To unlock a workplace retirement program’s full potential, employers need to adopt greater innovation
Workplace capital accumulation plans (CAPs) have become increasingly prevalent in providing retirement security for Canadian employees. Employers can customize a retirement savings program for their workforce, choosing to implement one or a combination of CAPs that might include a defined contribution (DC) pension plan, group registered retirement savings plan (RRSP), deferred profit-sharing plan (DPSP), tax-free savings account (TFSA) or non-registered savings arrangements.
Properly developed and administered, such plans not only provide a valuable benefit to employees in retirement but can also serve as a key tool in employers’ efforts to attract and retain high-performing employees.
The good and the bad news
The good news is that Canadian employers understand the vital role CAPs play for their organizations and employees, according to a recent study by Aon. Our 2020 Canadian Capital Accumulation Plans Employer Survey, based on interviews with more than 100 organizations across the country, found that employers are focusing on supporting workers to plan for a comfortable retirement, and they recognize the need to better engage employees in optimizing their retirement benefits.
The not-so-good news: While many employers express an interest in exploring new ways to improve value in their CAPs, they are still relatively conservative in their adoption of recent innovations. To unlock a workplace retirement program’s full potential, employers need to adopt greater innovation, engaging their employees and expanding support of employees’ total financial well-being.
The Aon report shows that employers want to deliver greater value and produce better employee outcomes in retirement. Critically, however, many of them struggle when it comes to engaging employees in that effort, which presents a significant roadblock to realizing the full value of CAPs — especially those that rely on employee involvement.
Survey respondents identified four keys to plan success, with almost nine out of 10 employers choosing one of the following goals as their top choice: improving employee financial IQ (31 per cent), increasing overall savings for better retirement outcomes (24 per cent), providing flexibility for emerging retirement patterns (24 per cent) and offering better retirement income options (13 per cent).
Gap between intentions and results
However, when asked what measures plan sponsors are taking to achieve those objectives and how effective they are, a clear gap emerged between intentions and results.
For instance, most employers agreed that they have an important role in helping workers improve their understanding of finance and retirement. Many employers in the survey provide education on saving for retirement (62 per cent) or financial planning (42 per cent).
Yet it is not clear that the messaging to employees is producing effective action. More than two-thirds (70 per cent) of employers pointed to concerns that employees were not engaging with their plans or using them effectively.
Meanwhile, many are worried that employees are not accessing available resources (38 per cent) and one in five highlights a concern that eligible workers are not joining the plan at all.
How can employers bridge this gap? One key lever is plan design. A CAP with an underlying smart design promotes member engagement and leverages automation and inertia.
Almost 70 per cent of responding employers offer a variety of plan types so that employees can choose the best combination of options to meet their personal savings goals and retirement income needs. More than half say that their plans have automatic features, such as automatic enrolment to encourage early participation, and two-thirds of employers equip employees with modeling tools to help determine their optimal savings and a targeted amount needed to retire.
Roughly half of employers are making their communications more engaging by providing personalized content or customized messages based on demographics.
Uncertainty about how to invest is a huge obstacle to employee engagement with CAPs. Smarter investment structures can help address that challenge, and many employers are at least offering default investment options to simplify employees’ decision-making journeys. Most CAP sponsors (68 per cent) now offer target date funds as the default investment option, according to the Aon survey.
Plenty of room for innovation
In our view, these are significant and welcome trends. But there is still plenty of room for innovation in increasing employee engagement and making CAPs more effective. Aon’s survey confirms that there is room for fresh ideas when it comes to decumulation — the process of drawing down assets in retirement — and for employers to help employees manage their post-retirement risks and costs.
Many respondents were interested in using an external pooled arrangement for CAP decumulation, with more than half saying they appreciate the scale and lower costs for employees, and 40 per cent see the value of this approach in releasing their own financial commitment and facilitating delegation of administrative responsibility.
Finally, managing risk through effective governance is a key ingredient for the success of any workplace retirement savings program, including CAPs. Many employers told us they have already taken steps to manage or mitigate their fiduciary liability by delegating responsibility for various functions — and in some cases partially or completely outsourcing decision-making — to third-party service providers with specialized expertise.
The survey findings show that 57 per cent of sponsors are delegating at least some of the responsibility for investment selection and management, while another 31 per cent are engaging the services of an independent consultant to support their decision-making.
Capital accumulation plans are an increasingly important part of the Canadian retirement landscape. As the Aon 2020 CAP Employer Survey shows, Canadian employers recognize the value of CAPs to their business and their workforce, as well as the need to take an active role in helping employees understand and participate in them.
But for these plans to fully live up to their promise of supporting workers’ post-retirement financial security, more needs to be done. No doubt, this is a significant challenge, but it can also be an opportunity for employers that respond dynamically and proactively, with a commitment to ongoing innovation.
Rosalind Gilbert is an associate partner in retirement solutions at Aon in Vancouver. She can be reached at [email protected].
