Case study #2: Introducing a new DC plan
The challenge
A market review found that this private sector company’s DB plan wasn’t competitive and came up short in attracting and retaining the specialized talent that is a key part of its workforce. The plan sponsor also wanted to control funding costs and limit volatility in its financial statements.
The change
A review of plan design options showed that enhanced competitiveness could not be achieved through DB plan improvements. It also showed that terminating or converting the DB arrangement would not address the plan risk.
Instead, the sponsor decided to introduce a new DC plan with generous employer contribution rates. New employees would join the DC plan, and existing members of the DB plan would have the option to move to the DC plan for future service only.
The new plan design was developed, in part, with a focus on employee communication. The DC plan formula was relatively generous when measured against both the existing DB plan and peer company retirement plans. Still, senior decision-makers felt it was important to address the new program’s value and the DC versus DB comparison head on. They wanted to ensure that employees and existing plan members valued and understood the new plan, as well as the impact of switching.
The comprehensive communication plan included employee information sessions, a series of educational bulletins, plan booklets and a personalized online decision-making tool allowing DB plan members to estimate and compare future termination values or pensions payable from the DB or DC options. Employees also received a broad range of investment information and financial planning tools.
The sponsor also carefully considered its options for implementing the new DC plan and decided on a “soft” approach, meaning that existing DB plan members could choose to continue earning benefits in the existing DB plan or switch to the new DC plan immediately or at a later date. However, members who switched from DB to DC would not be permitted to switch back. An existing member’s DB benefit would be based on service frozen at the date the member switched, but the benefit would grow in line with the member’s earnings, up to his or her eventual termination or retirement.
From the plan sponsor’s perspective, while the soft approach meant that objectives related to risk and cost control would be achieved in a more gradual manner, members were not forced to change plans. Given the sponsor’s labour relations and workforce demographics—about one-third of the plan membership was represented by a union, and about one-quarter was over age 55—this was an important feature.
The outcome
The plan sponsor viewed the implementation of the new DC plan as a success. Existing members switching to the DC plan or remaining in the DB plan were generally split along demographic lines, with younger members switching to DC. Fewer older members made the switch to DC than the plan sponsor had anticipated, citing apprehension over investment markets as well as taking on investment decisions and risk. However, the sponsor achieved much greater employee appreciation for the value of its retirement program and was able to limit future increases in DB program liability.