Helping them figure it all out

Employees need big push from employers to properly plan for retirement years

If you’ve ever asked a teenager to clean a bedroom, you’ll understand how the best intentions can fail. You can provide clear direction, mops, brooms and cleaning supplies, but the chance of finding a sparkling bedroom is slim, unless you resort to extraordinary measures.

Getting employees to fully understand the importance of effective retirement planning can also be a challenge for sponsors of capital accumulation plans (CAPs) — defined contribution plans and savings plans in which members make their own investment choices. It’s clear the message about retirement planning is frequently not received or acted upon.

The solution isn’t necessarily to provide more content. Instead, employers should start by examining why many employees aren’t even getting to the starting gate.

Working together

Generating retirement income through CAPs is a shared responsibility between employer and employee. Typically, plan sponsors strike a compromise between a compensation philosophy and the need to manage cost, then set a desired level of company contribution. In some cases, sponsors design a plan to meet a specified proportion of employees’ pre-retirement income.

The adequacy of the benefit depends on factors such as mandatory or optional membership, the nature of the contribution formula and corresponding definition of earnings, and whether or not company contributions are linked to service. Plan design also establishes the role employees are expected to play in saving for retirement, through voluntary and matching contribution formulas.

However, fully realizing the potential benefit of the plan requires effort, understanding and action on the employees’ part. Depending on plan design, they may need to do some or all of the following:

• Decide whether or not to join, if membership is voluntary.

• Decide whether or not to contribute, and how much.

• Decide how to invest account balances and future contributions — such as choosing between a predetermined portfolio such as a life cycle fund or creating their own asset mix.

• Regularly revisit their accounts to rebalance and monitor their money.

• Understand how much income they will need in retirement and plan accordingly.

Making the message stick

Although many plan members are fully engaged in making appropriate decisions, many others fall far short. Time and again, when sponsors monitor how members actually apply what they should have learned from the education strategy, they find a significant proportion of members are still at serious risk of underachieving the benefit potential of the plan. There is often inadequate diversification — in some plans, 40 per cent of members remain fully invested in a money market fund because that’s the default option.

As a result, many sponsors are rushing to add autopilot features, such as mandatory membership, mandatory employee contributions and target retirement date funds. This “no worries” default selection may save members from the worst consequences of their own inertia and lack of knowledge and time to manage investing.

For employers, ensuring employees make the most of their potential retirement benefit is not only good stewardship, it can help prevent the challenge of employees not being able to afford to retire.

But is the autopilot solution good enough? Although it may help employees achieve better benefit adequacy, they still won’t be equipped to manage their money in retirement. If employees are to have an adequate post-work income, even those who choose a target-date fund need to understand how to create a big-picture retirement plan by considering all their sources.

Company involvement

So what would it take to involve more employees in improving their financial literacy? There’s no shortage of information, from fund updates, investment education material and planning tools to other services such as call centres. Yet most plan members fail to use these resources successfully. Employers that supplement these materials, by putting a company stamp on the education, can achieve a higher level of employee engagement in active decision-making. Face-to-face meetings receive high marks from members while webinars can provide an equivalent education if meetings aren’t feasible (as long as members attend).

In addition, retirement planning tools can help with a broad financial plan and show employees how various sources of income will work together to pay for gas and groceries 25 years from now. Online planners range from simple to complex and the quality of the resulting plan varies accordingly. The most sophisticated can make projections using a full range of income sources, such as spousal assets, and model alternative spend-down scenarios during retirement years using future dollars.

Focus on behaviour

Employers might even consider taking a step back to conduct focus groups to drill down into engagement and behavioural issues. Responses about lack of knowledge, interest and time are commonly heard, as are admissions investing is being avoided because it’s scary or retirement isn’t on the radar screen. Focus groups can tell you what information or incentives members really need to fully grasp a plan’s value and understand that real money is at stake.

Only when employers understand how and why employees actually think and behave can they design a program to successfully engage the majority and lead them to make use of communication and education resources. The bedroom won’t get cleaned until the kid wants to pick up the mop.

Annie Massey is a principal in the workforce communication and change business at Mercer in Toronto and assists clients in developing and implementing employee engagement and education strategies for defined contribution plans. She can be reached at [email protected].

Retirement Tools

Planning your future

Plan sponsors and financial institutions are touting a range of online retirement planning tools, from simple to sophisticated. For example, a 40-year-old employee could fill out the following:

Annual after-tax retirement income needed (in today’s $s): $50,000
Year(s) until income needed: 25
Number of years income needed: 20
Annual inflation rate: 3%
Annual rate of return before retirement: 7%
Annual rate of return during retirement: 7%
Marginal tax rate before retirement: 30%
Average tax rate during retirement: 20%
Amount already saved in registered plans: $50,000
Annual registered plan contribution: $4,000
Total registered savings at retirement: $524,368
Amount already saved in non-registered accounts: $50,000
Annual contribution to non-registered accounts: $5,000
Total non-registered savings at retirement: $400,704
Your after-tax retirement income (in today’s $s):
From registered plans: $14,405
From non-registered plans: $12,002
Annual Old Age Security amount (pre-tax): $6,000 $4,800
Annual CPP/QPP amount (pre-tax): $10,000 $8,000
Other annual pension income (pre-tax): $0 $0
Total annual after-tax retirement income (in today’s $s): $38,847
Desired annual after-tax retirement income
(in today’s $s): $50,000
Annual after-tax retirement income shortfall: -$11,153
Increase to annual non-registered contributions to eliminate shortfall: $8,000

Source: CIBC Wood Gundy

Service Canada also offers an online calculator that takes about 30 minutes to complete. This takes into account other factors such as gender and types of pension plans. It provides retirement estimates along the way, from Canada Pension Plan contributions, RRSP plans, pension plans and other retirement income. The calculator can be found at

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