With about 400,000 Canadians expected to retire each year over the next 17 years, sponsors of DC pension plans should be considering their role in the decumulation phase of retirement savings.
Pat Leo, director, institutional business development with Sun Life Global Investments, and Dan Morrison, senior retirement consultant for Towers Watson, provided insight into the trends and post-retirement options during a presentation at the 2014 Benefits & Pension Summit in Vancouver.
“For many plan members, the DC plan is their primary source of retirement income,” said Leo, adding that as members retire and live into their 70s, 80s and 90s, they need to understand the options for turning their retirement savings into retirement income. “People aged 57 and over say that retirement planning is confusing and our communication strategy needs to change so that we can help members make a positive decision. We need more solutions, advice and debate on the options that should be available for decumulation.”
A post-retirement income menu could include annuities, guaranteed minimum withdrawal benefits and income funds, Leo explained, noting that each option has advantages and disadvantages that members need to understand. “Another option would be for plan members to stay in their DC plan after retirement,” he said. “We spend so much time getting plan members up to the point of retirement should we just let them go off on their own? They need help to cross that bridge.”
Currently, however, few DC plan sponsors offer decumulation solutions for members. Towers Watson’s 2014 Defined Contribution Plan survey found that only 8% of plan sponsors currently offer lifetime income distribution. Although 1% are planning to do so in 2015 and 6% are considering it for 2016, that leaves 85% neither planning nor considering offering lifetime income distribution options.
Reasons for not offering post-retirement income options, include being unfamiliar with market offerings, worry about added administrative complexity, and concerns about fiduciary risk or lack of clarity regarding safe harbour, said Morrison.
“Employees need access to good advice that can help them understand the options and implications of the choices they make for retirement income,” he added. “They need help to understand the risk of a long life and the potential of outliving their assets. They also need to know about the benefits of diversification through annuities and more flexible options.”
All the articles from both the Vancouver and Toronto events can be found on our special section: 2014 Benefits & Pension Summit Coverage.