By Scott Anderson
Canada’s employers often say they’re quite happy with their retirement savings plans, but studies suggest they are facing what’s becoming a global problem: Retirement readiness.
According to one survey, half of Canadians think the future of retirement is looking pretty bleak, and 38 percent don’t have any sort of retirement plan.
When employees are worried about affording retirement, they delay it. The employer’s costs mount, whether in pay differentials with younger, replacement workers or increasing demands on workplace health and safety programs.
Three trends in pension plan design can help address the long-term readiness issue while boosting participation and making employers more competitive in a tight labour market. They include:
A shift to more flexible group savings plans:
Group registered retirement savings plans with a deferred profit-sharing component are increasingly favoured these days by plan sponsors. In fact, group Registered Retirement Savings Plans (RRSP) and Deferred Profiting Sharing Plans (DPSP) now outnumber defined contribution plans two-to-one, according to the Canadian Institutional Investment Network.
While both offer employee and employer more flexibility and less red tape than traditional defined contribution plans, employers are taking it one better by giving employees even more flexibility on their contributions. Rather than monitoring employee contributions and having employees pay taxes on the withdrawals, workers can now save for whatever goal they have, contributing to a tax-free savings account with an employer match in a long-term vehicle such as a DPSP. The approach offers flexibility over the employee’s funds while allowing for restrictions on withdrawals and retention inducements on the employer-contributed component.
Reduced investment choice in group plans:
This ongoing trend continues to grow in popularity with plan sponsors. It’s become clear that having as many investment choices in the plan as possible actually prevented members from making sound investment decisions. So for several years, plans have been reducing their investment menus to offer only a few relevant choices, with an increased effort to include a passive/index option due to market trends and lower fees.
Reducing eligibility periods:
It used to be fairly standard to allow employees to join a group savings plan after one year of employment. But with the competitive nature of the workforce, companies have been waiving eligibility times for certain employees.
Overall, the recurring theme when it comes to plan design is to listen to what employees want. If an employer can’t convince a 25-year-old employee of the value of a plan created for 40 years in the future, why wouldn’t it change some key elements to match the worker’s perception of value? Likewise, if the plan wasn’t sufficient to help the employer’s 60-somethings be able to afford retirement, how will it stand the test of time for newcomers?
HUB International’s retirement plan fiduciary advisors provide ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees. Contact HUB to request an assessment of your group retirement plan.