First off I should thank Jeremy for his exaggerated praise in his last blog and maybe say something nice about him: he has a great family!
As the spouse of a journalist, I must confess to a high degree of skepticism concerning blogs and authors of blogs who are not trained journalists or writers. I am always concerned about the quality of the content as well as the cynical view that productive blog posters don’t do any real work (unless of course that is their main job). My conclusion would be if you see us posting every day that can only mean one thing for the state of our business and work-load! With these caveats in mind I will aim to post infrequently on topics that I care about.
Today, my topic is the future of DC pension plans (since the end of DB pension plans has received enough ink recently). When I refer to DC pension plans in this article I include workplace group RRSPs.
I recently left a DC pension plan managed in the typical way in corporate Canada:
- Voluntary member contributions with an employer-matching component
- Full member investment choice with 10-15 fund options available from the usual list of fund managers, including a range of target date funds
- Administered by a large insurance company
- Member self-service model with a shift of most of the member services and administration to the record-keeper’s web-site
I managed my own account the same way most DC members I know have done: I put all of my investments in a target date fund when I joined and forgot about my DC plan, until I left my employer and had to decide what to do with the money. (The existence of the DC plan made my decision to leave my employer easier in some ways). Even though pensions are my profession, I had no interest in checking my account on the weekend. There is always laundry to do.
There are a number of things that are great features of the current DC pension plan model:
- Forced savings: automatic payroll deductions help to build up retirement savings without you having to think about it.
- Economies: larger plans can be run with significantly lower fees than members would pay in the retail mutual fund world.
- Automatic tax deductions: members receive the tax deduction every pay-cheque instead of waiting until the year-end tax season
- Professional management: plans in general are governed well and provide good investment funds, communication and education material (web, print and typically annual meetings)
- Convenience: the ability to consolidate all employee benefits and pensions with one service provider is a time and money-saver for plan members and employers
However, there are also some serious disadvantages to the current DC model:
- Member investment choice: most members don’t have the interest or time to educate themselves. Members want investment advice, but plan sponsors and record-keepers have been slow to react for fear of lawsuits.
- Portability: there is no penalty for members who leave the plan, so the plan is not a useful employee retention tool.
- Unpredictability of retirement income: no-one retires on an account balance, retirees need income. Plan members can’t predict their retirement income with any accuracy.
- Lack of retirement options: plans are set up for the member’s working career and ignore the long retirement period. This often means members are left to fend for themselves in the retail investing world during the period when they need the most help.
- Contribution rates: typical contribution rates are still too low in Canada to fund a reasonable retirement income, even after allowing for CPP and OAS.
- Participation: membership is often voluntary so plan participation rates are low in Canada.
- Fiduciary liability: plan sponsors are concerned about their legal risks, so plans are often run to avoid liability instead of providing what is best for the plan members, e.g. advice.
Many of the above issues have been cited by stakeholders in the CPP vs. PRPP (pooled registered pension plans) debate, but that’s a topic for another post.
Overall, I think the future for DC plans in Canada will look different than the current model. I’ll cover my suggestions in Part 2 next month. A hint: the future includes PRPPs, target benefit plans and a simpler DC plan structure. Of course predicting the future in pensions is easy: things move slowly so it’s tough to be proven wrong as long as you don’t commit to a time horizon!