When it comes to issues related to workers’ retirement, there is no shortage of topics to discuss.
Proposed reforms to legislated or universal retirement programs, survey results on whether Canadians think they have enough to retire on and arguments stating younger workers are better prepared for their future in comparison to their parents are all on the menu.
As society and economies evolve, retirement planning must adapt. And whenever workers need to adapt, understand and take action, they must be engaged with effective communications so they can make informed decisions.
It’s about looking at a worker’s various stages as he travels the road — from entry level to near retiree — to proactively plan ongoing retirement communications around capital accumulation plans.
Start at the end
A worker approaching retirement needs to decide what to do with accumulated contributions. Unfortunately, some employees say they are ill-prepared to make certain financial decisions before retirement, as seen in a 2012 survey conducted on behalf of Standard Life:
•Employees are somewhat confused about what to do with assets at retirement.
•They need, and want to receive, support from their employer or plan provider.
•They want information about retirement options — well in advance of retirement.
•There are those who believe a retirement plan is important... but don’t have one.
To help near retirees understand upcoming choices, sponsors need to help members comprehend:
•how to transition savings into a monthly retirement income, such as transferring funds into a registered retirement income fund, life income fund or annuity
•whether changes in asset allocation are appropriate
•new rules around collecting retirement income from the Canada Pension Plan, Ontario Old Age Security and other sources before or after the traditional retirement age of 65
•whether or not they will require supplemental income through part-time work.
Employers should track which employees are approaching retirement and begin communicating options and directions years in advance. While five years in advance might seem like plenty of time, and it is for certain decisions, it is not early enough for ideal financial planning, which could be decades in advance.
Planning a realistic retirement is a career-long endeavour and employers need to communicate throughout. With two or three generations of workers in today’s workplace, different career ages and stages require different communications.
Younger employees: When plan membership is voluntary, employees need to understand two key elements:
•The importance of establishing a retirement goal. Granted, this is a moving target throughout a career, but the retirement income formula remains the same — the sum of contributions plus time plus investment earnings and plan members need to work that formula. Communications needs to focus on that first step of establishing a goal — even one that’s subject to future revision.
•The value of enrolment. Projections about future accrued savings (assuming a conservative, long-term rate of return) and the resulting potential income stream help employees visualize the final savings objectives.
Historically, the presumption is younger employees have difficulty envisioning the realities of a future that is decades away. However, that assumption is changing. Younger employees are investing 10 years earlier (age 20) than their parents did (age 30), according to the TD Investor Insights Index of 2013 (which surveyed more than 1,000 Canadians including 150 people aged 23 to 33).
Consequently, they are likely thirsty for more information on investment returns and options. Providing them with clear, plain language retirement communications will be valued and appreciated.
Mid-career employees: Members already enrolled in a company plan need ongoing communications to steer them toward actively reviewing assets and ensuring their investment strategy reflects their investment personality as well as time horizon to retirement. They should be encouraged to periodically retake an investment personality test, especially when life circumstances change.
Something to talk about
Here are some typical topics for ongoing and refreshment communications:
•understanding investment management fees
•statements and how to read them
•directions to a provider’s online tools and resources
•the different features of savings vehicles, such as pension plans, registered retirement savings plans and tax-free savings accounts
•understanding how to create a custom portfolio or select a pre-determined portfolio, including the reasoning behind and value of pre-determined portfolio selection based on investor risk tolerance, investment time horizon — or a combination of both
•examples of possible income projections and to help answer “Will I have enough to retire?”
•timelines — when a person can begin collecting retirement income
•implications of early withdrawals and transfers.
Let the CAP guidelines be your guide
The Canadian Association of Pension Supervisory Authorities (CAPSA) obviously endorses quality retirement communications, as the Guidelines for Capital Accumulation Plans (CAP Guidelines) include: providing statements, communicating options upon termination of a CAP and enabling access to additional information on investment funds, transactions, contributions or performance reports.
In addition, members need to:
•determine how much to contribute
•make informed investment decisions
•ensure the contact information is current
•understand all fees, expenses and penalties borne by the member
•consider obtaining investment advice from a qualified individual.
CAPSA’s newly released guideline, in March 2014, specifically addresses defined contribution pension plans and their relevant communications. For a member to properly execute her role, the plan sponsor needs effective retirement communications throughout the worker’s career — whether at the entry level, midway or near retirement.
Esther Huberman is a communications consultant at Pal Benefits in Toronto. She can be reached at (416) 969-9894 ext. 311 or email@example.com.
Legal ramifications of retirement communications
While possible legal challenges to a plan sponsor’s communications requirements abound, two areas require serious consideration, according to Ross Gascho, a partner in the pension and benefits practice at the law firm Fasken Martineau DuMoulin in Toronto.
Voluntary plan membership: Some employees, perhaps younger ones, may choose not to join — they may not appreciate its value or simply want a bigger cash flow in the present, rather than save for distant retirement. If a plan sponsor’s best efforts to extol the virtues of early savings are not completely successful, and an employee chooses not to join, an employers should obtain written and signed acknowledgement from employees who choose not to join the plan.
"The sponsor is better protected if it has an employee’s written confirmation that he or she chooses not to join. And for an employee who declines to join, be sure to provide an opportunity to do so every year."
Withdrawals or transfers from a CAP: An in-service withdrawal is expensive in the long-term. It triggers withholding tax and possible additional tax payable at year-end depending on the individual’s marginal tax rate. The member also loses future tax-deferred investment income on the withdrawal and there is no corresponding increase to RRSP deduction limits to reflect the withdrawal.
Consider the Ontario Court of Appeal’s observation in Deraps v. Labourer's Pension Fund of Central and Eastern Canada that a member must understand the consequences of a decision he made in order for it to be enforceable against him (and, in that case, his widow). A sponsor should explain the consequences of a withdrawal on a member’s participation in the plan, such as whether a withdrawal triggers a temporary cessation of contributions.
Also, a plan sponsor can help a member understand the financial ramifications of a withdrawal and, if the member proceeds, require that the member acknowledge in writing the consequences of the withdrawal.
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