Understanding the role that behaviour plays in plan member engagement.
In the evolving climate of group retirement savings, getting members to play an active role in the process has been a continuing challenge. Early discussions about member engagement focused primarily on motivating plan participants to make investment choices. Over time, particularly with the introduction of asset allocation and target date funds (TDFs) to ease the selection process, the industry has been turning its attention to factors more firmly within members’ control: their behaviour.
In the more controlled environment of group retirement savings, where funds are selected and monitored by a consultant or pension committee, the variation in comparative returns from different funds is likely to be limited. For example, a comparison of two balanced funds in which Fund A earns first- and second-quartile returns (an average annualized return of 8.6%) over 20 years while Fund B earns third- and fourth-quartile returns (an average annualized return of 8.2%) shows that a $10,000 investment in both creates a difference of just over $5,000.
While many pension committee members agree that behaviour is key to a member’s success in accumulating wealth, investment choice remains their leading area of focus. In a Manulife Financial study of 200 pension committee members conducted in January 2009, 36% of respondents identified joining early as the most important factor in a member’s success. Yet the same respondents said that only 10% of an average governance meeting focused on this, versus 37% allotted for investment discussion.
As the survey respondents suggested, behaviour plays a more significant role. Compare two members of the same age who earn the same salary and choose the same fund. Isolate any behaviour—joining early, maximizing contributions or not making withdrawals—and the difference in outcome is significant.
Compare two members of the same age who both earn $50,000. They join a voluntary group registered retirement savings plan (RRSP), make the maximum contribution (a 5% employee contribution that immediately earns a 2.5% match) and earn an 8% rate of return during their years of participation. The only difference between the members is when they join the plan: the first member joins at age 40 while the second member joins at age 45. All other things being equal, the first member will accumulate just over $204,000 by age 60 while the second member accumulates just over $123,000—a difference of slightly more than $80,000.
Remembering that $80,000 advantage, consider what happens if that first person makes a good behavioural decision and joins the plan early (at age 40) but selects Fund B, which earns lower returns. The second person starts five years later and selects the better-performing fund (Fund A). The first person will still have a better accumulation—in this case, a $78,000 advantage—as a result of making the better behavioural choice. Every additional good choice that the member makes—such as maximizing contributions or not making withdrawals—will improve the outcome for that individual, often substantially.
Ultimately, most members have the ability to understand and control these behavioural factors more than their investment selections. The challenge is helping them to act in their own best interests. While industry attention is shifting toward a focus on member behaviour, this effort needs to be accelerated.
Sue Reibel is senior vice-president, group retirement solutions (Canada) at Manulife Financial.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.