Pension plan sponsors can overcome the barriers to implementing auto features
When discussing Canadians’ low levels of retirement savings, two issues emerge: one, the number of people who don’t have workplace pensions; and, two, the number who do but don’t use their plans effectively. Federal and provincial governments are addressing the first issue by looking to broaden the options available to employees. In the case of the second issue, some solutions already exist, but employers don’t use them to their fullest.
Automatic plan features can remedy employees’ tendency toward inactivity in decision-making and put more Canadians on the road to building sufficient retirement savings. These features can help get employees into workplace savings plans (auto-enrollment), put them into an investment option if they don’t choose their own (auto-default) and then ensure that their contributions increase over time (auto-escalation). Some obstacles—such as collecting consent and incurring a cost to promote auto features—prevent them from being broadly adopted. However, these obstacles are surmountable.
Auto-default
Of the three auto features, auto-default is most easily applied. As part of setting up a pension plan, sponsors already designate a fund for contributions for members who do not make active selections. Low-risk, short-term investment funds were once the preferred default options, but they weren’t ideal, as members who never moved out of these funds lost long-term growth opportunities. With the introduction of options such as target-date funds (TDFs), which can be matched to an employee’s age, many sponsors have shifted to these types of default investments. Despite some criticism that TDFs are a one-size-fits-all solution, supporters say these funds are more likely to help less-engaged workers.
Auto-enrollment/Auto-escalation
Introducing auto-enrollment and/or auto-escalation requires a change in employment standards legislation in many Canadian jurisdictions. (There have been discussions about making such changes— in Quebec, for example—but nothing has been approved yet.) Currently, employees must consent to have contributions automatically deducted from their wages. Sponsors can address this issue for new hires by including the consent language in the employment offer. However, in the absence of legislative change, consent also has to be secured from current employees who didn’t agree to this at the time of hire, which can be hard for a company with a large or geographically diverse staff.
There are options for reaching employees—from distributing flyers to original plan members and hosting sessions that require them to sign on under the new design, to starting active campaigns with promotions and contests. But these strategies take resources and time while delivering limited results.
Experience in foreign countries such as the U.K. and New Zealand suggests that most plan members—new or existing—don’t oppose automatic features and don’t opt out or make changes on a large scale, according to 2007 research from Fidelity Investments.
In fact, research actually reveals interest in these options. In Benefits Canada’s 2013 CAP Member Survey, 78% of respondents support auto-enrollment, and 49% support auto-escalation of contributions. Legal changes that allow wider application of auto features are the best way to ensure secure retirement for Canadians. Until then, plan sponsors can apply these features to new members and try to draw existing members into auto options.
Sue Reibel is senior vice-president of business development for group benefits and retirement solutions at Manulife Financial. sue_reibel@manulife.com
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