Is retirement still the right objective for DC pension plan design?

Why workplace retirement plans?

The “why” of offering a group retirement plan has traditionally been to attract and retain talent by helping employees save for retirement. This takes significant investment in the form of:

• Employer contributions
• Staff to administer the plan
• IT staff to manage payroll, contribution remittance
• Time from employees to engage with the plan, attend information sessions and educational seminars

If the return on investment (ROI) for offering a retirement plan is measured by how effective it is in attracting and retaining talent, the logical questions for employers to keep asking may be: “Is our retirement-focused plan design doing the job? Is it giving our employees what they need?”

In other words, “Are we maximizing our ROI?”

Three factors challenging the status quo

Let’s look at some challenges and trends that may be affecting the effectiveness of a retirement-focused plan design, and therefore its ROI for employers. 

Challenge 1: member engagement 

Over the last few decades, the evolution from defined benefit (DB) plans to DC pension plans shifted a lot of responsibility for outcomes away from plan sponsors to plan members. This included responsibilities like choosing and monitoring their investments, deciding on their contribution levels, and setting their retirement goals. 

This required members to understand their plan and concepts like risk, rates of return, and goal setting. It also needed members to think about a goal that was so far in the future it might not even get on their radar until late in their careers.

And all this required member engagement—something the industry has been trying to solve over the decades using education, tools, materials, and in recent years, digital channels, and advice. 

Challenge 2: changing employment trends

Changes in employment patterns and career paths can present another challenge in attracting and retaining talent. 

The traditional, well-delineated path of school, followed by work life, then retirement has become less linear and features career changes, interruptions, return to school, and semiretirement. 

This trend also extends to retirement, where we see Canadians retiring almost four years later than in 2000. Various surveys have also found that a significant number are planning to continue working after retirement, while 76% of Canadians expect to work longer than their parents to retire comfortably. 

From these trends, two insights seem to emerge:

1. In a market where workers follow a nonlinear career path, employee loyalty is hard-won.
2. Retirement readiness is an issue.

Challenge 3: financial stress 

Financial stress continues to be a challenge for Canadian workers, leading to more diverse financial needs. According to our third annual stress, finances, and well-being survey, almost three-quarters of Canadian workers are concerned about their level of financial stress, with the top five financial worries being:

1. Credit card debt 
2. Not having enough emergency savings 
3. Not having enough retirement savings 
4. Repaying student loans 
5. Current financial situation

And while financial stress is widespread across many demographics, certain populations are disproportionately affected by economic stress and uncertainty—the survey found that women, for example, are more likely than men to be adjusting their spending habits and less likely to be sure of their retirement plan.

With such varied financial preoccupations and more immediate needs, saving for retirement is only one of several concerns for employees. This, in turn, can affect their retirement readiness: According to the survey, 49% feel like their retirement planning and savings are falling behind. 

The opportunity: broadening the scope from retirement to financial wellness 

What if the core objective of workplace plans moved from a retirement focus to a larger financial wellness objective? 

For employers, such an approach doesn’t mean overhauling their current plan design. They can evaluate their existing design and decide to what degree they want to adjust it using a toolkit that already exists:

• Offering financial wellness programs—they can offer tools, services, or education opportunities to help employees feel more empowered. Education and financial literacy can be incredibly helpful because it can often be the unknown that generates stress. 
  
• Using digital tools to help members maximize their plan—digital channels can help with communicating plan benefits, delivering education through webinars, and giving members channels—like mobile—through which to engage with their plan. For example, we’ve found that members participating in group savings plans at Manulife who engage with their plan online are 6.5 times more likely to make lump-sum contributions or transfer money to their plan.²
• Partnering with a third party to offer advice—our survey showed that 61% of workers are interested in getting access to a certified financial advisor through their workplace.¹ Our own data has shown that members who work with an advisor are more likely to maximize their group program than one without. For example, they’re 13 times more likely to transfer money to their group plan, and the value of those transfers is 77% higher.³ 

A more elaborate implementation could include introducing new tax types to help employees save, reviewing investment products and contribution levels, and offering rollover and decumulation products to help them transition out of the plan. But any combination of the above measures can help move the plan towards a broader financial wellness focus.

Financial wellness and ROI

A financial wellness approach still includes retirement readiness, but also addresses employees’ other, more immediate financial goals and concerns. And since this is what Canadian workers are looking for from their employer, it can make it more likely they’ll engage with their plan.

This broader focus can also make the workplace retirement plan more effective, as employees may be less likely to approach retirement with debt and other financial challenges. 

In other words, a financial wellness-focused plan can drive better outcomes, maximizing the employer’s ROI.