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Improving DC pension plans

Wednesday December 17, 2014 Written by 
A majority of Canadian employers with defined contribution (DC) pension plans say retirement readiness has become a major issue for their organizations.

According to the Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey, 72 per cent of Canadian DC plan sponsors believe retirement readiness is currently a top issue for their plan members and 74 per cent believe that retirement security will become a more important issue in the next three years.

“Ensuring employees are able to retire when they are ready allows organizations to plan an orderly transition of their workforce,” said Karen Burnett, Towers Watson’s Canadian Defined Contribution Business Leader. “While some progress has been made, and a vast majority of plan sponsors indicate that they plan to take action to improve retirement outcomes, employers will need to develop targeted strategies for the key components that support retirement readiness: plan design, investment structure and employee communication.”

Matching contributions

According to the survey, the most common plan designs include mandatory employer and/or employee contributions and plans with an employer match. Fifty-eight per cent of employers offer plans with mandatory employee and/or employer contributions and 72 per cent provide for matching employer contributions. However, only seven per cent of plan members contribute above the matching threshold.

“While mandatory contributions will ensure higher participation rates, in order to boost retirement readiness, employers should look at ways to educate their employees about the impact of contributing beyond what is required to receive the company match,” Burnett said.

Improving accessibility

The survey shows that employers are also taking action on the investment front. In an effort to make DC plans more accessible for members, close to half of Canadian plan sponsors (43 per cent) have streamlined their investment options in the last five years, with 90 per cent of sponsors offering 19 or fewer investment choices.

Plan sponsors are also beginning to reconsider their pre-mixed fund options, with 67 per cent of plan sponsors offering Target Date Funds (TDFs).

“Plan sponsors often inquire about the average number of funds the typical plan offers," said Marcus Turner, senior investment consultant at Towers Watson. "However, sponsors should focus on quality and clarity rather than the number of funds. Aligning investment structure with participant needs and plan objectives should always be the top priority. To achieve this, some larger plans sponsors are beginning to consider higher-level customization that includes custom TDFs as well as custom Risk Funds.”

Better communication needed

While sponsors appear to be embracing the concept of customization when it comes to investment structure, there is still work to do when it comes to communication. Despite the sentiment that retirement security is important, only six per cent of survey respondents believe their employees know how much they need to save for retirement. This suggests room for improvement in education and outreach.

However, more than 75 per cent of survey respondents said that they are still relying on traditional forms of communications such as statements and newsletters. Over two-thirds of plan sponsors (64 per cent) have yet to use mobile applications as a communication tool.

“Many plan sponsors continue to rely on traditional communication methods that have proven to be ineffective — account statements that are too long and complex or face-to-face meetings that don’t reach enough employees,” said Ofelia Isabel, Towers Watson’s Canadian rewards, talent and communication leader. “Mobile technology is another area that is still under-utilized. If retirement readiness is a top concern, effective communication must be a top priority. Sponsors and plan members alike would benefit from new approaches and customized communication is one approach that has proven to be effective. In fact, according to our survey, of the plan sponsors that are currently customizing all or some of their communication, a majority believe that they are improving member engagement.”

Better retirement readiness

"If plan sponsors are going to improve retirement readiness, they should adopt a targeted and comprehensive approach," concluded Burnett. "A good place to start is to analyze participant segments to understand member characteristics such as life-stages and risk tolerances. Sponsors should also consider seeking input from their plan members — something only 20 per cent of sponsors have done in the past five years. Armed with this information, sponsors can establish a customized and effective strategy that encompasses all aspects of plan design, investment structure and employee communication.”

The Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 139 Canadian companies that sponsor a DC plan.

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