2. Participants do not save enough – Once people are in a plan, short-term needs may stop them from contributing as much as they could. Employers might set a default contribution rate that applies unless the employee actively chooses to contribute at a lower rate.
3. Participants invest unwisely – Participants may deploy the funds they do contribute inappropriately. Participants in group registered retirement savings plans (RRSPs) also often use vehicles with high administration fees, undermining their returns and sacrificing contribution room. Employers might steer participants into lifecycle-appropriate portfolios and/or vehicles with lower administration fees.
4. Participants cash out ineptly – Many participants exit from retirement saving in group RRSPs with lump-sum or rapid withdrawals that expose them to outliving their assets or paying unnecessary tax. Employers might set a default annuitization option at the end of a career or a staged option as the end approaches.
5. Participants use their own untrained judgment or badly selected advisors – To address these problems, employers may make group and individual advisory services another default option.
Helpful though they are as a benchmark for good practice, the CAP Guidelines provide no direct legal protection. Hence, the attractiveness of timely federal and provincial pension legislation providing legal safe harbours for employers that, in good faith, steer their employees toward wise choices in money-purchase plans.
U.S. and Canadian Initiatives
The U.S. has recently refined its safe-harbour provisions. The Employee Retirement Income Security Act (ERISA) has long aimed to give sponsors of money-purchase plans that provide participants with appropriate choices and advice some protection from liability for losses arising from them. The Pension Protection Act of 2006 elaborated those protections for sponsors that automatically enrol employees and/or automatically raise contribution levels over time, as long as appropriate notice is given and opt-outs exist.
How might Canadian legislators approach the problems outlined above? First, they should address roadblocks to automatic enrollment, and give employers guidance about what kinds of automatic enrollment and contribution escalation features will be safe. Second, employers need protection as they seek to steer employees into wise choices. A particular focus of safe-harbour rules regarding portfolio choice will be the size and transparency of fees.
Next Steps
A reasonable near-term step for policy-makers motivated to improve the situation would be legislative or regulatory endorsement of the CAP Guidelines as a safe harbour for employers. Giving the guidelines such standing would mean that they no longer raise the fiduciary bar without providing protection. It would also spur employers to ensure that their plans are up to standard. Adding safe harbours to Canadian pension legislation and regulation would empower employers to act in ways that would enhance the retirement incomes of their employees.
William B.P. Robson, is the president and chief executive officer of the C.D. Howe Institute.
To view his white paper, click here.
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