Retirement Readiness

A] Prelude

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B] The Issue

A recent survey of more than 550 US employers by WTW has exposed an uncomfortable truth at the centre of the investment based Defined Contribution (DC) plan governance: a large majority of plan sponsors have no formal definition of what retirement readiness means for their workforce.

C] The Details

“You can’t prove that your plan works if you haven’t defined what working actually means,” said Chris West, director at WTW. “Employers are facing a retirement readiness gap and that pressure is mounting for them to prove that their plan works,” West added, underscoring the main theme from the survey.

The issue resonates north of the border for Canadian plan sponsors too. According to C.D. Howe research earlier this year, 9.1 million Canadian employees do not have any workplace retirement plan at all. The authors of that report argue coverage is at the heart of retirement readiness.

WTW’s survey identified that many employers are relying on blunt, aggregated data rather than segmented analysis, administrative burden is crowding out strategic thinking and the transition from accumulation to decumulation remains a weak point across the DC landscape.

D] Measuring Retirement Readiness

Among the employers that do attempt to measure readiness, approaches vary. While some lean on participation rates, others point to accumulated balances or use age as a proxy – a holdover, West notes, from defined benefit plan conventions. Still others fall back on gut instinct.

“Employer support is really less developed at this important stage of an individual in their retirement journey. Planning tools and flexible withdrawals are widely available while more comprehensive retirement income solutions remain less common,” she said.

“As a plan fiduciary, you have a lot of fiduciary responsibilities. You’ve got day-to-day responsibilities, you’ve got audit responsibilities, you’ve got required reporting responsibilities. And what we heard from the survey is that those activities are holding plan sponsors back from being able to be strategic within their plan,” said West. Adding that routine compliance work leaves little room for plan sponsors to define what retirement readiness actually looks like for their workforce.

“Especially when it comes to moving the accumulating balance in members’ retirement plan to actually converting that to some sort of retirement income perspective,” she added.

E] EPH’s View

As EPH we see often that companies look upon the corporate pension plan as an employee benefit they want to offer but do not want to get involved into the total pension planning of their employees. Which is understandable from their perspective thinking about privacy issues and as it involves many very personal aspects.

In our opinion the employer’s obligation in this respect is to provide a company pension plan that includes a market/branch level old age and next of kin coverage with maximum options for extra voluntary coverage if so desired by the employee. And furthermore provide the employees with all available extra options to use all tax and investment benefits at the lowest costs and options for maximum pay-out flexibility.

Finally we see that some companies even give their employees access to quality retirement consultancy. Which often introduces them to aspects they had not thought about beforehand. Like for example the impact of inflation, tax, early retirement and estate planning. We think that this is the nobel and smart approach. Our experience shows that employees know how to value this service. They respect an employer who cares. So in the end that is consultancy fee well spent by the employer and which gives them an excellent return!

F] EIOPA’s Policy

As EPH we are always interested to see what the EU’s regulatory pension and insurance authority called EIOPA has to say about an issue and what their policy is.

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(Sources: benefitsandpensionsmonitor/WTW/EIOPA/EPH)