These days when people who work in the pension industry talk
about the various options available to develop an effective pension
risk management strategy, they are fond of pointing out that when
it comes to looking at the range of plan design options, the
discussion is about a lot more than traditional defined benefit
(DB) verses defined contribution (DC) arrangements. Increasingly,
plan sponsors are expressing interest in considering target
benefit/shared risk plan (TBP) alternatives to the extent such
arrangements are, or appear soon to be, authorized under enabling
legislation in their pension jurisdiction.
The legislative changes to date to accommodate TBP alternatives
should be applauded – in the right circumstances, conversion
to a TBP can be beneficial for all stakeholders involved. (For more
information on TBPs, see our prior posts: "The ABC's of
Target Benefit Plans" Part I, Part II and Part III, and "C.D. Howe Paper: Target Benefit Plans in Canada
– An Innovation Worth Expanding".) However, TBPs are
not intended as a "one size fits all" pension risk
management solution and may not be a viable option for all
employers and their employees. For some employers, a better
"balancing" of pension risk with employee compensation
and retirement savings goals may be achievable through finding new
ways to maximize value out of their DC plan design.
In a four part blog series, we will first examine various ways
in which the "traditional" accumulation driven DC plan
design fails to maximize value (Part I) and then explore methods to
increase DC plan value and ensure compliance with administration
best practices (Parts II, III and IV).
Confronting the Issues in An Employer's Existing DC Plan
Apart from setting contribution levels and trying to educate
members on how to create winning personal investment strategies, it
is often the case that too little thought is given to ways of
maximizing DC plan value. As a DC plan sponsor/administrator, the
first step forward may be to ask yourself the following
Are you missing low cost ways to
enhance the value of your DC plans and increase member appreciation
of these plans' true potential?
Could your plan do more to encourage
employees to participate and maximize their contributions?
Is there more that you could do to
communicate the value of your DC plans to your workforces?
Should you (and your record keeper
delegatees) be doing a better job developing effective
communication programs to prepare members for important
decumulation decisions as they approach retirement?
By designing and administering their plans to focus exclusively
on the DC accumulation phase, many sponsors/administrators would
likely answer "YES" to one or more of these
Today DC plans are thought of merely as saving plans and not as
retirement income generators. This is a serious issue as
approximately 60 cents of every retirement dollar will come from
returns earned after retirement. Without addressing the
cost-effective conversion of assets into income (i.e.,
decumulation), the danger of significantly lower retirement incomes
For a variety of historical reasons, most DC plans are designed
to deal with what happens over 35 to 40 years of employment, but
not the next 20+ years following retirement. Ironically, this 20+
years of decumulation can in many cases have a greater impact on
overall DC value. Despite this fact, the conversion of DC assets
into retirement income is, for the most part, left up to the
retiree on the theory that such conversion can be done cost
efficiently through individual efforts and "practical,
cost-effective and transparent products and services" readily
offered by financial institutions and intermediaries. However,
achieving this in today's market, given longevity risks,
investment product fee structures and most individuals' lack of
financial/investment experience, may be a tall order for the
average DC pensioner.
The result – DC plans designed to leave decumulation up to
individual retirees are potentially much less valuable than DC
plans which embrace decumulation on a group basis as part of plan
design and overall retirement income objectives. Addressing this
undervaluation may provide plan sponsors with a more attractive DC
plan for workforce recruiting and retention, in addition to
improving plan governance for plan administrators.
In Parts II, III and IV of this blog post series, we will
further examine methods to increase DC plan value and for plan
administrators to ensure compliance with best practices.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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