Top 50 DC Plans Report shows some things never change

That is not to say, however, that the administration of a DC plan is frozen in time. There are plenty of issues currently on the periphery of plan sponsors’ radar, such as pension reform, benefit adequacy and products designed to help members transition from their working lives into retirement. But for the majority of industry representatives, some things—particularly member inertia—never change.

Taking Stock
In terms of returns, 2010 has been far kinder to the Top 50 DC plans than 2009 was. While last year saw almost all (45) of the plans in the red, with average returns of -17.1% (compared with the year prior), the reverse is true for 2010. Only two plans are posting negative returns, and two are breaking even. Overall, the Top 50 DC plans gained a total of $2.8 billion in assets between 2009 and 2010, an increase of 16.4%.

If call-centre activity can be viewed as a bellwether for plan members’ emotions, then the situation has calmed significantly since the outset of the financial crisis in September 2008. Service providers report average call levels, aside from a slight uptick during the most recent round of volatility that buffeted the markets in the spring of 2010. For the most part, however, DC investors seem to have developed nerves of steel over the past two years, or perhaps they stopped reading their monthly investment statements.

That being said, there is some concern by plan sponsors over the long-term viability of their plans, many of which are asking themselves, “Is my plan sustainable, and will it provide adequate retirement income for members?” The spectre of increasing longevity risk has pushed some employers to embark on an investment evaluation while others have added funds featuring exposure to alternative asset classes such as real estate, infrastructure and other long-term products that can provide sustainable returns.

According to Jean-Daniel Côté, Canadian leader of Mercer’s DC retirement consulting group in Montreal, benefit adequacy is currently a slow-burn issue. “When many of these [DC] plans were put in place, the expected long-term returns on the various asset classes were probably a bit higher, perhaps as much as 1.5% to 2% higher than they are today,” he explains. The only options currently available to plan sponsors are either to ensure that people are as well invested as possible or to put in more money, he adds. And most would rather avoid the latter. “It’s the elephant in the room. Everybody knows the issue is there, but few want to fix it.”

Once More Unto the Breach?
And plan sponsors that focus on the former may be on shaky ground, if warnings about the financial health of the U.S. economy prove to be prescient. Toronto-based futurist Richard Worzel, who spoke at Benefits Canada’s 2010 DC Plan Summit in February, warns that several large-scale investment risks lurk in the short to medium term for plan sponsors, including a new run on the American banking system due to loan losses from commercial and industrial real estate and the possible bankruptcy of Greece (or other European countries) triggering a run on the European Union. However, his most disturbing suggestion concerns the potential insolvency of the U.S. government.

The fiscal situation America finds itself in is unprecedented, explains Worzel, with the government borrowing more money than has ever been attempted. Government debt levels surpass any previous time outside of major wars, and deficits are historic. Should these trends continue, Worzel believes the trust that glues the entire financial system together could come undone as investors question the viability of America’s debt. Should this happen, the U.S. government could become insolvent, with untold knock-on effects for the world economy.

“U.S. Treasuries have been the risk-free asset since I’ve been in the markets,” says Worzel, a chartered financial analyst and former Bay Street investor. “How long are lenders going to continue lending money to the U.S. government when they don’t know if they’ll be repaid?”

In an age of economic uncertainty, it is easy to dismiss such alarmist claims. However, Worzel is not alone in his concern for the economy that serves as the bedrock for the global financial system. One of the most strident critics of the future of Treasuries is David Einhorn, president of hedge fund Greenlight Capital in New York and the man who first exposed the rot at Lehman Brothers. While he declined an interview, Einhorn is on the record in previous speeches that he’s pessimistic about the finances of the U.S. and has been buying financial instruments designed to pay off should interest rates on U.S. government debt surge.

As for Worzel, he believes Bay Street is in the dark. “Do I think money managers are prepared for this? No, I don’t,” he says. “What happens when the risk-free asset is no longer risk-free?”

Growing Up
It would be easier to discount such warnings if Canada’s DC market had a long track record to use for comparison. Unfortunately, we won’t see a full cohort of DC plan members begin to retire for the next 10 to 15 years. “So far, we really haven’t seen what the system can produce in terms of income replacement when someone has been a DC plan member for their entire career,” says Azita Bassiji, a principal with Hewitt Associates in Toronto. “The system is simply not mature enough.”

Bassiji explains that Canada’s capital accumulation plan (CAP) system is still young compared with that of countries such as Australia or Chile. However, the Canadian system has done well overall, as recently highlighted in the Melbourne Mercer Global Pension Index, which put Canada in fourth spot out of 11. Bright spots include the ability for people to save money on a tax-deferred basis and relatively low investment fees in CAPs compared with those in mutual funds. Also, Bassiji points out, the ability to include spousal contributions and the introduction of tax-free savings accounts and non-registered accounts are a real plus.

As good as the system is, there is room for improvement. The lack of a regulatory structure is preventing plan sponsors from taking larger steps to help employees save more, as they cite exposure to lawsuits. And a dearth of available products for the tail end of the retirement process can make a plan sponsor’s life difficult. “Once people decide to retire, we don’t have good products to transition people into the retirement phase,” says Bassiji. “People can certainly buy individual annuities, and some providers offer guaranteed minimum withdrawal benefit products, but they tend to have heavy prices associated with them.”

Further, the patchwork of pension standards across the country that bedevils defined benefit (DB) plan sponsors also creates problems for DC plans, a situation Michael Dodd, director of pension and shareholder services with The Co-operators in Guelph, Ont., would like to see remedied. “It may be a bit of a cliché, but I think it’s very true,” he says. “A centralized approach to pensions across Canada would be warmly received by plan sponsors.” Not only do the myriad rules and regulations of the 13 regulatory regions add to the complexity of running a DC plan, says Dodd, but they also trickle down to plan members as well, muddying the message and straining communication efforts.

“When you’re trying to communicate [with plan members] and there are different rules and regulations depending on where people are based, I think it makes it harder to communicate with them. The eyes tend to gloss over a bit.” Plus, communication laden with references to other regions only serves to decrease members’ attention spans, he says. So keeping it focused is important. “What we hear is, ‘Tell me what it means to me.’”

Know Your Quarry
The targeted, personalized approach Dodd outlines has been taken to the next level by Sun Life Financial, according to Tom Reid, senior vice-president for group retirement services in Toronto. Taking a page out of cutting-edge marketing and advertising strategies, Reid’s department leverages technology and media to build communications strategies that take into account a member’s gender, age, geographic location, industry segment and other factors. “This gives us a greater chance of engaging you in whatever the communication says,” explains Reid. “We spend a lot of time with our clients developing communications that are tailored to the member. Even the graphics we use on communications vary depending on whom they’re aimed at. It’s a powerful tool.”

Reid is also experimenting with media in an effort to find the best delivery platform for the various demographics his clients need to reach, an effort he describes as “communicating with members in ways they want to communicate with us.” For generation Y members who have never known anything other than digital communications, it only makes sense to provide the most up-to-date technology in the struggle for their attention. “We’ll go to an education session, hand out iPads to a group of 30 employees and walk them through how to enrol with this device,” he says. “And then it’s done.” The goal is to avoid the typical situation where members attend an information session on their investment choices, only to forget what they’ve learned a week later. “This way, they connect that knowledge with an action immediately.”

Whether through technology, savvy marketing and communications, or old-fashioned persistence, the ultimate goal for DC plan sponsors is to get their members to take responsibility for their retirement. “This has been an issue for DC plans for a long time, and it continues to this day,” says Dodd. “Plan members need to understand that they have to take ownership over how they want their retirement funds invested and what it means to them when they take their funds into their retirement years. The challenge is how to get the attention of the members. They need to read the information, understand it and ask questions.”

An example of how ambivalent plan members can be is related by Côté, who explains how one plan member was distraught in early 2009 after receiving a quarterly statement showing a drop in his account. “That comes as a shock to you?” asked Côté. The member explained that yes, he watches the news and is aware that the markets are not doing well, but he “didn’t think that it would affect my pension plan.” While rare, Côté says that such an incident serves as a warning for plan sponsors. “This highlights the fact that some people just don’t get it.”

On the other end, for an example of a successful communications campaign, employers can look to the Saskatchewan Public Employees Pension Plan (PEPP). According to Ann Mackrill, director of pension programs in Regina, PEPP’s recently reinstated benefit adequacy statement is hitting all the right notes. “What we decided to do is give [members] a statement that projects everything into the future, but it also shows them when they will run out of money,” she says. “We’re getting extremely positive feedback on that.”

It could be that the statement’s inclusion of a retirement income “day of reckoning” puts members’ finances into stark terms, but either way, follow-up surveys on the communication show that more than 90% of members are happy with the information contained in the statement. The plan offers five balanced funds as well as a type of auto feature that takes members through each available fund in five-year steps, based on the member’s age. This helped PEPP’s members survive the worst of the crisis. “2008 wasn’t a great year for us, but the membership certainly didn’t make loud noises that we should change things,” says Mackrill.

While the majority of DC plan sponsors are wrestling with the same issues they face year in and year out, 2010 provided a breath of fresh air in the form of government talks surrounding pension reform. However, as the lion’s share of attention goes to the debate over how to save DB, DC plan sponsors will continue their perpetual struggle against plan member inertia. Like Siddhartha’s river, engaging plan members to take ownership of their retirement planning is always the same and yet every moment it is new. BC

Jody White is associate editor of Benefitscanada.com. jody.white@rci.rogers.com

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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the September 2010 edition of BENEFITS CANADA magazine.