If anything, Mercer has noticed a slight drop in plan member contributions from its clients, even though this is not always the case. Mercer principal and DC retirement consulting leader Jean-Daniel Côté says one of his clients has actually allowed additional contributions when members demanded to be able to put more money into the DC pension plan. “That’s a plan that’s very well managed—lots of communication, people understanding pretty well how things work—even though it is not the type of environment where you would expect plan members to be very investment-savvy.”
Application: Pay attention to what your employee population is doing. “Plan sponsors are asking for more reports on member behaviour to see whether their members are making fund transfers and what investment choices members are making,” says Smith. “They’re taking a look at their member education materials. They have a heightened awareness.”
Lesson #4: Offer some downside protection.
While equities can produce large returns, in a bear market—and, worse, an economic downturn—they can plummet, offering no safety net to avoid significant losses. Members can potentially lose their hard-earned dollars and, as a result, may not be able to retire as planned.
Application: Rethink retirement income products and default funds. Côté says the market downturn will likely bring more interest in safer retirement income products with some form of member protection, such as the guaranteed minimum withdrawal benefit. However, Jiwani offers a caution. “The key is to weigh that protection versus the cost of that product. Sometimes there’s insurance on it or an extra layer, and those fees will eat away at your savings.”
Plan sponsors are also revisiting default funds. “Prior to the downturn, there was a trend that default funds should be a balanced fund, an asset allocation fund or a target date fund,” says Hurst. “I’m not sure plan sponsors have changed their minds, but I think it’s given them pause.” Jill Purcell, senior investment consultant with Watson Wyatt, agrees, adding that default options will be paramount. “The default option is a plan design issue that we’ve always been working on with sponsors. [The recession] hasn’t really changed that; it’s just a harder argument to have right now,” she says.
The target benefit plan, as outlined by the Ontario Expert Commission on Pensions (OECP), could offer employees some downside protection. Arnold says the target benefit plan may be the bridge between DB plans and DC plans. “You could see it as the third angle or the rotator in the middle to hold it all together.”
Lesson #5: Help plan members understand their options.
While plan members must take responsibility for their decisions, under the CAP Guidelines, the CAP sponsor is responsible for “providing investment information and decision-making tools” to DC plan members. For this reason, communicating with and educating plan members should be a priority. “We’ve seen increased focus on the type of education—not in terms of the frequency of the education, but education on more generic topics such as market volatility and diversification,” says Jiwani. “There’s been a lot more focus on those general messages. They were embedded in the education before, but now [plan sponsors] are really bringing them to the forefront and focusing in on that.”
Application: Consider financial literacy education and access to investment advice. “I have some clients that are thinking about engaging financial advisors for one-on-one consulting with their individual members and seeing what they can do as part of a benefits package,” says Purcell. “We have to worry about the vast number of plans out there that don’t engage outside advisors.”
In addition to these elements, Bellingham says the pension industry needs to find the right balance of responsibility between the government, the individual and the employer when it comes to achieving adequate retirement savings in DC plans. “We need to ensure that we have an appropriate regulatory framework to support the accountability for each of these groups,” Bellingham says. In the U.S., everybody understands the division of responsibilities, she adds. “The individual is accountable for their own retirement income and accumulating a sufficient balance. They know that they can only count on minimal government support and whatever they can get from their employer.”
However, deciphering who’s accountable in the overall “retirement project” will take time. For now, plan sponsors have enough homework to do in applying these lessons.
| Learning Curve The University of Western Ontario’s defined contribution pension plans attended to some difficult challenges through the economic downturn. By Brooke Smith It seems only natural that an institution such as The University of Western Ontario would excel at educating its pension plan members about their investments. While Western’s education program is very strong, the often-insulated world of academia couldn’t protect its employees from the past year’s market turbulence. Assets for the university’s two defined contribution (DC) plans—one for faculty and one for staff—were down 20.5% (compared with -1.1% last year). However, the drop wasn’t as severe as other plans such as OMERS or the Caisse, says Louise Koza, director, HR (total compensation), with The University of Western Ontario. “We did all right—which is surprising, maybe, because our members make the investment decisions.”* Maybe not that surprising. “Members know from day one that they take ownership [of the plans],” says Koza. During the last 12 months, however, the members needed more information. While Western typically holds a financial update series at least once a year (usually in April/May), last year, it held one in November/December, too, because plan members wanted to know how to interpret what they were hearing about the markets in the media. The sessions were packed; it was standing room only. “Our members were hungry for that information,” says Koza. “We tried to be as transparent as we could.” While members were trying to make sense of the market turmoil, the university was going through its own turmoil: “a significant budget problem.” As with many companies in a downturn, the university hoped that some of its older employees would take voluntary retirement. Unfortunately, “[it was] the very worst time, as far as I’ve been involved, to try to incent people to retire: after they just lost 20% of their pension fund,” says Koza. HR sent out offers to the roughly 300 employees who were eligible to retire. “We were offering retiring allowances that were based on service; it wasn’t overly generous,” says Koza. “Nobody walked out with more than $60,000.” HR expected 50 retirements. It got 40—“enough to protect and significantly help the university’s funding challenges,” but layoffs were still necessary. The downturn also affected the 350 retirees in the university’s retirement income fund, in which they can keep the same investment choices after they retire. Retirees who were invested in equities had to scale back their budgets, says Koza, because they couldn’t afford to draw the pension they were used to. Another issue was the asset-backed commercial paper (ABCP) debacle. The university had about 3% of its entire portfolio invested in ABCP, with varying exposure among the investment options for members. The exposure had a significant impact on operations because of the plans’ principles, one of which is to maintain fairness among plan members. “We imposed redemption restrictions on our members, so when they were trading, terminating or retiring, we weren’t able to pay 100%,” says Koza. “We’re still looking for liquidity in that market.” But through layoffs, deferred retirements, budget woes and the ABCP illiquidity, Western’s governance structure allowed the pension team to review its risk management program, as well as its mandates for fixed income and money market funds, which had some “undue exposure to corporate credit.” And while General Motors and other defined benefit plans shared the headlines, Koza and her team sat back and said, “I’m really glad we have a DC plan.” *OMERS, however, reports a return of -15.3% in 2008. |
Brooke Smith is associate editor of Benefits Canada.
brooke.smith@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the September 2009 edition of BENEFITS CANADA magazine.