A well-designed plan has to provide the right support against people's worst financial tendencies
Christine van Staden, regional vice president for group customers, Toronto Consulting, at Great-West Life, discusses some insights gleaned from the firm’s recent 2017 Capital Accumulation Plan Benchmark Report, which looked at what Canadian plan sponsors are doing to support their employees’ saving and retirement needs.
In addition, employers in Canada shy away to a certain extent because of all the publicity around the safe harbour legislation that exists in the US. They actually consider that a barrier when the truth is those safe harbours are not really going to be a stop-gap either, and even in the US, there are plenty of cases outside of those safe harbours. The bottom line is that they can always find a level at which they’ll be comfortable making plans mandatory, and employees will always have the choice to opt out.
The experience of employers abroad suggests that automatic enrolment carries significant benefits. Several years after employers in the UK were obliged to automatically enrol eligible employees into a workplace pension scheme in 2012, the Institute of Fiscal Studies found that workplace pension plan membership nearly doubled, even among those not eligible to be automatically enrolled. The analysis also suggested that more savers started boosting their existing contribution as a result of automatic enrolment.
Non-participation also tends to feed into people’s myopia. Even if members realize that they’re leaving money on the table by not saving for long-term needs, there’s a significant tendency to spend on short-term desires. Instead of putting money into RRSPs, many would choose to spend on a vacation or a new car. Those behaviours are understandable, and education is key to nudge members away from them. Explaining compound growth, and driving home the point that earnings in an RRSP are tax-free as long as money is kept in it, will help motivate people and encourage them to see the benefits of consistent savings.
Once in the plan, members can also overcome myopia with the help of auto-escalations. Gradual increases in contributions over time, perhaps tied to salary increases they may receive, would be less painful from employees’ perspectives. And by placing restrictions on withdrawals, sponsors can limit the tendency for savings and retirement plan contributions to be used instead for short-term spending.
As for members leading up to the decumulation phase, they face specific issues that include reducing investment risk as they near retirement, converting savings into retirement income, and facing tax implications that they aren’t even aware of. We feel that transition is the most important decision point of anyone’s life, particularly as they shift from being part of a group to figuring out how much they should pay themselves individually. That’s on top of determining how they can continue to grow their assets as they take payouts.
Retirement should be an exciting time for employees, but the financial uncertainty around the transition makes it a stressful time for many Canadians. From our perspective, that shift is something that they should never try to undertake on their own. There are too many complexities involved, which means they need a professional guide to truly understand how they should be making their financial decisions.
