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.

Comments

  1. Paul N

    Now my 2 cents.

    This is all great theoretically for many of the reasons you have listed. But it is also not so great. I feel many of the companies that offer group benefit plans, benefit themselves first, their organizations second and the individual employee somewhere down the food chain.

    High MER’s, fund information that is 6 months old, limited choices of “dog like performance” funds, fund purchases that take 2-3 days so you can’t take advantage of market drops, tons of restrictive withdrawl rules, no advice from advisor’s due to liability rules. Where do I stop here?

    Empowering employee’s to make their own choices with information that may not may not be in their best interests on the websites. I would say at my work over 90 % had no clue where to start to create a basic portfolio. (might as well get a board write the fund names on it and throw darts)

    They simply look at a fund that made 17% return in the last 365 day snapshot shown as your rate of return and pile in all their funds into that fund. Then the employees cries foul when it free falls 30 + % and they panic ans jump into a bond fund or MM fund and contiue to compound their loss.

    Workplace savings programs – great idea. Actual reality is that each employee becomes a cash generator for life for the insurance companies offering the plans.

    Profits made by the GWL’s and the fidelity’s, and the Sun lifes etc. should be disclosed and transparent as well. 2 or 3 % every year for life on a large portfoilo starts to add up real quick.

    But we all know that secret will never get out.

    Mama should tell their kids to be financial advisors….

    Sorry i think the industry needs overhauling and it needs to be more in favour of the individual.

    • Jim Yih

      Thanks for voicing your two cents. It’s important to see engagement, especially from the plan members.

      I think a lot of your points are valid and many of the issues should be addressed with education (that’s my bias because that’s what I do) but allow me to address some of your points:

      1. High MERs. MERs should be lower than retail. In fact in most plans I see, MERs or IMFs are much lower. The bigger the group, the lower the fees … that’s one of the advantages of group plans. I’ve seen fees as low as 50bps in group plans. That being said, there are some plans that charge too high of fees and when we see this we let the employers know. You should do the same if fees are high.

      2. Fund trading. I believe that’s more of a regulatory thing than a company thing. There is concern that group plans are not designed as trading platforms. It’s not that I agree with this but just for information.

      3. Typically withdrawal rules are set by the employer, not the insurance company. I think if employers are putting money into the plan, they have the right to implement some restrictions on withdrawals. I see too many plans where people withdraw RRSPs too freely to buy cars, go on vacations and for other lifestyle reasons. This is not good and this is where withdrawal restrictions can be healthy to the individual and to the plan.

      4. Some employers do include advice and education as part of their plans. I think the best programs include this. You may be part of a group that does not offer this and may want to discuss it with your employer. I’m sure there are options available to you.

      5. Profits from public companies are disclosed. You can read the annual financial statements.

      6. I completely agree that the best place to learn is from your parents. the problem is not all parents are capable or willing to take on this role.

      Thanks again for your comments! They are great!
      Jim

  2. Paul N

    Thank you for your quick reply, this being an open commentary i don’t want to get too specific, but i would like to respond to you.

    Our company has about 75 employees. The company is extremly generous and contributes the full 18% of our RRSP room over and above our wages to a DC plan at one of the 3 above mentioned companies.

    We can choose from 30 funds, a GIC ladder, and 5 portfolio funds (selected for you based on your safe to aggressive profile result).

    The funds in my opinion all carry high fees. Bond funds over 2 % Equity funds from the mid 2’s to over 3 %. The Portfolio funds are al in the high 2’s. So I agree with you, with 75 employees, I feel these fees are way too high. I have complained and even had the fund company come in to our work for what turned out to be a rehearsed “information session” and any question’s that i brought up were answered with pre packaged answers. These people are simply sales people that project themselves as CFP’s. So you see where my frustration comes from.

    Fund trading is very easy and free within the 30 funds. But your purchase or exchange does not happen on the same calendar day. It can take up to 3 days losing your window of a day. For example like this past Monday in my own RRSP outside of work, where at 3 pm I was able to call at 2:45 pm and purchase a fund at Mondays closing rate and purchase quite a few more units for the same amount of money. I can’t do that in the company plan. You can’t even see a value unless you do the math yourself.

    Withdrawal rules : If one reaches retirement age, you are restricted by penalty if you wish to transfer out more then a certain amount in kind to another institution because for example you do not like the performance or fees there. (sort of like a Cansim fee schedule- “the penalty version”) The fund company has created penalties if you try to do this to get you to stay with them allowing you to transfer out only a small percentage each year without penalty. I find this unfair. I again agree with you. People should NOT use these funds as a bank account and cash them in. But you should, upon retirement, be able to switch your product to another product with a different company if you feel the one you are in does not meet your expectations or is too expensive without penalty at some point.

    As for the education part, there are tools, but i think you can also agree that these tools are not in the best interest of each individual. Doing a 10 question risk profile assessment on line and selecting your asset allocations, and foreign % allocations is not an easy task even for ones trained in university to do so. There are a lot of bad managers out there. Just read the last issue of Moneysense – there is one story in there of a couple whose 30 years of investing went nowhere. You can’t expect everyone to create their own fund portfolio. Pro active help should be offered to those needing it by the fund company not the employer. An employees lack of knowledge should not make him a candidate for a portfolio loss of 50% IN 2008. Other panicked employees put all their funds in the MM component of the fund which with the MER has lost them money for the last 3 years. The MER being higher then the return.

    Profit disclosure:

    What i would like to see on the statements, is clearly in dollars (not units or %’s or other nonsense) What I contributed, what it cost me in fees for a set period (so that is what the fund company made from the money they are investing that i gave them), and what my profit was for same set period. Quite plainly. I see how much I made, and what the investment company made off me, and where I am at. Then I can see for myself over time if investing with this company is a fair deal. That’s truly disclosing fees so i can make an educated decision to see if it’s time to consider another investing plan. Your right i can look up Power financial’s information and see how well they did as a company. (Probably be better just to buy their stock directly then be in their funds)But that does not tell me how much i personally have shelled out to them to get my return or loss.

    Regarding parents and education, mine would never have dreamed of owning a stock or a fund. (Those are like Kryptonite to some old world people). It would have been real estate for them. People do have to educate themselves. But how to wake them up. You can watch Snookie or play lottery every week or you can pick up a few books, listen to some free podcasts or visit your website and learn a few basics and do so much better in your life with minimal discipline and effort.

    I think i have partially gone off you original topic but I am relaying a real life experience with our workplace savings program. Being middle management and having to listen to employee after employee come to me asking for help with their broken portfolio(s) has been a real eye opener.

  3. Julie Fagan

    I have recently been involuntarily retired from a large corporation. We had switched over to a new pension plan in January 2011, with employees getting 100% vesting from old plan. I have to make a defined benefit ancillary decision on whether to take the pension now, at 56 years old or defer until 60. The defined benefit ancillary has a bridge benefit to help me in my current situation, but because I only contributed just over 3/4 of a year into this part of the plan, the monthly payout isn’t much per month. Would it be better to take it now or deferr it until age 60 with the intention to find replacement work. As it is a defined benefit bridged company contribution until age 65, I’m thinking that I should take it now, as who knows how my investments in this fund will fair in 4 years from now. Please let me know your thoughts…
    Sincerely,

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