Canadian employees like the idea of group retirement plans, with 70 per cent willing to trade a higher salary for a workplace pension plan in a recent survey by Abacus Data. But do they have the knowledge they need to get the best value out of them?
According to a Financial Consumer Agency of Canada report, fewer than half of Canadians (47 per cent) know how much they need to save to preserve their standard of living in retirement, which suggests there is plenty of room for improvement in plan members’ financial literacy.
“The vast majority of plan members … have little to no idea if they’re on track for retirement,” agrees Amar Munjal, partner, pension & benefits, at CapriCMW. “Even though most of them have access to retirement calculators through the carriers’ websites, the majority of them – I would say 85 per cent – don’t go through the planning process.”
Barriers include not knowing there are tools available to help them, not understanding how to use those tools, and a reluctance to face how far they are from their goals. The first step towards addressing these barriers, Munjal suggests, is to deploy effective communication that gets plan members interested in attending education sessions.
“A lot of our clients offer group education sessions, or even one-on-one [sessions], on company time [but] it ends up being the same 30 per cent of the staff that come to the meetings on an ongoing basis. So 60 to 70 per cent of the staff haven’t attended even one education session,” he says.
To reach more people, Munjal proposes exploring alternatives to in-person workshops such as recorded webinars and quick-hit videos that convey one important message in two to three minutes. Invitations need to stand out – perhaps even verging on the provocative. Campaigns can also be targeted – for example, to people who are still investing in the default fund or to different demographic groups.
Employee education sessions should be offered consistently at least once a year, and employers can consider making them mandatory – perhaps for a period of two years during which virtually all employees can acquire a base level of knowledge about retirement planning. Some of Munjal’s clients have opened up sessions to plan members’ partners, since the partner may be the one who makes financial decisions for the household.
For those who can’t be persuaded to engage, plan design is critical. Munjal says the default fund should offer a reasonable long-term rate of return for plan members who don’t actively choose an investment. Compared to a guaranteed investment certificate or money market fund, a target-date fund or balanced fund is much more likely to help plan members achieve an acceptable level of income decades down the road in retirement.
Advisors have an important role to play in identifying financial literacy gaps within a specific organization and tailoring programs to meet those needs. Furthermore, to encourage plan sponsors to give this the attention it deserves, advisors can clearly explain how plan sponsors benefit from more financially literate employees – for example, by reducing the presenteeism that occurs when employees worry about their finances at work and improving retention because plan members grasp the full value of their group retirement plan.
“I heard a human resources specialist say the cost to replace someone is anywhere between 20 and 30 per cent of their first year’s income … That’s a significant amount of money,” says Munjal. “If you can provide a retirement plan, and get your staff engaged and get them looking at their retirement plan online, at their statement, asking questions, coming to education sessions … it reinforces, wow, my employer is really helping me out here and contributing to my financial future.”