Top 50 DC Plans Report: Back to Basics

It has clearly been a turbulent and frustrating time for DC plan members. According to Greg Hurst, a principal with Morneau Sobeco, one sponsor of a DC plan that did not offer investment choice (members invested in a balanced fund) told him of a plan member within a couple of years of retirement who wanted to quit his job to stem the losses in his retirement portfolio. Hurst says, “[This] wasn’t really a rational response, but it was illustrative of the depth of concern that somebody who is close to retirement can have.”

Actions and Reactions
But while negative returns have been a concern for plan members looking at their statements, there’s been no unusual plan activity this year. Recordkeeper statistics indicate that the real anxiety spiked last fall. For example, Sun Life Financial’s call centre volumes and website visits increased during October 2008, with a 48% increase over October 2007, but then returned to seasonal patterns at the start of 2009. “We’ve always observed some increase in volume in both the call centre and on the Web in January, February and March, associated, in large part, with the RRSP season,” says Randy Colwell, regional vice-president, western Canada, group retirement services, with Sun Life Financial.

At the asset level, Sun Life had roughly $200 million (net) transferred to guaranteed funds over 2008. Compared with the insurer’s entire block of assets, $200 million represents less than 1%. “In aggregate, it tells us that people didn’t do a lot of portfolio rebalancing,” says Colwell.

Manulife Financial also observed an increase in activity last fall toward more conservative funds and money market funds, but that movement settled back down to “normal levels”—and perhaps even “marginally lower” levels than in the past. “Some members decided to move their money into conservative funds last fall and since then, many have left their money and stopped moving it around,” says Steve Smith, vice-president, operations, with Manulife Financial.

Employers, too, have made only minimal changes to their DC plans. “[For] plan sponsors, it’s really been a much more intensive exercise in communications—making sure that members have the most up-to-date information in terms of fund performance and market activity, and reiterating the importance of reviewing their investment strategies on a regular basis,” says Greg Malone, a principal with Eckler Ltd.

Susan Bellingham, vice-president, DC, retirement practice, and national leader for the DC practice with Aon Consulting, says there haven’t been any radical changes to plan design or governance practices either. “We’re going to see, I think, a review of investment lineups and slow progress on putting governance houses in order.” Peter Arnold, national practice leader, investment and CAP consulting, with Buck Consultants, agrees. “CAP pension committees are rethinking their approach to plan governance—especially if they also sponsor a DB plan—such that they better diversify their governance efforts,” he says. According to Callan Associates’ 2009 Defined Contribution Trends Survey: Impact of Recent Market Volatility on DC Plans, respondents said that fund and manager performance and governance are their main focuses for 2009. In fact, 76% of plan sponsors said they’d be increasing the number of investment committee meetings.

And while an environment of cost cutting may cause challenges, some plan sponsors have made either “temporary or indefinite reductions in their matching,” as opposed to winding up their plans, says Smith. Sun Life hasn’t seen any material change with respect to contributions. “There’s been some U.S. literature that suggests that a number of U.S. 401(k) plan sponsors have either suspended their match or cancelled their match, or even reduced the contributions,” says Colwell. “[But] we haven’t seen that in Canada.”

While many plan sponsors are under pressure to keep their organizations afloat, Colwell argues that they haven’t “jumped to the conclusion that they should reduce the contributions that are going into their DC plans. That’s great for the employees in those plans,” he says. “It sends a strong message that DC plans work really well. Full stop.”

Lessons Learned
Clearly, the recession has had a serious impact on DC plan sponsors and members alike, but have they learned anything from it? Here are five important lessons to take away from the market turmoil.

Lesson #1: Focus on governance.
A plan sponsor may have the best pension plan in the world but if it isn’t governed well, it won’t be the best plan for long. “There’s been a trend in place for a few years now to improve governance, and that trend continues,” says Hurst. “Everybody thought that was important [even] before the market downturn.”

Establishing good governance practices is key, since while plan sponsors monitor their investments, they typically pay less attention to the other aspects of managing a capital accumulation plan (CAP). “We call this the ‘gravitational pull’ that investments have on a pension committee,” says Arnold. “Committees will systematically review their investment programs but not necessarily other important areas of their CAP programs.”

Application: Review all aspects of plan governance, including investment managers, investment lineups, recordkeepers and reporting, and member communications. The University of Western Ontario (No. 4 on the Top 50) undertook a review of its policies. With a -20.5% return, Western reviewed its mandates for fixed income and money market funds. It also examined its risk management and governance practices. “We have specified principles on which we make decisions,” says Louise Koza, director, HR (total compensation), with The University of Western Ontario. “So when we’re faced with these challenges, we go back to our principles all the time and say, ‘Okay, how does this fit?’”

Appropriate plan governance also means compliance with applicable legislation—in this case, the CAP Guidelines. “Because they’re guidelines, [employers] take them with varying degrees of concern,” says Bellingham. And many of the guidelines are process-oriented. “It’s more about operational practices than fiduciary accountability.”

In fact, some consultants feel these guidelines need restructuring. “I don’t think they were ever intended to be static,” says Malone. “There’s some desire on the part of the marketplace for a more up-to-date assessment of what are considered best practices today for DC plans.”

Lesson #2: Save more for retirement.
Remember the saying, A penny saved is a penny earned? Unfortunately, few DC plan members are saving enough pennies. “The average account balance, if you survey all of the insurance companies, is around $20,000, $25,000 per person,” says Bellingham. “Nobody’s going to retire on that.”

Application: Devise new methods to get plan members to save more. Bellingham says the pension industry can do a lot more to help plan members understand how much they need to save for retirement. “It’s very nice [that the government] put in those $5,000 tax-free savings accounts, but that’s not sufficient. As an industry, if we could lobby the government to increase the allowable levels, that would be very helpful.”

Perhaps further down the road, a mandated DC arrangement will be possible. The expert commissions have been looking at a provincially or federally mandated DC type of vehicle. “[This would] help all of the members who are only in DC plans and don’t have the DB protection, or those who don’t have retirement savings of their own outside of what’s provided by their plan sponsor,” says Zaheed Jiwani, senior investment consultant with Hewitt Associates.

Lesson #3: Zero in on member behaviour.
One of the possible dangers of a DC plan is that members themselves make the investment decisions. For that reason, it’s important that plan sponsors do what they can to influence member behaviours in a positive way.