Research sponsored by Great-West Life shows that there are several ways employers could structure their pension plans to encourage workers to save more and make better investments.
One of the recommendations contained in the 2015 Capital Accumulation Plan (CAP) Benchmark Report is that plan sponsors should not inundate members with investment options. “Members who enrol in their plans often fail to choose a suitable investment option, particularly if they have to choose among several funds, so they opt not to choose — and stay in their default fund, which may be a low-risk investment but also low-return,” says Christine van Staden, vice-president, national accounts, group retirement distribution of Great-West Life. “It’s unlikely this investment will generate adequate retirement income.”
Default investment option
The report also suggests that sponsors set the default investment option to be a target date fund; this way members’ savings have a chance of earning higher returns than they would sitting in a money market fund. In fact, target date funds are gaining in popularity. According to the study, 41% of defined contribution (DC) plans and 42% of group RRSPs now offer target date funds, which is a dramatic increase from 2008 when they were only available in 12% of DC plans and 9% of group RRSPs.
Another recommendation is that sponsors make plan membership both immediate and mandatory for employees. If they are concerned about costs, GWL points out that employers can change their match formula. For example, sponsors who currently have 50% participation and match dollar for dollar could change their plan design to pay to 50 cents on the dollar to offset the cost of 100% participation.
“Eliminating the choice to enrol and contribute helps members avoid procrastination," comments David Harris, national accounts executive, group retirement distribution at Great-West Life. "Many people are interested in joining a plan but put it off, sometimes for years. But if someone has that money taken out of their paycheque from the start, they probably won’t miss it.”
The report also reveals that pension plan members tend to contribute up to the maximum their employer is willing to match, and nothing more thereafter. Jeff Aarssen, senior vice-president, wealth management, group retirement services at Great-West Life says there are ways to overcome this. One technique is to implement an auto-escalation policy in which each member’s contribution increases by 1% or 2%. An alternative is to establish default contribution rate.
Maximize RRSP contribution
“For example, if their first paycheque includes a 10% contribution to the CAP, and the employer matches up to 50% of a member’s contribution, they end up saving 15% of every paycheque, almost maximizing their RRSP contribution limit (set by the Canada Revenue Agency at 18% to a maximum dollar amount, which is $24,930 in 2015), unless they actively choose another contribution option,” explains Aarssen. “They may never miss that amount because they never see it.”