We’ve seen the shift from defined benefit (DB) pension plans to defined contribution (DC) plans. But organizations need to understand that the switch results in a shift in responsibility for providing retirement income. In essence, the employee takes over the burden of fund management.
Employers need to reconsider the part they play in their employees’ future income stream, or face possible legal consequences. Organizations in the United States are suffering from burdensome litigation as the number of employers being cited with negligence increases. The question is, “How long before this kind of litigation seeps into Canada?”
Today’s working Canadians have been told their retirement will be composed of three sources — a company pension, government pension (Canada/ Quebec Pension Plan) and personal assets. A stern warning that governments of the industrialized world will renege on their pension promises was issued by Moody’s, an international bond rating service, last March. It stated that almost all countries will have to substantially re-engineer their pension schemes.
It is for this reason that employees will need to develop their own sources of capital to replace income streams lost to the promises that governments once made. Because of the uncertainty of government plans, and the increasing responsibilities that DC plans entail, employees will require ongoing support, information and education from their employers.
Today, companies use personal financial education to help employees in their choice of benefit options. In the future, financial education will be used as a tool to empower employees with the knowledge and skills to make choices regarding their benefit options, and to implement those choices in light of their overall retirement plans.
Employees need information
Some organizations believe that an employee’s finances are intensely personal, and they do not view personal financial education as a necessity. In this environment, employees receive information packages regarding how their benefits work and the options available to them. The packages are given to them when they are hired, and sometimes at major transition points, such as downsizing.
The growing popularization of the DC plan could pose a lapse in the plan sponsor’s fiduciary role if employees become their own investment managers. Unfortunately, there is no clear legislation in Canada, yet, regarding what is sufficient information for employees managing their DC plans. However, there have not yet been many retirees using DC plans as their source of income in retirement either. Plan sponsors who neglect their roles may risk future legal repercussions as industry standards establish themselves in the courts.
Don’t overestimate
Most plan sponsors initially provide employees with a prospectus on their investment manager and available funds. Additional information may address asset allocation, risk levels of funds offered, or briefly discuss what risk levels certain employee profiles are best suited for.
Companies that undertake this approach believe that the provision of explanatory materials is adequate. This assumes that employees already have a set of realistic retirement goals and a well-defined strategy to achieve them. However, discussing the characteristics of different funds is not necessarily an effective process of ensuring the employees meet their long-term needs and make informed and responsible decisions.
Plan sponsors using this approach are overestimating employees’ understanding of their responsibility toward long-term management of their pension assets. Research conducted by the Association of Canadian Pension Managers has shown, “Canadians are not as retirement income-literate as they should be.”
As employers are moving away from the “provider” role, employees who admittedly do not have the skills and knowledge fill their new role as “pension fund managers.”
But, who will be accountable? If not handled properly, this void in responsibility could potentially lead to liability issues and increased costs of providing retirement benefits.
Employers need to effectively bridge the growing gap between their removal from the provider role for employees who do not know how to accept the role of pension fund manager. Education, in addition to counselling and financial planning technology, will enable employees to actively manage their retirement plans while ensuring that a plan sponsor’s fiduciary role is fulfilled.
Pensions 101
Comprehensive research by the National Institute for Personal Finance Employee Education in the U.S. has shown that when financial education is “supplemented with participation in one-on-one financial planning advice sessions, changes in personal financial behaviours and attitudes are substantial.”
Companies can ensure their employees are in control of their financial lives by providing financial education that corresponds to the different stages of an employee’s career. Constant, consistent financial education and on-going support cultivates the skills necessary for employees to administer their financial planning needs.
Such an environment needs to be fostered in order for employees to truly become the caretakers of their own retirement security.
Without a comprehensive approach to financial education, employees will be financially unprepared for retirement, and quality employees will continue to undervalue retirement benefits that are offered by the company.
There are several methods of evaluating the effectiveness of a current financial education program. One of the easiest methods is distributing evaluations incorporating statements, such as “Did you like the seminar?” Measuring the participation rate in the company pension or retirement savings plan is a more rigorous measurement of success. One of the most stringent methods of evaluation is to monitor who is maximizing their contributions to these plans.
Company payback
There are very real benefits to companies that provide financial and retirement education. The National Institute of Personal Finance Employee Education found that the immediate value of financial education programs can be found by examining the decrease in absenteeism, less time spent at work dealing with personal financial matters and increased productivity.
The institute’s research has shown that “approximately 15 per cent of workers in the U.S. are experiencing stress from poor financial behaviours to the extent that their productivity is negatively impacted.”
Providing financial education not only improves the way a company’s benefits are perceived by employees, it can also dramatically reduce a company’s costs. Adding personal financial education to a company’s array of benefits also aids in attracting and retaining more productive, quality employees.
A last note to educators: To be effective, education and advice must be provided in an environment that is free (and perceived to be free) from sales and product bias.
Jury Kopach is vice-president, retirement services at T.E. Financial Consultants Ltd. in Toronto. He can be reached at (416) 366-1451.
Employers need to reconsider the part they play in their employees’ future income stream, or face possible legal consequences. Organizations in the United States are suffering from burdensome litigation as the number of employers being cited with negligence increases. The question is, “How long before this kind of litigation seeps into Canada?”
Today’s working Canadians have been told their retirement will be composed of three sources — a company pension, government pension (Canada/ Quebec Pension Plan) and personal assets. A stern warning that governments of the industrialized world will renege on their pension promises was issued by Moody’s, an international bond rating service, last March. It stated that almost all countries will have to substantially re-engineer their pension schemes.
It is for this reason that employees will need to develop their own sources of capital to replace income streams lost to the promises that governments once made. Because of the uncertainty of government plans, and the increasing responsibilities that DC plans entail, employees will require ongoing support, information and education from their employers.
Today, companies use personal financial education to help employees in their choice of benefit options. In the future, financial education will be used as a tool to empower employees with the knowledge and skills to make choices regarding their benefit options, and to implement those choices in light of their overall retirement plans.
Employees need information
Some organizations believe that an employee’s finances are intensely personal, and they do not view personal financial education as a necessity. In this environment, employees receive information packages regarding how their benefits work and the options available to them. The packages are given to them when they are hired, and sometimes at major transition points, such as downsizing.
The growing popularization of the DC plan could pose a lapse in the plan sponsor’s fiduciary role if employees become their own investment managers. Unfortunately, there is no clear legislation in Canada, yet, regarding what is sufficient information for employees managing their DC plans. However, there have not yet been many retirees using DC plans as their source of income in retirement either. Plan sponsors who neglect their roles may risk future legal repercussions as industry standards establish themselves in the courts.
Don’t overestimate
Most plan sponsors initially provide employees with a prospectus on their investment manager and available funds. Additional information may address asset allocation, risk levels of funds offered, or briefly discuss what risk levels certain employee profiles are best suited for.
Companies that undertake this approach believe that the provision of explanatory materials is adequate. This assumes that employees already have a set of realistic retirement goals and a well-defined strategy to achieve them. However, discussing the characteristics of different funds is not necessarily an effective process of ensuring the employees meet their long-term needs and make informed and responsible decisions.
Plan sponsors using this approach are overestimating employees’ understanding of their responsibility toward long-term management of their pension assets. Research conducted by the Association of Canadian Pension Managers has shown, “Canadians are not as retirement income-literate as they should be.”
As employers are moving away from the “provider” role, employees who admittedly do not have the skills and knowledge fill their new role as “pension fund managers.”
But, who will be accountable? If not handled properly, this void in responsibility could potentially lead to liability issues and increased costs of providing retirement benefits.
Employers need to effectively bridge the growing gap between their removal from the provider role for employees who do not know how to accept the role of pension fund manager. Education, in addition to counselling and financial planning technology, will enable employees to actively manage their retirement plans while ensuring that a plan sponsor’s fiduciary role is fulfilled.
Pensions 101
Comprehensive research by the National Institute for Personal Finance Employee Education in the U.S. has shown that when financial education is “supplemented with participation in one-on-one financial planning advice sessions, changes in personal financial behaviours and attitudes are substantial.”
Companies can ensure their employees are in control of their financial lives by providing financial education that corresponds to the different stages of an employee’s career. Constant, consistent financial education and on-going support cultivates the skills necessary for employees to administer their financial planning needs.
Such an environment needs to be fostered in order for employees to truly become the caretakers of their own retirement security.
Without a comprehensive approach to financial education, employees will be financially unprepared for retirement, and quality employees will continue to undervalue retirement benefits that are offered by the company.
There are several methods of evaluating the effectiveness of a current financial education program. One of the easiest methods is distributing evaluations incorporating statements, such as “Did you like the seminar?” Measuring the participation rate in the company pension or retirement savings plan is a more rigorous measurement of success. One of the most stringent methods of evaluation is to monitor who is maximizing their contributions to these plans.
Company payback
There are very real benefits to companies that provide financial and retirement education. The National Institute of Personal Finance Employee Education found that the immediate value of financial education programs can be found by examining the decrease in absenteeism, less time spent at work dealing with personal financial matters and increased productivity.
The institute’s research has shown that “approximately 15 per cent of workers in the U.S. are experiencing stress from poor financial behaviours to the extent that their productivity is negatively impacted.”
Providing financial education not only improves the way a company’s benefits are perceived by employees, it can also dramatically reduce a company’s costs. Adding personal financial education to a company’s array of benefits also aids in attracting and retaining more productive, quality employees.
A last note to educators: To be effective, education and advice must be provided in an environment that is free (and perceived to be free) from sales and product bias.
Jury Kopach is vice-president, retirement services at T.E. Financial Consultants Ltd. in Toronto. He can be reached at (416) 366-1451.
