One Step at a Time

Holding Hands

To help manage member expectations, plan sponsors need to stress a long-term focus on retirement and the inevitability of market risk. Many do this through a yearly education seminar delivered by their service providers. The provider usually talks about the pension plan, the investment options and the markets. But while it may hit the key points, it’s not enough, according to Tony Ioanna, vice-president, DC unit, with Aon Consulting. “If [a plan member] has to sit through a one-hour session of, ‘This fund did -12% and the markets did this; I have a 1-800 call centre, call me’—they’ll never do anything,” he says. But if the seminar focuses on adequacy of retirement income and the member’s risk tolerance, he continues, the participant will most likely react to what he or she just heard. “Plan sponsors are going to have to rethink how they do these education sessions for their members in order to lead them,” he says.

Leading makes a lot of sense in the DC market. “In most vocations, you’ve got to qualify to do something—you go to law school to be a lawyer—but here we are saying to members, take responsibility for a substantial portion of your retirement planning,” says Peter Arnold, national practice leader, investment and DC consulting, with Buck Consultants. “A lot of people simply aren’t qualified to do that.” Plan sponsors need to identify where their members fall within the “financial literacy spectrum,” according to Arnold. Financial competence among members varies, he says: there are the Warren Buffetts at one end, the Gilligans at the other and those right in the middle. “How can you have a one-size-fits-all [seminar]?”

Once a plan sponsor has figured out the financial literacy level of its employees, it can help them in any number of areas such as retirement planning and investments. Benchmarking, says Oma Sharma, principal with Mercer, is one element that members often don’t understand. “They don’t use the right comparators,” she says.

Another area of confusion is portfolio rebalancing. In the current market downturn, plan members should be rebalancing their assets, which essentially means “selling the winners and buying more losers,” says Arnold. “It is the oldest axiom of investing: buy low, sell high. Certainly, from an education perspective, some sort of non-emotional systematic approach is helpful for members to be able to deal with these types of scenarios.” However, it’s clear that from an education perspective, the “buy low, sell high” message is not stressed enough. In the Survey of CAP Members, only 29% of respondents changed investment options or rebalanced the investment mix within the past year.

Online calculators can help members with retirement projections and planning; however, they’re not always being used. Although UBC’s Faculty Pension Plan has a comprehensive website, only 20% of the membership actually uses it, Neighbour says. “We’re a typical pension plan [in that] most people don’t have questions about their accounts until they’re ready to retire.” In the Survey of CAP Members, only 27% of those surveyed use employer-provided online tools to make investment decisions. Sharma says plan sponsors have a responsibility to make sure the tools are reasonable. “Sponsors should be taking a look at those tools, not just accepting whatever tool is put before them,” she says. “If the tool is supposed to help [the member] to figure out how much to save for retirement, make sure [the] tool does do that.”

Even if plan members understand market volatility and benchmarking, there’s still the issue of contributions. “We just think the contribution rates by members are way too low,” says Janet Rabovsky, practice leader, investment consulting, with Watson Wyatt Worldwide. In the Survey of CAP Members, 46% of members said they were increasingly confident that they understood the amount they needed to contribute to their plan in order to retire, yet only 34% actually increased their contributions within the year. “People just need to save more,” says Rabovsky. “I know that’s a tough one, but it pays such big dividends long term.” And it’s not just member contributions—plan sponsor contributions are also too low, she adds. According to Watson Wyatt’s 2008 Pension Risk Survey, 62% of Canadian plan sponsors have contribution rates of less than 6%.