Preparing for Payout
Plan sponsors should also prepare members for retirement itself—the so-called de-accumulation phase. They should be explaining to members which options they have to choose from—including life income funds (LIFs), retirement income funds (RIFs) and annuities—before they reach retirement.
Members also need to be aware of longevity risk (the risk of outliving one’s retirement savings) and investment risk. “[The retiree’s] ability to withstand a market downturn changes dramatically in the de-accumulation phase,” says Arnold. “[The plan member] might live longer and take market risk or be able to perfectly phase out [an] amount of wealth by annuitizing.”
Furthermore, members need to understand the dynamics of demographics and inflation—especially now, as the baby boomer generation moves rapidly toward retirement. “We don’t know what’s going to happen as a large chunk of the world retires at the same time,” says Arnold. “That’s the boomer effect. What’s going to be their needs for goods and services? How are they going to be driving the prices?”
At UBC, the focus on the de-accumulation phase is really for those members within five to 10 years of retirement. “When [employees] come to the initial workshops, there is probably five minutes spent on retirement options, only because nobody’s really interested in it at the beginning. [But we] put a little bit of something in their minds that these are available,” says Neighbour. Information on retirement options is available on the website and is also featured, at times, in the quarterly newsletters, says Diane Fulton, investment director with the UBC Faculty Pension Plan. However, some consultants say that plan sponsors aren’t doing as much as they should to help members in this phase. That’s because the DC market is in its nascent stage, says Sharma. “Plan sponsors should be doing more to assist employees in the de-accumulation phase. It hasn’t been a priority because the DC market in Canada is still relatively young.”
From an industry perspective, many service providers offer LIFs and RIFs for members once they retire, but there’s still no focus on the member, Ioanna says. By joining a group LIF, let’s say, the plan member benefits from the group rates that she had when she was an active employee, but “she doesn’t have much handholding,” Ioanna says. “That individual has [even] less opportunity to talk to the service provider because she’s now on her own.”
And LIFs and RIFs aren’t always the answer. They are limiting in two ways, according to Ioanna. One, they don’t give members a guaranteed income because they’re still exposed to the markets, and, two, they are usually the only options plan members think they have, because that’s all the industry talks about in the current low interest rate environment. “Annuities are good retirement income planning tools,” says Ioanna. He compares them to the Canada Pension Plan, in which employers put money aside and employees get a promise at age 65. “Why not do the same with [a] CAP? Take a portion of it [and] purchase an annuity. [But the plan member] will only do this if somebody tells [him or her] about it, and what the merits are.”
Helping Out
In addition to communication and education, there are a few other steps that plan sponsors can take to ensure that members have adequate retirement income. One is to lower investment management fees. “There’s a lot of room for fees to improve, especially if the plan’s been in place for many years or the assets have grown,” says Ioanna. “A reduction in fees means returns will be higher, which means more money at retirement.” However, sponsors have to take the initiative. “It’s rare that a service provider will come knocking and say, ‘Mr./Mrs. Plan Sponsor, this month, we’ve reduced your fees by 10%.’”
There’s also a movement to simplify the DC world, says Hurst. “There’s a trend toward simplifying investment menus and perhaps moving toward asset allocation funds, target date and target risk asset allocation funds as opposed to offering investments across asset classes,” he says. However, just because it’s a bit more simplified, this doesn’t mean that plan sponsors don’t have a responsibility to their members. “I personally like the target date funds,” says Ioanna. “But you’re not really helping the member to understand what happens at his [or her] retirement. You’re helping in terms of managing investments, but not necessarily in managing retirement income. You still have to go that extra step.”
Another possible solution in the future is to create a mandatory contribution rate, following in the footsteps of Australia, which has mandated that DC plan sponsors contribute a fixed amount to their plans. However, in Canada, implementing this type of mandate could mean a long wait because we don’t have the same regulatory environment, says Jiwani. “We don’t even have regulations on CAPs; we just have the CAP Guidelines.”
Until mandatory contributions are legislated or every plan member becomes a retirement planning expert, plan sponsors will need help members understand how and why they need to save. The most important aspect of retirement planning, however, is a hands-on approach to member education. “A lot of sponsors will organize annual information sessions because they feel they have to,” says Ioanna. “Since they invest in doing the presentation, why not do it differently? Add some value. And they’ll see [that] more and more people will start attending the sessions because [plan sponsors are] talking to them, not talking at them.”
