DC plan sponsors need to manage members’ growing expectations
The tidal wave of Canadians nearing retirement is a well-known trend. According to Statistics Canada, by 2036, Canadians age 65 and over will comprise more than one-quarter of the population. Their biggest concern is the combination of creating a sufficient income stream and managing their health in retirement. Many of these future retirees expect their DC plans to play a significant role in their retirement, so plan sponsors are increasingly facing the challenge of identifying how they will manage and meet these expectations.
Greater Expectations
According to a 2013 retirement income study by Manulife Financial, Canadian DC members between ages 45 and 65 expect 40% of their retirement income to come from their plan—more than any other source of income—despite having an average plan balance of only $97,000. At the same time, they’re becoming more risk averse: 39% would take a guaranteed 3% notional return on plan assets over a higher return with some potential downside. Guaranteed income solutions get a lot of attention these days and have obvious appeal. But they also offer less growth potential for low-balance accounts and, naturally, require substantial invested amounts in order to produce sufficient retirement income.
All of this reveals a gap between the expectations and the retirement readiness of Canadian pre-retirees. And it’s not just member expectations that are evolving. A 2012 study from the CEB (formerly called the Corporate Executive Board) shows that more than half (53%) of plan recordkeepers in the U.S. consider providing members with a steady income in retirement to be the primary goal of plan design for DC plans—up from 0% in 2007. Putting aside the CAP Guidelines and interpretations of fiduciary responsibility, if this trend keeps creeping into Canada, it could create a complete shift in mindset around the way plans are designed, managed and measured. It could also further influence members’ expectations regarding their plans and the employers that sponsor them.
Holistic Retirement Plans
So how should sponsors—and the DC industry at large—respond? The answer is broader than simply identifying the right products and giving them to members. While offering the right income solutions is crucial, it’s not enough to address the challenge ahead. Most members need help with setting realistic retirement goals and understanding the complex choices presented to them, so sponsors should take a bigger-picture approach, prioritizing targeted communication and education strategies. These strategies should aim to raise awareness among pre-retirees, helping them to assess and understand their own retirement readiness and the options and support available to them. Sponsors should also provide ways for members to access qualified financial advice in order to create a proper, holistic retirement plan that goes beyond pure income and incorporates a member’s expense planning as well as his or her health and lifestyle needs and desires in retirement.
Sponsors offering group benefits plans also need to manage member expectations about the extent to which their plan directly supports retiree health needs. They should partner with their carriers to educate members about the options available to them, even if those options are outside of the plan’s purview.
No matter how a plan sponsor sees its role in helping members, finding ways to close expectation gaps is crucial. After all, aligning expectations is in the best interests of both sponsors and members.
Matt Miles is vice-president, product and marketing, group benefits and retirement solutions, with Manulife Financial.
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