavy use of the retirement planning tools and services offered. They are also revealing genuine concerns. According to the Unretirement Index (a new survey launched in 2008 by Sun Life Financial), almost half of the pre-retirees recognized some tough new realities following the 2008 market crash. They understand that they may need to change their retirement plans to achieve the quality of retirement they’d hoped for. For example, some pre-retirees now expect to work longer, while others seek stronger risk management tools.
There is a huge opportunity for plan sponsors and the industry at large to smooth the road to retirement for members. More comprehensive and robust retirement income products will support the de-accumulation phase. More flexible solutions will recognize that each member’s retirement is unique. DC plans featuring DB-like features can help members to manage investment risk for retirement. Members understand more than ever that they are bearing the risk of retirement income adequacy, and they want solutions to help them manage those risks. While these solutions will cost money, there is an opportunity for them to be elective and 100% member-paid. Why deny members the risk management solutions they are prepared to pay for? The coming pre-retirement demographic wave will drive demand for new, customized and flexible solutions with built-in risk management. It is critical to get ahead of that wave.
Claude Accum is senior vice-president, group retirement services at Sun Life Financial.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.