Early retirement expectations and the trouble to come

Employers need to provide ongoing financial education for employees or face future lawsuits.

Canadians are retiring earlier and expecting more from it. There are relatively few Canadians in the workforce today whose answer to the question, “When would you like to retire?” is anything other than “age 55.”

With the predominance of capital accumulation plans in the workplace including defined contribution pension plans, group savings plans, group RRSP plans, stock purchase plans and stock option plans, corporations have provided not only the tools for employees to retire on, but they have also created a mindset — an expectation.

THE PROBLEM
In this consumer-oriented society, the mindset for satisfying expectations is already built in. In employees minds, there is an expectation that money will be there to retire on.

Corporations have provided a magnificent array of tools for their employees to reach this blessed state of early retirement.

However, the use of these retirement/investment tools requires some modicum of investment decision-making by the user — the employee. If the decision-making is not properly handled, or is misunderstood, expectations will likely be created but will not be met, and corporations will suffer consequences.

Capital accumulation plans are intended to build sufficient capital during the course of an employee’s working life to allow the employee to retire in a certain lifestyle.

The introduction of these employee benefit programs is typically accompanied by what are generally referred to as “enrolment sessions” where glossy booklets are provided to plan members and 45-minute presentations are made. These are generally regarded as education programs. Many companies feel that their job is finished.

Unfortunately they fail to differentiate between what is information, education or advice.

INFORMATION, EDUCATION, ADVICE
What occurs at enrolment sessions, is primarily, the dissemination of information. Some employees can and do make intelligent decisions solely based on information. These employees are few and far between. Most employees require ongoing education in order to properly put the information to work for them. Almost all employees want to be told what to do — that’s advice.

If an employer does not provide information or sufficient information, they will likely suffer legal consequences in the future. If employers provide the wrong advice or inappropriate advice that is not prudent they will likely suffer legal repercussions. However, there is an area between information and advice — education — that will enable employees to use the tools and information, make decisions for themselves, and understand the consequences of these decisions.

Employee education as it relates to retirement is an ongoing process, that can best be defined as applying and adjusting information and concepts relating to investments, taxes and personal needs. As people’s needs and situations change, their financial plans need to be adjusted and reconfirmed.

Many employers fear that if they provide education or advice, they may be sued in the future. It is more likely that they will suffer the legal consequences if they do nothing. Ongoing financial education must be regarded as part and parcel of an ongoing benefit program, and not on an ad hoc basis. However, education must be delivered objectively and prudently.

Because defined contribution plans have not been around very long, liability issues have not been tested before the courts. There is considerable potential for employees to hold the employers accountable if they are not adequately prepared to properly manage pension assets.

In addition to fulfilling their fiduciary obligations, employers can seek to limit liability through employee financial education and access to professional advice.

It is important for corporations to stop and re-think benefit programs to ensure information, education and advice are provided. Employers will find that they are less concerned with liability issues than those who do nothing. They have greater confidence that employees have the information and tools necessary to make the right investment decisions for their retirement needs and in turn, employees have a greater confidence in themselves and the company.

Jury Kopach is vice-president, retirement services at T.E. Financial Consultants Ltd. in Toronto. He can be reached at (416) 366-1451.

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