Why don’t more employees take advantage of employer-matched retirement savings programs? According to Sun Life research, one in five employees who have access to an employer-matched savings program in the workplace is leaving free company money on the table. Twenty-nine percent of respondents said they didn’t know why they weren’t participating in the program, while 21% said they had no need or desire to participate. Six percent said they preferred to invest on their own.
Canada’s impending retirement income shortfall has sparked a renewed focus on increasing pension coverage for private sector workers. One way to help is to ensure that more Canadians take advantage of workplace savings programs.
Greater gains
Providing matched savings programs isn’t just a nice thing to do for your employees; it makes good business sense. These programs can be an effective way to attract and retain talent.
For employees, one of the main advantages is that when markets fluctuate, they’re essentially getting a high rate of return aided by the employer match. Employees are also able to access a range of funds, make contributions on a pre-tax basis and enjoy attractive fees.
When comparing matched versus unmatched programs, there can be a significant difference in savings for plan members. For instance, let’s say an employer offers contributions equal to 3% of an employee’s earnings and also matches 50% of the employee’s contributions. If the employee contributes 5% of earnings to a defined contribution (DC) plan for 30 years (assuming earnings of $45,000, a 2.5% annual salary increase and a 5% annual average investment return), the total DC balance would be $430,000. Company and matched contributions would be $109,000, the employee’s contributions would be $99,000 and investment earnings, $222,000.
However, for an employee who chooses not to contribute, the DC balance would be only $123,000 (company contributions of $59,000, investment earnings of $64,000 and no employee contributions). In the first case, by contributing a total of $99,000 over 30 years, the employee receives a company match and additional investment growth, and would see his or her DC account balance increase by $307,000. In this example, an employee’s lifetime income after age 65 would be approximately 3.5 times as much by taking advantage of a company match.
Barriers to participation
One main barrier to matching programs is lack of automatic enrollment. Auto-enrollment nudges people in the right direction by allowing them to save earlier and maximize the value of the plan.
Adding auto features to capital accumulation plans (CAPs) seems simple enough, but legislative restrictions today make it difficult. The Income Tax Act and the CAP Guidelines, along with pension benefits, employment standards and insurance legislation, all need to be considered.
Additional barriers for employees include lack of understanding of how matching programs work and not having enough money to spare.
Increasing enrollment
Auto-enrollment and auto-contribution increases have been enthusiastically embraced in the U.S., and auto-enrollment has been shown to increase participation. In a 2009 Vanguard study, DC plans with auto-enrollment had an average participation rate of 84% versus 60% for plans without this feature. Although legislative changes are needed, employers can take steps to ensure that employees are getting the most from their plans.
• Identify non-participants and participants who aren’t taking advantage of the company match to make sure they understand what they’re giving up.
• Talk to your providers about available solutions to help employees understand the program.
• Highlight employer-matched savings programs as part of your recruiting strategy.
• Suggest that employees seek advice from a financial advisor.
Kim Duxbury is assistant vice-president, product and research, group retirement services, with Sun Life Financial.
kim.duxbury@sunlife.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the May 2010 edition of BENEFITS CANADA magazine.