ACPM calls for CAP automatic enrolment and escalation features in Ontario

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“The shift from defined benefit plans to [CAPs] over the last generation has shifted the burden of having adequate income in retirement from employers to employees,” the ACPM said in a recent letter to the province’s ministry of finance. “Many employees do not understand how much money they will need to retire comfortably or how critical it is under a defined contribution pension plan to save as much as possible as early as possible. Many studies have shown that employees are increasingly concerned about not having enough money in retirement, yet many employees are not taking full advantage of their retirement programs and leaving employer matching contributions on the table or otherwise failing to maximize the possible contributions.”

The way CAPs in Ontario are set up today, employees begin from a default of not contributing because they must take action in order to opt-in, resulting in many employees failing to contribute to available CAPs at all, the letter said. Further, many other plan members contribute insufficiently to fully take advantage of their employer’s contribution-matching maximum.

The letter pointed to three key barriers for employees in using CAPs, namely poor planning skills, decision avoidance and procrastination and inertia. “It is easy for employees to delay making decisions that are complex and poorly understood but, in many cases, employees who delay making a decision never revisit their choice. This is true for employees even if they don’t feel like they are saving enough and say that they want to. This also holds true for employees who join a pension plan at a very low contribution level intending to increase their contributions over time but never do.”

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Research by the Vanguard Group on U.S. CAP members in recent years found auto-features are an effective remedy for these problems, the letter said. “The Vanguard studies show that for plans with auto-enrolment, plan participation is 93 per cent compared to only 47 per cent for voluntary plans. In addition, for plans with auto-escalation, less than 20 per cent of plan participants opt out of the automatic increases in contributions,” the letter said. “The studies also show that for both voluntary and automatic plans, employees do not tend to change their contribution percentage over time. In fact, nine out of 10 employees make no changes to their contribution rates or, if auto-escalation is included in their plans, follow the annual increase schedule with no changes.”

The ACPM also highlighted the importance of auto features given the current coronavirus crisis. “During these difficult times, employees who are participating in their employer [CAP] and may have been contributing an amount to maximize the employer match, may have had to make the difficult decision to lower their contributions due to other financial needs, even if they would not have under normal circumstances,” the letter said. “With the knowledge we have of employee behaviour, it could be very challenging to have these same employees increase their contribution to the pre-pandemic level voluntarily once the financial situation stabilizes. Allowing employers to amend their pension plans to include auto-enrolment and auto-escalation features will assist employers in helping employees get back on target for a secure retirement.”

Read: 2020 Top 50 DC Plans Report: Member behaviour under microscope amid pandemic