The importance of a Workplace Savings Program
Study after study suggest that Group Retirement Plans or Workplace Savings Programs are important to everyone’s financial future.
A recent US study from Fidelity Investments (2011) suggests that more than half (55 percent) of current workplace savings plan participants say they would not be saving for retirement if not for their workplace savings program.
The study also suggests that 19 percent of employees currently enrolled in workplace plans report they have no retirement savings at all outside this key retirement benefit.
Given this study is American where the savings rate is actually higher then that of Canada, one might argue that Canadians may benefit even more from enhanced use of workplace savings programs.
The need for more Workplace Savings Programs
According to research (Environics Research Group, 2010) from CLHIA (Canadian Life and health Insurance Association),
- Only 50% of the Canadian private sector workers participate in a workplace-based savings program
- 89% of Canadians say workplace savings plans should be made more accessible to all working Canadians
- 56% of people not part of a workplace savings plan say they are interested in participating in a plan through work. 18 to 44 year olds are most receptive to saving through work
- 41% of people not part of a workplace savings plan would consider changing jobs if another employer offered one
- 50% of working Canadians are concerned they will not have enough to live comfortably during retirement. The older the age, the greater the concern
- 45% of full time workers would feel more confident if money was deducted automatically from their pay. The higher the income, the greater the appeal.
Web usage data from Sun Life
Launched in 1997, Sun Life has offered a plan member website for all users of Sun Life Group Retirement plans. In a November 2010 report, Sun Life shared some data around website usage and compares their data to some other Canadian data.
- Younger people use the employer sponsored website more.
- 80% of those under 30 use employer sponsored plan websites
- Less than 30% of those over 60 use these websites
- Most people use the website to check their account balances
- 30.3% use the website to check account balances
- 26.7% checked transaction histories
- 19.9% check investment options, performance and research
2010 CAP benchmark report – Defined Contribution vs Group RRSP
One of my personal favorite reports every year is sponsored and supported by Great-West Life. Here are some highlights of that report:
- The Defined Contribution pension plans (DC plan) are much more significant in Canada. The average assets in a DC plan is $85.9 million where the average assets in a Group RRSP is only $19.8 million
- Employees are responsible for making investment decisions 86% of the time in a DC Plan and 97% of the time in a Group RRSP.
- There has been a trend to streamlining investment choices. The average number of investment choices in a DC plan is about 8. Many studies have shown that more choice actually create more confusion and paralyzes people from making decisions.
- On average members actually invest in 3.5 funds
- The most common investments offered in group plans are Balanced Funds, Bond Funds, Canadian Equity Funds and Money Market Funds.
- Every plan must have a default investment option. The two most common choices are a money market fund or a balanced fund.
- The report differentiates Information from education from advice given to members.
- To no surprise, 85% of plans provide information about investments and plan through a website or print material
- 70% of plans provide a higher level of education (my take is this education is focus on plan and product education as opposed to a more holistic approach to financial education.
- Only 38% of plans offer individual advice. Individual advice is more likely to happen with smaller companies than large ones.
- 42% of plans allow for immediate participation. 20% of plans allow for participation after a waiting period of 3 months. 18% of plans have a waiting period of 1 year.
- DC plans are more likely to have mandatory enrollment
- on average 71% of DC plans have mandatory enrollment
- only 16% of Group RRSP plans have mandatory enrollment
- How much does the employer contribute?
- in DC plans the average contribution is 5%
- in Group RRSP plans, the average is 4.1%
My two cents
Data can be interpreted in many different ways so here’s my informal view of Workplace pensions
- helping employees to save for retirement through group programs is a very important benefit that employees appreciate
- The best plans are ones where both the employer and the employee contribute to the plan. Employer matching creates a great incentive for employees to save
- Money and contributions is not the only benefit. Employees see more value in their plans when there is more awareness created through communication, education and advice.
- Placing some withdrawal restrictions is better than no withdrawal restrictions. Most employees accept that the may be withdrawal restrictions on the employer contributions
- Mandatory enrollment improves the plan. The next best solution is Auto-enrollment with the ability for the member to opt out of the plan.
- When it comes to making investment decisions, simple is better.
- There is no ‘one size fits all” solution. Every company has unique needs and circumstances so plan accordingly.