60 per cent of pension plan members report barriers to retirement saving
New research from Benefits Canada magazine shows that even folks who are in retirement plans say they’re finding barriers to saving – all thanks to the impacts from the pandemic.
The magazine’s annual CAP (capital accumulation plan) Member Survey was carried during the start of the crisis, from March 30 to April 1.
A capital accumulation plan is any type of savings vehicle where members put in money – sometimes matched by the employer – over their working lives. At the end of work, the total amount saved for retirement is then either paid out to them via an annuity, drawn down from a special locked-in RRIF, or a combination of both.
The folks at Benefits Canada asked people in these types of plans how the pandemic was affecting their spending and saving habits.
The research found that Canadians “are continuing to juggle their financial priorities. More than half (54 per cent) of CAP members are prioritizing day-to-day expenses, followed by paying the mortgage or rent (47 per cent), paying off personal debt (38 per cent), enhancing personal savings (34 per cent) and saving for retirement (28 per cent),” the magazine reports.
A fairly low number of respondents – 41 per cent – “described their current financial situation as excellent or very good,” the magazine notes. A further 40 per cent said their finances were “adequate,” but 19 per cent said things were “somewhat poor or very poor.” A whopping 60 per cent said “they’re unable to save as much as they’d like for retirement due to other financial debts, such as credit cards or student loans,” Benefits Canada reports.
Debt is definitely a barrier to saving, the magazine reports. “I think the big thing we need to start to get across to workers, savers, Canadians . . . is that having too much credit card debt is the opposite side of insufficient retirement savings,” Joe Nunes, executive chairman of Actuarial Solutions Inc., states in the article. “It comes from too much spending. We have to get better at educating people that they need to keep the spending in check to get the savings in order.”
The problem, however, is that the pandemic is making Canadian household debt even worse.
“You don’t need to be a psychic to predict that over the next weeks and months, the country will see an increase in personal bankruptcies, while household debt is going to soar,” reports Maclean’s magazine. “Well before COVID-19, there was growing concern over the country’s personal finances, with debt-to-income ratios topping 176 per cent in the third quarter of 2019, which means for that every dollar of income we earn we owe $1.76.”
With so many people off work and receiving CERB benefits, which may equal only about half of what they were making at work, credit cards and lines of credit will feel the strain, the magazine predicts.
Let’s face it – at a time when just staying healthy and avoiding COVID-19 is the new national priority, followed by keeping a roof overhead and food in the fridge, retirement saving is going to get bumped to the bottom of most people’s to-do lists.
But remember that with some capital accumulation plans, like your RRSP or your Saskatchewan Pension Plan account, you can reduce your contributions and put in what you can. If you can’t chip in what you did last year, put in less. Any contribution, however small today, will benefit you in the future, thanks to the professional investment growth it will receive over the years. You can ramp things up again when better times return.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22
Hi. My name is Sheryl Smolkin, and today I’m interviewing Randy Bauslaugh for a savewithspp.com podcast. Randy is a partner at the McCarthy Tétrault law firm, where he leads the national pensions, benefits, and executive compensation practice. He has been involved with many of the leading pensions and benefits cases over the last 30 years, and he is also a member of the Saskatchewan Pension Plan.
Welcome, Randy. I’m so glad you could make time for us in your busy schedule.
Thanks. I’m happy to give back to the SPP.
That’s terrific. Randy has recently written an article titled Dumb and Dumber: Individual Investment Choice in DC Plans. That’s what we’re going to talk about today.
Q: Randy, that’s a very provocative title for an article. Tell me about the independent research supporting your thesis that giving investment choice to plan members in defined contribution RPPs is riskier from a legal perspective and a bad idea from a financial performance perspective.
A: Sure. The research comes from various sources – research institutions, academics, news articles and a lot of that relates to the financial performance side. Also, on the legal side, I had a student a few years ago take a look, and there were 3,500 class actions relating to defined contribution plans particularly in the US and those were just relating to DC plan fees.
I think you can pick up any standard textbook on pensions and it will tell you that defined benefit plans have a low legal risk but potentially fatal financial risk. That’s because they guarantee the retirement payments. However, they always say DC plans have low financial risk, because the employer just contributes a fixed amount, but very high legal risk, because there are so many different ways of getting sued.
Q: Then why do DC plan sponsors typically provide a broad range of investment options for plan members?
A: Well, I don’t really know. I have some theories. Before the mid-1980s, most plans did not provide choice, and then it sort of became trendy. I think a lot of employers just believe that choice empowers their employees, or maybe it’s just because after all, who wants just one TV channel.
I also know for a fact that aside from individual empowerment or incentives for the financial industry, there are a lot of plan sponsors out there who think either they have a legal obligation to provide choice or they are somehow reducing their legal exposure if they do provide choice when exactly the opposite is true.
Q: What legal risks does offering multiple investment options raise for DC plan sponsors?
A: Well, one thing a client once said to me is, “Well, what about the (Capital Accumulation Plan) CAP guidelines? I need to provide choice to comply with the CAP guidelines.” Financial market regulators put out something called Guidelines for Capital Accumulation Plans. Take a look at the table of contents and you’ll find a whole lot of ways of being sued under a DC plan that offers choice. I’ve got a slide presentation that just identifies 48 different ways in which plan members have sued their employers only over fees.
The other thing people should do is read the second paragraph of those guidelines. It says it applies where you’re giving two or more choices, so it doesn’t apply if you’re not giving any choice.
Q: Is providing only one investment option, such as a balanced fund, a set-and-forget strategy for plan sponsors, or do they still have active management and monitoring responsibilities?
A: They still have the active management and monitoring responsibilities. It’s definitely not just “let’s turn it on and forget about it.” Ideally, a DC plan should be managed like a defined-benefit fund. You may do a profile of what your current particular employee group looks like and then the investments can be shaped to that group’s profile, but you still need to manage it on a regular basis.
One of the advantages of a single fund is that you get professional management of the whole fund, not members making their own investment choices for their own little pots. Once you set it up, you should still review it every month or at least every quarter just to make sure that that fund has got an appropriate mix for your group.
Q: Why is a one-fund approach less expensive from a fees perspective for both plan sponsors and plan members?
A: Well, usually you can get economies of scale that will keep the fees down, because you’ve just got one big pot and not multiple little pots. I know that recently a lot of DC fund providers have dramatically reduced their fees for, say, balanced funds and other investment vehicles but some of the other esoteric funds are still pretty expensive. When you’ve got all these little individual accounts, you still have lots of transaction and other fees that are tied to those accounts. That tends to make them a bit more expensive than a pooled arrangement.
Q: Doesn’t having one or more investments managed by several investment managers better diversify a DC plan member’s portfolio and promote better overall returns?
A: Well, you can get that in a no-choice plan, as well, because you could have many managers that are managing different parts of the bigger pool. But the difference is you now have scale, and you’ve got professional management of the money.
Most plan members are not good at investing. In fact, only 7% or so of DC members can actually beat the rate of return of the average DB plan. One of the more interesting statistics that came up in the research was that only 3% of their professional advisors can beat the average rate of return of the average DB plan.
Q: What is a default fund, and what percentage of DC plan members typically invest in the default fund?
A: About 85% of the members in DC plans don’t make any choice at all. If they don’t make a choice, they end up in the “so-called” default fund. It’s a fund that you get into in default of making an election. Employers have to keep track of who is in the default fund because it’s not really clear whether it is just as a result of a decision or simply putting off investment of their money. It may actually be the plan member’s choice to go into the default fund.
In some surveys many members have said that they thought the default fund must be the best fund because that’s the one the sponsor set up for people who don’t make decisions. Increasingly, what we’re seeing out there today, though, is people defaulting into what’s called a target date fund.
A target date fund is based on your age when you go into it, and as you start getting close to your retirement age, it will move your portfolio from largely stocks to largely bonds. That’s not a bad idea, because once you retire, the theory is you don’t have the capacity to make more income, so a loss just before retirement is undesirable.
One of my clients actually allows employees to choose their target date funds, and they found that a number of people were choosing three of these target date funds because they weren’t sure if they were going to retire at age 55, 60 or 65. So they put a third of their money in each in case they retire early or later, which is probably the absolute worst thing they could do.
Q: How long have you been a member of Saskatchewan Pension Plan, Randy?
A: Probably about 10 years. I was at another firm some years ago, and they had a pension arrangement, and then when I came to this firm and they don’t. I just think SPP is a great idea.
I know a lot of people … Even my own professional financial advisor questioned how I got into the SPP and asked whether I was born in the province. No, I wasn’t. It’s open to anybody, and it works just like an RRSP. Anyway, every year I just keep moving the maximum amount from my RRSP to the SPP, and I make the maximum contribution every year. I’m glad to see it’s gone up.
*This is the edited transcript of a podcast recorded in April 2018.
Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.