'If they can't afford their life [now], how can they afford to save for their future selves?' says academic, questioning recent study results
However, employers could help employees retire early by providing 100% matching contributions, says a separate report. With access to these funds, employees could retire two years earlier with an additional $250,000 in retirement savings at age 65, if they pay off debt early rather than focusing on retirement savings from age 30.
Alternatively, splitting income between saving for retirement and paying off debt for the entire period until retirement at age 65 could mean taking three times as long to pay off debt and leave employees with a shorter period of time to make larger retirement contributions, the report from Mercer Canada said.
However, Nita Chhinzer, associate professor in Human Resource Management and Business Consulting at the University of Guelph, highlights some flaws in the study.
“One of the conditions of the survey’s math was that it's better to pay off your debt rather than save initially on the assumption that your debt interest is higher than your retirement interest. If an employer gives you a 100% matching return, or even if they match you at 50 cents to the dollar, and if your return rate on that loan is 1%, it's still a better deal because it's not the interest on the loan that’s going to help you get long-term stability, it's the input from the employer and that matched contribution that's helping you get long-term stability,” Chhinzer said.
Are matching contributions an effective incentive?
Traditionally, matching contributions rebuilds loyalty and serves as a retention tool, as employees invest more and more in the company. This benefit also acts as an incentive, because not only is the employer demonstrating care for their employees’ future, but there is an implication for employees if they leave the employer and the pension they’ve accumulated, she said.
While Chhinzer notes that matching contributions does help employees save for the future, there are two factors influencing why individuals may choose to not take advantage of this.
The first is that for younger generations, the concept of “the future self is an unknown entity,” she says, with people more concerned about current affordability issues rather than saving for the future. The second is that these individuals aren’t looking to stay with the same employer for, say, 30 years and they are aware that when they leave, they will be taxed on whatever they've been able to save.
“People now are worried about the affordability crisis; they have debt because they couldn’t afford to go to school, for example, so if they can’t afford their life, how can they afford to save for their future selves?” Chhinzer said.
Legal considerations with matching contributions
When considering offering matching contributions, employers should be cognizant of the different tax limits for different contribution plans, said Adam Ngan, partner at Blake, Cassels & Graydon.
Employers should also ensure they carefully structure contribution matching plans with regards to factors such as auto enrolment or auto escalation, in which the contribution amount increases over a period of time, he said.
“Employers will want to very carefully communicate all aspects of their plans to employees to make sure nobody is surprised by certain aspects of the plan.”
When matching contributions, employers should also be wary of the possibility of a constrictive dismissal occurring if they change the terms of the contribution; for example, by lowering the matching percentage, Ngan said.
“If you start making contributions at a certain rate for your employees, I think, for better or for worse, that is probably going to become an expectation that those contribution rates will continue even if they aren’t legally binding in some way,” he said. “Employers need to think about the cost perspective both currently and going forward, as well as other factors like how these contributions fit into your overcall compensation and the tax limits on the contributions that can be made.”
Alternatives to contribution matching
Employees later in their careers or in a higher tax bracket are the “right target market” for pension matching contributions so these employees can maximize their benefits, Chhinzer said.
“I do think that there is a big market for matching contributions; young people [are] just the wrong target market, as there may be few people in this group who are really, really incentivized by this.”
For younger generations, thinking about alternative investment options is critical for employers, Chhinzer said. Offering assistance with loan repayment or subsidizing housing and transportation allows employers to give incentives that have greater value for younger employees who may not be thinking about retirement because they’re struggling to afford transportation to get to the office, she said.
“Companies that are pushing and pushing to market retirement matching for new graduates are really taking an employer-centric view; it’s legacy thinking, and the consumer demand just isn't there,” she said.
“I think this is an opportunity for employers to think about innovation and rethink the value proposition of the incentives they’re offering. They need to remember the diversity of employee needs, and if they are really willing to put their money where their mouth is and incentivize employees for productivity, loyalty and retention reasons, they need to demonstrate value to the employees. It’s time to start thinking differently about incentives; they shouldn’t be limited to only a few privileged people who can take advantage of them.”
