Returns, member comprehension bedevil DC plan sponsors

Mercer’s 2009 Global DC survey of 1500 plan sponsors (including 193 Canadian plans) in 33 countries finds 77% of respondents cite a lack of plan member understanding as their top challenge, followed by poor investment returns at 71%.

According to Mercer, plan sponsors are ready to take action.

Almost 90% of respondents are making it a “high priority” to improve member understanding and education, while more than 50% say they will change investment arrangements to reduce costs and/or improve investment returns over the next two years.

Jean-Daniel Côté, Mercer’s defined contribution retirement leader, says maturing DC plans are staying the course, as few Canadian plan sponsors said they have made, or are planning to make, reductions or suspensions of DC plan contributions. In fact, 92% of respondents say they have decided not to make any changes to DC contributions in the near future, whereas over 20% of their U.S. counterparts report they have reduced or are planning to reduce company contributions in response to the recent economic downturn.

“This should be reassuring for Canadian DC plan members,” says Côté.

Three-quarters of respondents cite the provision of a competitive retirement program in line with the market as the top reason for establishing a DC plan. When asked to identify the top three most important success factors for their DC plans, respondents most frequently said the plan should be valued by employees (72%), cost predictability (44%) and benefit adequacy (43%).

“While benefit adequacy is identified as a key goal, close to half of respondents never review projected DC retirement benefits and only 29% identified inadequate pension benefits as a particular concern,” says Côté. “We suggest a review of projected benefits, especially in light of limited member understanding and poor investment returns, might be a useful exercise for plan sponsors to consider in 2010.”

Investment options
The survey found two-thirds of respondents offer between six and 13 investment options to members, and one-third say they are considering the addition of target date funds within the next two years.

“Canada continues to lag the U.S. in offering these funds,” says Oma Sharma, Mercer’s defined contribution investment consulting leader.

For members hesitant to make their own investment decisions, the majority of Canadian DC plans have a default fund option in place. However, default fund selection varies widely, with 36% of respondents’ plans using a balanced fund, 23% a money-market/short-term fund and 19% a target date fund series.

“This indicates how existing DC plans differ from new ones being implemented,” says Sharma. “New plans are much more likely to use target date funds as the default fund option. The good news is most DC plan members are making an active investment decision, with two-thirds of survey respondents indicating fewer than 20% of their DC plan members have defaulted.”

Contribution levels
Contribution levels have remained stable in comparison to Mercer’s 2002 and 2006 DC surveys, with the median overall maximum employer contribution for pure DC arrangements being 5% for non-unionized, management plans, and unionized plans, but 6% for executive plans. The median employee maximum contribution for all employee groups is consistent at 5%.

Approximately two-thirds of plans include bonuses in eligible earnings for DC contribution purposes, and over 80% include commissions, a significant increase from Mercer’s 2006 survey results.

“It will be interesting to see if this apparent trend to include variable compensation in eligible earnings represents a desire on the part of plan sponsors to more closely link DC plan contributions to business cycles, or if it is simply the result of this particular plan sponsor subset,” says Côté.

Communication
The survey found that half of plan sponsors say they rely primarily on their administrators to provide communication to members, while 12% have a strategy to proactively plan and deliver DC communication based on actual participation and investment behaviour of their plan membership. Almost one-third (30%) don’t measure the success of communication and education efforts in any way.

While many plan sponsors (45%) believe their plan members changed DC asset allocations due to the impact of the global financial crisis, available figures seem to refute this. According to data from Canadian DC record keepers, plan members made few changes to their investments.

The future
As for new developments in DC arrangements, approximately 60% of respondents indicated they have already added or are considering adding a group TFSA to the DC plan mix within the next two years.

“DC plans are in constant evolution, and plan sponsors still need to think through the long-term repercussions of 2008,” says Sharma. “The year 2010 will be a key year for plan sponsors to assess the lessons learned and implement changes to improve the effectiveness of DC plans over the long term.”

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