1. Condition employees to save for retirement from their hire dates
Required contributions – Employees are required to contribute a certain percentage of pay. This rule would be easier to implement with respect to new hires; current employees would require sufficient notice of the change.
Additional incentives – Provided to join the plan when first eligible:
- Offer a retirement savings bonus after the first year if the member contributes at a certain threshold (i.e., above 5% of pay). The bonus could be, for example, an hour with a financial planner, an enhanced company matching contribution or additional flexible credits.
- Create a retirement “lottery” where each percent of pay that an employee contributes earns one chance in a lottery for the non-vested forfeiture balance at year-end.
2. Keep members saving at a high rate
Retirement savings bonus – After a member accumulates a certain number of “points” (e.g., one point for each percent of pay that the employee contributes), he or she receives a bonus such as a financial health check with a financial planner, cash, an additional contribution to the retirement plan or an RESP, or even time off.
Active annual enrollment with an incentive – While organizations that offer flexible benefits conduct an annual enrollment, they don’t invest the same time and effort in their retirement plans, even though poor decisions in this regard are more likely to have long-term effects. Employers may want to introduce annual enrolment for their retirement plans, with an incentive for active enrollment. For example, an employee earns 0.5% of pay for completing an investment questionnaire, using a retirement projection tool and confirming or changing their investment allocation and savings rates.
Aggressive matching structure – Higher company matching is available for those who save more.
3. Help employees balance other financial pressures
Build flexibility into the contribution structure to allow employees to allocate a portion or all of the company contributions into vehicles such as the new Tax-Free Savings Account (TFSA), RRSP (for purposes of the government loan programs, HBP or LLP) and RESP or RDSP (enabling savings for children’s education and disabled family members while attracting government matching programs).
Linking benefits and retirement plans – A portion of the company match could be directed to provide an enhanced benefits plan. Similarly, unused flexible credits could be directed to the retirement plan.
Facilitate transfers to the HBP or LLP – Since RRSP savings can be used for withdrawals under the HBP or LLP, employers should help facilitate these types of transfers.
4. Link saving rates and investment returns
Employer contributions – Employers would have a stake in helping employees meet a target income replacement objective by linking company contributions with investment returns. For example, a target savings rate would be set, and company contributions would increase if the investment return of a proxy balance fund is below target or decrease if the investment return is above the target return objective.
Target date company contribution structure – To incent employees to save early and aggressively, the matching portion of the company contribution would reward more aggressive investment allocation early in an employee’s career and less aggressive investment allocation later in an employee’s career when employees are saving more.
Adequate retirement savings are dependent on both savings and investment. The DC plan of the future may well be one that returns to the basics, yet finds new ways to encourage members to save more.
Shawn Cohen is a senior investment consultant and Mazen Shakeel is a principal in the retirement consulting practice at Hewitt Associates.
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