This is Part 3 in our 3-part series on the 2011 DC Investment Forum. For more coverage, read Part 1: Coping with uncertainty and Part 2: Risk and retirement.
In September, more than 100 senior DC plan decision-makers, recordkeepers, academics and money managers gathered at Benefits Canada’s 2011 DC Investment Forum in Toronto to discuss the future of DC investing and how to help plan sponsors address these challenges and opportunities. Following are highlights of the sessions.
Creating the optimal DC plan
In March 2011, BlackRock surveyed more than 1,000 DC plan members and more than 100 plans across the country, representing roughly $525 billion in plan assets from approximately 4.1 million participants. The goal of this survey was to compare plan sponsor and participant views on retirement preparation and DC plan structure.
The survey revealed four key findings that can help plan sponsors to design more effective plans, noted Chip Castille, managing director and head of U.S. and Canadian defined contribution with BlackRock. “The first was that participants see saving as their responsibility but worry that they are failing.” Auto-enrollment and auto-escalation features in plans can help members feel more confident about their saving habits. “Try to design a system so that good outcomes are easier to obtain,” he suggested.
The second insight is that participants are impressed with the pre-retirement support provided by employers but are looking for more guidance. “The reality is that everything the sponsor does is perceived by the participants as advice,” said Castille. He recommends using target date funds. “Research shows that people in target date funds tend to do better than those who are not in them.” Incorporating re-enrollment policies could also get members closer to their retirement goals.
The third key finding was that members and sponsors differ on post-retirement responsibilities, which highlights a critical gap in DC plans, Castille added. “Most plan members realize that they don’t have the experience and comfort to manage a big chunk of money, so they are looking for more information on secure income.” His recommendation is to find life stages where there is an opportunity to give plan members key information. “In their early 40s and 50s, they are asking for informa-tion about secure income options, which should be provided at that point so they can make the best decision for themselves when they are motivated to do so.”
The final key finding was that participants find secure retirement income attractive. “Sponsors should be considering the addition of retirement income options into their plans now,” Castille added.
DC and retirement income adequacy: Are we there yet?
The closing panel discussion began with the following question: What can plan members do to protect their portfolios, and how can employers help? Matte suggested that members take advantage of the diversification opportunities available to them but make sure they do so in a timely manner. “Target date funds and absolute return funds are also good solutions,” he added. Castille believes there is a need for more explicit hedging strategies, which plan sponsors need to figure out how to incorporate into DC plans.
What role does the default option play in helping to ensure adequate retirement income? “It plays a crucial role, and it would be great if it played less of a role,” said Drake. “The problem is, what do you put as a default option? If you must have one, then a target date fund is probably as good a way to go as any.”
Employers have to consider how to protect themselves in the event that employees do not end up with enough money for retirement. Michelle Loder, Canadian defined contribution business leader with Towers Watson, suggested that sponsors review their plans on an ongoing basis to see if members are participating as expected when the plan was created. “Are they joining the plan and contributing at the levels the company expected? Performing this analysis could lead the plan sponsor to reconsider plan design features, such as promoting higher levels of employee participation, locking in contributions or imposing penalty provisions on withdrawals,” she explained. “It can also help to identify the need for more strategic communication and messaging around the plan’s purpose and what employees can expect from the plan in terms of retirement outcomes.”
And when it comes to DC plans, there is an increasing focus on outcomes. “The outcomes are the way participants understand their own problem,” said Castille. “Sponsors need to find a way to relate to investors in terms of the outcomes they are likely to experience and not necessarily on asset allocation breakdowns and risk exposures. This will relieve a lot of the burden of trying to teach them about investment theory. I think that’s what the provider community needs to move toward, to really help plan members with their retirement income adequacy.”
Leigh Doyle is a freelance writer based in Toronto. leigh.doyle@gmail.com
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