Building a successful Group Retirement Plan
I recently watched a video from Great-West Life about some research collected from the 2013 CAP Benchmark Report. In this video, Jeff Aarssen walks through some strategies from the research to help create and maintain a successful Group Retirement Plan.
Most plans have an eligibility period on their plans before employees can join the plan. The research shows that plan participation is greater when the waiting period is shorter like 3 months. Plans that have a 1-year wait period or longer tend to have lower adoption rates into the plan. Everyone gets busy over time and when to wait periods are longer than one year, people just tend to forget.
It’s pretty intuitive but plans that have mandatory participation grow more and thus have better long-term success. According to the data, participation drops dramatically when membership into the plan is voluntary:
– 54.7% participation on Defined Contribution Pensions
– 43.6% participation on Group RRSPs
Participation levels tend to go up with more and better financial education programs. A proactive HR team, encouraging corporate culture and systems to remind employees about opportunities to participate in the plan also help improve participation in group RRSP plans and pensions.
Again, it’s pretty obvious to think that higher employer matching makes for a better plan not only from the employee’s perspective but also from the plan’s perspective. According to the CAP report, the average employer match in 2012 was:
– 5.6% for Defined Contribution Pensions
– 3.8% for Group RRSPs
When polled, members viewed their group retirement plan as their primary source of retirement income which is why workplace savings programs are so important to helping employees retire.
Plans with no withdrawal restrictions tend to grow at a slower rate. In the past few years, we have seen high withdrawal rates create significant problems. In a couple of extreme cases, we have seen some employees in their 60’s who could not retire because they had a lifetime habit of withdrawing their RRSPs from employer-sponsored plans.
Some employers don’t feel it’s their responsibility to monitor the use of their employee’s money but many times, employees need to be protected from their own worst enemy.
Related article: Understanding Withdrawal Restrictions
In my experience, I feel very strongly about incorporating withdrawal restrictions or withdrawal consequences to discourage members from cashing out their retirement funds to facilitate their day-to-day living.
Choosing the right investments and the right number of investment options is a blend of science and art. On one hand, you want to make sure a plan offers enough choice to ensure that all employees have access to viable options that suit their personal needs. At the same, time giving employees too much choice leads to more complexity confusion and clutter.
Related article: How many investment options do you need in a Group Retirement Plan?
In my experience, 90% of the employees I have encountered are passive investors that do not have the time, knowledge or expertise to make investment decisions on their own. That’s why at the bare minimum, plans need to offer a good target date investment option and/or an asset allocation option for these passive investors. Offering a good streamlined investment menu that does not overwhelm members is an excellent way to improve group retirement plans.
One other aspect of investment selection is choosing a good investment default options. At one time, money market funds were the default option of choice. The idea was that the money market fund would be a parking place for their money while they decided what they wanted to invest in. The reality was that many of these members never made those investment decisions and too many people left their money in these low return accounts.
Over the years target-date funds have become the most popular default option.
My five cents
As someone who spends a lot of time helping companies improve their group retirement programs, I think these 4 recommendations from the 2013 CAP report and excellent strategies for a more successful plan. The only other strategy would add to the list that was not mentioned is the importance of lower fees. One of the advantages of a group retirement plan is the ability to negotiate fees dues to the scale of a plan. Employers can negotiate lower fees as the plan grows in size. If you don’t know how to negotiate lower investment management fees, a qualified pension consultant can help.