Taking responsibility – Saving for retirement in a DC world
I have been so busy writing about government fantasies that I have fallen behind on writing about the pension arrangements that now cover most private sector workers these days – the much maligned ‘capital accumulation plan’ also known as the ‘defined contribution plan’ or the ‘we wish you the best of luck plan’.
Yesterday, Benefits Canada published an article addressing the disconnect between the expectations of employers and employees when it comes to saving for retirement using a defined contribution (DC) plan.
Benefits Canada tells us that the vast majority of employers want their employees to retire with ‘adequate retirement income’ but at the same time, these employers think that their role is to provide ‘tools and resources to help them (employees) make sound decisions’ and that ‘it is their employees’ responsibility to take an active role in their capital accumulation plans to ensure they retire successfully’. Interestingly, 50% of employees ‘believe that, ultimately, their employer is responsible for ensuring they retire with enough funds to live on’.
Frankly, after 20 years working with defined contribution plans I continue to be shocked that employers don’t want to take a major role in making sure retirement benefits are adequate and at the same time I am shocked that individuals aren’t also wanting to be 100% responsible for the final outcome. My dad expected all of his children to take full responsibility for their economic security and I am happy to report that my sisters and I have all done that. I didn’t realize growing up that every other kid around the world wasn’t getting the same message.
Without taking sides, I want to make some simple observations:
If no one is taking responsibility for ensuring the adequacy of retirement income for workers because everyone thinks it isn’t their job, I have a suspicion that the job isn’t going to get done.
If workers don’t have adequate retirement income, they may not be able to retire at a reasonable age or at all – this can’t be good for employers, and definitely isn’t good for workers.
Consultants to the rescue
When I tell clients that the combined employee and employer rate of contribution in their DC plan probably needs to be increased if the goal is adequate retirement income — I am generally told that there is no money to increase the bucket of ‘total rewards’. It is hard for me to argue with clients that they should spend more on payroll and provide business owners with lower profits. That isn’t my decision to make for those businesses.
What I do wonder is perhaps if employers should rebalance the basket of total rewards, lowering salary increases (current pay) and increasing DC plan contributions (deferred pay)? In the end, I have learned two things: First, many (maybe most) DC plan participants are not saving enough for retirement. Second, those participants want help. The fact that we spent two years talking about the ORPP and also that we now have an expanded CPP is evidence that these things are true.
I think it is time for employers to move past providing ‘information’ and take things to the next level where the plans that they sponsor have enough money going into these programs to get the job done. In the end, total pay is a decision for every employer. I think as an industry we need to start to help employers think harder about the balance between cash and deferred pay. The alternative is to give future governments the motivation to tinker further with our social programs — something I don’t think we should make the mistake of doing a second time.