Managing our retirement dreams
Canadians need to pay more attention to pension plan investments
The colliding forces of Canadians’ inertia toward their defined- contribution pensions and ambiguity in regulations guiding plan sponsors’ responsibilities to educate plan members may be leading to dashed hopes of a comfortable retirement lifestyle for the next major cohort of retirees.
Despite heightened awareness and attention of the financial markets and the impact they could have on retirement nest eggs, Canadians remain predominantly indifferent toward their pension investments.
According to Statistics Canada’s most recent roundup of pension numbers, an estimated one million Canadians ( 6% of the workforce) are currently registered in a defined- contribution pension plan. Yet, few are actively managing their assets.
Plan providers have been broadening the scope of the educational tools available to members in hopes of encouraging them to be more mindful of the state of their pensions. Those tools range from literature about the funds available to assessment of risk aversion via call centre representatives to one- on- one meetings with licensed advisors. Yet, it’s up to plan sponsors to make those tools available to plan members and up to plan members to take advantage of the tools.
Sara Hakim, associate partner at human capital consulting and outsourcing company Aon Hewitt, says that while advice services are being made available by plan providers for a set fee, few plan sponsors are opting
Employers are introducing target- date funds and making them the default
to make it available to plan members.
“The number of clients who are choosing to offer it to their members has not seen a huge uptick yet,” she says. “Of those who do offer it, the utilization [ by plan members] is usually less than 10%.”
Unlike the more common definedbenefit pensions — typically found in the public sector and managed by the plan sponsor — defined- contribution pension investments are managed by each individual plan member.
Idan Shlesinger, managing partner of defined- contribution Pensions and Savings Plans at insurance consultancy firm Morneau Shepell, says most defined- contribution plan members mistakenly believe they need not worry about their retirement because they have a pension. “The impact of DC pensions hasn’t entirely been felt yet; the concern is that when it happens there will be a great deal of disappointment out there,” says Mr. Shlesinger in reference to the potentially inadequate final balance of defined- contribution pensions that aren’t being actively managed by the plan members who own them.
Current pension regulations only loosely define the fiduciary responsibilities of plan sponsors with respect to the resources they must provide plan members to help them manage their pension investments.
Non- binding guidelines set out by the Canadian Association of Pension Supervisory Authorities ( CAPSA) say employers have to offer plan members investment choices with varying degrees of risk and return so that a reasonable person could create a portfolio that meets their needs. However, employers who offer information that borders on specific investment advice could later be liable if that advice turns out to be poor.
Terra Klinck, partner at law firm Hicks Morley, says some plan sponsors are choosing to offer plan members a stipend to use toward thirdparty, fee- based advisors to indemnify themselves against potential litigation in the future.
In addition, says Ms. Klinck, many employers are choosing to make targetdate funds the default option in their defined- contribution pensions so that the investments of inert plan members are better managed, if only passively.
“It used to be that the typical default was a money market, but employers are introducing target- date funds and making them the default to deal with that apathy,” she says.
Target- date funds automatically reset asset mix classes of investors based on assumptions about the investor’s personal life stages and circumstances. Ms. Hakim says that while the move to target- date funds as a common default choice among plan sponsors is a positive development, investors should still keep a watchful eye on the state of their pensions.
“I’ve heard people say these targetdate funds are ‘ set it and forget it,’ but I don’t think that’s true,” she says.