If plan members aren’t hitting their retirement goals, how can CAP suppliers help them get back in the game?
Over the last few years, a lot of time has been spent enticing employees to become more engaged in retirement planning. While engagement is still an important issue in the capital accumulation plan (CAP) space, an aging workforce nearing retirement is bringing other priorities to the forefront. De-accumulation and “emotional readiness” for retirement are becoming hot discussion topics.
“It’s a different world since 2008,” says Jennifer Gregory, vice-president of business development, group savings and retirement, with Standard Life. “There’s constant uncertainty, combined with a barrage of information. Faced with this, people don’t know what to do, so they ignore, stagnate, postpone and procrastinate.”
“Approximately 71% of Canadians are not confident [that] their basic needs will be met in retirement,” explains Tom Reid, senior vicepresident of group retirement services with Sun Life Financial. “Unfortunately, this number has risen steadily over the last five years.”
The 2013 Sun Life Canadian Unretirement Index Report reveals even more startling trends about how Canadians view their retirement readiness. For example, just over one-quarter of those polled report that they expect to retire by age 66, and only one-third are very satisfied or somewhat satisfied with their current retirement savings.
But Reid points out that it’s not all doom and gloom. “I do believe employees are more engaged than ever before, and the picture is getting better,” he says. “Canadians are becoming more aware of their retirement needs and are demanding more planning tools and information.”
Nichola Peterson, a partner and actuary with Morneau Shepell working in the company’s Ontario retirement solutions practice, has a different take. She believes many employees are financially better off than they think.
“Most people have no idea how much money they’ll need in retirement,” Peterson explains. “So it’s not that they don’t have enough money; it’s more that they are less prepared for retirement in terms of knowing how much money they’ll really need.”
Peterson says the typical 70% replacement ratio idea is, in many cases, too high of a target. When Morneau Shepell takes retirement planning seminar participants through the budgeting process, they typically need closer to a 50% to 60% replacement ratio. Higher-income households often need less than 50%.
“If there’s one message I can hit home, it’s budget, budget, budget,” says Peterson. “If people take the time to budget for retirement, they’ll likely find that their retirement income needs are lower than they originally assumed and that they are much closer to meeting their savings target.”
Redefining Responsibilities
As the Canadian CAP industry expands, so, too, does the aging workforce. And the lines that indicate who is responsible for what aren’t as clear as they once were.
“Gone are the days when the majority of workers received a guaranteed pension income for life when they retired,” says Lori Landry, chief marketing officer and head of institutional business with Sun Life Global Investments. “DB plans provided that security and were pretty cut and dry. We’re now in the early days of seeing members of DC plans start to retire, and there are a lot of unanswered questions.”
So just whose responsibility is it to ensure that an employee has enough money to retire: the employer or the employee? How about investment decisions? What if an employee loses a lot of money right before retiring?
And what happens after retirement—is there a duty on the employer’s part to consider providing access to funds and solutions that provide retirement income? “A lot of sponsors are now asking, ‘Can this come back on us if we don’t provide such access?’” says Landry. “It’s a very good question, and one that the industry is just starting to contemplate.”
Michelle Loder, Canadian DC business leader with Towers Watson, believes a plan sponsor’s main responsibility is to ensure that there are good governance processes in place to help employees reach their financial retirement goals.
“I don’t believe many would successfully argue that it’s a DC plan sponsor’s responsibility to guarantee that members will have sufficient savings in the company-sponsored retirement plans to ensure an adequate income for their retirement years,” says Loder. “But many do believe employers are accountable for developing sound governance processes that lead to decision-making that demonstrates that the best interests of their members was a key factor. That’s what employers could be challenged to demonstrate in the future.”
As Loder explains it, sound governance processes that are in members’ best interests are those that are shown to be totally unbiased and without any conflicts of interest, real or perceived. For example, considering factors such as the decision-making tools and investment choices available to members, the sponsor needs to be able to clearly demonstrate and articulate why it chose a particular recordkeeper as part of its due diligence process.
Other sponsor objectives include offering a plan that is simple to understand; encourages sound member choices regarding participation and contribution levels; is competitive within the sponsor’s industry; offers a welldiversified, fee-effective suite of investment options targeted to the various types of investors within its membership; and is supported with a solid educational component to enable members to get the greatest benefits from the plan.
“For most—but not necessarily all— plans, it’s the member’s responsibility to make decisions such as whether to join the plan, how much to contribute, how to invest, and when and how much to withdraw,” says Loder. “The fiduciary is not responsible for making these decisions for the employee. But the fiduciary is responsible—through good governance and oversight processes—to provide the communication, education and plan framework to help employees make the best possible decisions within the plan for their retirement.”
Loder adds that the DC industry is evolving, and plan sponsors and service providers are paying more attention to the “endgame.” The industry is starting to focus more on helping employees learn how to set and articulate retirement income goals and on offering tools to enable them to track these goals— shifting some of the focus away from the day-to-day accumulating asset balance without an appreciation for tracking to a retirement goal or the potential impact of contribution and investment strategies.
“As more employees participating in DC plans begin to retire over the coming decades, the importance of helping participants understand this now will become increasingly important,” notes Loder.
One-click Wonder
Karrina Dusablon, Desjardins Financial Security’s group retirement savings national director of education and training, says Desjardins stats show that employees—particularly those 10 years or less away from retirement—have reason to be worried.
“In general, those closer to retirement are not as financially prepared compared to past generations,” says Dusablon. “When you consider that people are now living past retirement almost as long as they’ve worked, it’s not surprising that some of these people may need to take a part-time job after they retire.”
She also believes a lot of people aren’t quite ready to manage their income and preserve it during retirement. The key moving forward, says Dusablon, is to continue educating and engaging employees and to encourage them to use the available retirement planning tools.
“We know that people who use retirement simulators do better,” Dusablon explains. “They contribute more and have more assets at the end of the day. So you really have to find a way to show people, visually, where they stand. It makes a huge difference.”
Dusablon says you can do this through “one-click engagement.” “One-click engagement is instantaneous. It’s a message that is delivered in a short, digestible chunk,” she explains.
As an example, Dusablon says 60% of employees still receive a paper statement. No problem: for these plan members, one-click engagement might be putting a reminder or targeted message on Page 1 of the statement.
The other important part of one-click engagement is that the message needs to be repeated, and it needs to be delivered using different mediums for different audiences.
“For one of our clients in the gaming industry, we created a closed Facebook page, an augmented reality game and a contest combined with individual one-on-one [sessions] between participants and their education advisor,” says Dusablon. “We brought the real world into the virtual whereby we created an emotional connection with our participants.” She adds that, after eight months, use of web tools increased by 11.3%, and the number of visits to the website increased by 24.4%.
Dusablon also points to one of Desjardins’ clients in the pulp and paper industry, for which it created a hightouch national communication plan. Each participant who wasn’t on target to reach his or her retirement objectives received a personalized invitation to meet with an advisor. During these individual sessions, the advisor guided and supported the participant by illustrating the different avenues available to them for reaching their retirement goal.
“The results were exponential,” she says. “We doubled the use of our retirement simulator, and 58% of participants increased their contribution rate.”
Trending Now: De-accumulation
De-accumulation, the phase in which retirees draw down on their assets, is garnering more attention now—and with good reason, since the risks associated with accumulating wealth are much different than those associated with preserving and using it.
According to Philippe Toupin, vice-president of group solutions with Standard Life, de-accumulation is important for everyone to consider, but it’s especially important for employees with 10 years or less to go before retirement. As an example, he points to those who, back in 2000, had planned to retire in 10 years.
“If they didn’t have a specific de-accumulation strategy in place that would have allowed some protection against market volatility, chances are, their retirement date was likely delayed by a few years,” he says.
Sue Reibel, senior vice-president of business development, group benefits and retirement solutions, with Manulife Financial, notes that, at the 10-year point, an individual still has an opportunity to make adjustments to address retirement savings gaps. Ideally, though, she believes a retirement income strategy should be part of the planning process at least 10 years before an employee hopes to retire—and longer if the employee hasn’t been a diligent saver earlier in his or her career.
“Often, the 10-year point is where individuals have more disposable income, so it’s possible to increase contributions and give them a bit of time to grow,” Reibel explains. “As an example, consider an individual who contributes an extra $625 a month (or $7,500 a year) at age 55—an amount likely less than a monthly mortgage payment. Assuming a 5% rate of return, this grows to just under $100,000 over the 10-year period.” Reibel also notes that another key part of any retirement plan is to look at how income will be drawn in retirement, considering what portion needs to be guaranteed (such as an annuity) and what can be more liquid (such as a registered retirement income fund).
Yet this is not an area that the DC industry has emphasized to date. “Traditionally, the CAP space has focused on accumulation, with very little thought given to the other end,” says Idan Shlesinger, managing partner, DC pensions and savings plans, with Morneau Shepell. “It was a very simplistic approach.”
As Shlesinger explains, retirees and those close to retirement are starting to ask what they should do with the assets they’ve spent years accumulating, noting that even retirement planning tools don’t necessarily have the answers.
“Certainly, better communication in this area is required,” says Shlesinger. “Most people don’t have the background or time to understand their investments, let alone de-accumulation, so the industry needs to move toward a ‘cradle to grave’ type of relationship.”
Is there a duty for employers to help steer employees in the right direction past retirement as well? Shlesinger believes it’s an area that has been largely ignored, and plan sponsors need to take a position one way or the other.
Yet the bulk of the private sector is looking to CAP providers to come up with solutions. “We haven’t seen much in the way of effective investment products for post-retirement incomes,” says Shlesinger. “Unfortunately, the industry just isn’t there yet.”
Emotional Readiness
Another area that’s gaining more attention is helping pre-retirees prepare emotionally for their golden years. It’s an area that, according to Jeff Aarssen, vice-president of sales and marketing for Great-West Life’s (GWL) group retirement services, offers a real opportunity for plan sponsors and providers.
“Traditionally, providers haven’t focused on the emotional preparedness of pre-retirees as much as they have on addressing financial readiness,” says Aarssen. “Of course, once the financial side is taken care of, then the emotional considerations and lifestyle planning are easier to address.”
But, as Aarssen explains, providers and plan sponsors are starting to better support pre-retirees through this emotional transition by engaging them in discussions about what their retirement will look like. Will they continue to work part-time? Create a bucket list? Explore a new hobby? Move closer to family?
“We frequently engage in one-on-one sessions for this and often include the pre-retiree’s spouse,” says Aarssen. “It’s important to establish trust before discussing someone’s emotional preparedness, and nothing beats the personal touch of face-to-face sessions.”
Jean Wong, vice-president of HR with Pacific Blue Cross (PBC), estimates that, based on an average retirement age of 62, one-quarter of PBC’s employees will likely retire within the next 10 years. For PBC, ensuring that its employees are emotionally prepared for retirement is a priority.
Wong says PBC started offering one-on-one sessions with GWL a couple of years ago, after seeing that the lunch-and-learn format was leaving some participants with a lot of questions. “I noticed, after the lunch-and-learns wrapped up, there were often a number of employees who wanted to speak with the speaker,” she explains. “The feedback I was getting from some of the participants was, ‘I don’t quite understand the presentation, and I’m not comfortable asking questions in front of the group.’”
She credits much of the success of the one-on-one sessions to the trust built between the GWL representative and PBC employees, noting that the GWL representative attends PBC offices at least twice a year, is engaging and makes herself available. She is also able to speak effectively and simply in terms that employees can understand.
Wong believes it also helps that the GWL rep, too, is in her retirement planning years. “Being close to retirement herself, she is able to discuss retirement issues in a practical, nonthreatening manner, making these one-on-one sessions a valuable tool in helping PBC’s employees better prepare themselves emotionally for retirement,” Wong adds.
Clearly, helping plan members through retirement, not just to retirement, means playing the long game. But to ensure that employees retire successfully, it’s a shot the CAP industry will have to take.
Tony Palermo is a freelance writer based in Smiths Falls, Ont. tony@tonypalermo.ca
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