Reducing costs in DC arrangements

Yet this approach is not widespread in Canada. Anecdotal evidence shows that organizations that went this route tend to be Canadian subsidiaries of U.S. companies in industries more severely hit by the current economic context. Contribution cuts also tend to be temporary at this point. The trend is somewhat stronger in the U.S.—where labour laws tend to be less restrictive—but still does not represent a tidal wave.

Canadian employers need to be careful before unilaterally modifying their DC contributions–whether in a DC pension plan or another form of CAP—as this raises the issue of constructive dismissal. Yet many employers cutting their contributions are not too concerned with such considerations, as they may simply be fighting for survival.

Reducing employer contributions in a DC pension plan is still a bit trickier, as the Income Tax Act requires employer contributions to represent at least 1% of payroll. It also requires the plan text to be amended and due notice given to plan members before proceeding.

It is easier for employers whose DC arrangements are structurally able to take into account variations in employer contributions, such as some group RRSP/DPSP programs.

An important drawback with this approach is that employees will often also stop participating in the plan, possibly due to the loss of employer matching or because they fear this may signal important financial problems with their employer, leading to the employees having a shorter term focus.

Sharing the hurt
Even though DC providers have seen their asset base severely eroded recently, recordkeeping and investment fee structures have still been reduced significantly over the last few years. Recent cases brought to market also show that some providers are pricing aggressively, allowing for important potential fee savings.

In this context, renegotiating your program’s fees (or going to market if this proves necessary) could result in a significant fee reduction, primarily to the benefit of your plan members (note that this is already one of your responsibilities). At the same time, modifying the fee sharing arrangement by reducing the recordkeeping fees currently paid by the employer while still allowing for a fee reduction for plan members could result in a nice “win-win” solution.

If program fees are reduced significantly, this approach may create enough room to cover other plan-related costs as well, which is acceptable as long as these costs are incurred for the benefit of plan members. These may include ongoing fees for services such as investment monitoring, plan member communication and education or plan quality audits. These fees could be offset either through the payment of commissions or by the use of an expense recuperation account (a.k.a. “governance account”).

One other cost saving opportunity is by looking into whether you are subsidizing fees for employees who have left the organization. Most employers are now ensuring they stop doing so, generally through a fee structure modification and the creation of a separate member group for inactive members, with distinct pricing.

Don’t forget that, according to the CAP Guidelines, any change to the fee structure should be communicated to plan members. Again, for pension plans, this may represent filing a plan amendment depending on how your plan text is drafted.

Thinking more long term: alternative plan design
An emerging trend—particularly for sponsors in cyclical industries—is to modify the definition of covered earnings to include variable pay items such as overtime and bonuses, albeit with accordingly lower contribution rates. The appeal for this approach is that overtime and bonuses are usually tied to periods of growth and/or business prosperity, where both employer and employees are likely better able to make large pension contributions.

In more difficult times, covered earnings naturally decrease, along with pension contributions. Introducing this approach in the current context may actually be well received, as employees realize the difficult economic context. They would also be positioned to make and receive additional contributions when the economy turns around.

Cutting employer contributions is one sure-fire way to reduce costs, but will have significant impact on employees’ retirement planning, as they will either need to make up for lost contributions in the future (possibly asking for employers to chip in), or modify their retirement goals. Other, less dramatic changes can better benefit both employers and employees. It’s up to you to decide!