In our last post in this series, we considered whether the development of decumulation strategies for defined contribution (DC) plans may be a matter of good DC governance. In this post, we review decumulation strategies in more detail, as well as specific considerations for plan administrator and plan sponsors.
We read Jean-Daniel Cote's excellent August 26, 2014 article in Benefits Canada and found his list of example steps a DC plan sponsor/administrator might take with respect to decumulation to be very helpful, regardless of whether variable DC pensions are payable from the plan. We have included Jean-Daniel's list below:
- Ask your DC provider about the retirement transition services it offers — Retirement is a big business for all of them, and most have been gearing up to ensure they capture member assets at retirement by dramatically improving their offerings, some with a team of dedicated specialists. Better than throwing your plan members to the sharks—bring in a commissioned advisor, for example—and it's free.
- Bring in independent experts — Having someone explaining the ins and outs of retirement without any hidden (or not-so-hidden) agenda to sell products is probably the best service you can offer your plan members. I have given hundreds of retirement planning seminars in my career, and have repeatedly heard employers say that this is the only service that ever generated thank you emails and calls to HR on a regular basis. Unfortunately, it's not free, but some arrange to pay for these through a governance account (out of the investment management fees (IMFs) paid by members).
- Vet the products offered to members — Understand your provider's retirement product offering to make sure it fits your member population. Special care should be given to any guaranteed minimum withdrawal benefit (GMWB) product if your plan makes it available: check that pricing makes sense, that members are not getting in too early so as to pay increased fees for longer than required, and make sure they understand it well.
- Review your target-date solution — Target-date funds have greatly evolved since their introduction, gaining in sophistication and asset class diversification. Make sure your target-date approach is up to date, and check if the maturity date allocation ("to" versus "through" retirement) makes sense. Is the equity allocation too low for members transferring to a life income fund (LIF) at retirement? Maybe it's time for a change.
- Reduce your members' fees during retirement — Retail product fees are simply outrageous and can severely reduce retirement income. "Orphan" group RRIF/LIF programs offered by all DC providers tend to offer lower fees and are typically sold with no commissions. But some large sponsors are able to negotiate even lower IMFs for their retirees from the DC provider. Some have also been able to negotiate reduced pricing on life annuities.
- Reduce their fees and offer them great options — Another approach is to set up your own group RRIF/LIF as part of your contract, keeping your retirees' assets under your umbrella, and possibly helping to maintain or get even lower fees for all of your DC members. This means possibly adding a different set of funds that are a better fit for retirees, but it increases your governance burden.
- Pay them a pension right out of your DC plan — For DC pension plans, some jurisdictions allow LIF-like or variable-annuity-like benefits to be paid out directly from the plan. However, few sponsors (most in the public sector, such as universities) have embraced this opportunity due to extra system costs and governance requirements.
Plan Administrator Considerations
On the governance/plan administration side – it would be helpful for plan administrators to review Jean-Daniel's list after having refreshed their understanding of their existing governance requirements, including CAPSA Guideline No. 8. In particular:
- During the accumulation phase:
- What information and tools should be provided to DC members during the accumulation phase to assist members to assess their retirement savings needs and achieve their goals?
- What information/tools should be provided periodically regarding DC account contributions and investment, as well as projected account balance at retirement?
- During the approach to payout phase:
- What information is required by legislation to be provided on membership termination?
- What information should be provided under CAP Guidelines,
- Options available to the member;
- Any actions the member must take;
- Any deadlines for member action;
- Any default options that may be applied if no action is taken; and
- The impact that the termination of plan membership will have on each investment option.
- What information should be provided regarding guaranteed minimum withdrawal benefit retirement products (LIRAs, RRSPs, LRIFs etc.)? Note, while such products provide predictable retirement income streams they may provide lower returns and tend to be costly.
- Plan administrators should provide information which assists members in making informed decisions which strike a balance between protection from the risks inherent in the various products and achieving target replacement rates.
Plan Sponsor Considerations
Sponsors should, of course, be interested in maximizing DC plan value and member appreciation no matter how they design their plans in terms of contribution levels. It goes without saying that even less generous plans which are well governed may be more valuable to their members than similar plans which are not.
However, even the best governed DC plans may fall short of their true potential value (to both the sponsor and plan members) by failing to incorporate into their design a decumulation component which provides more proactive assistance to members, both immediately preceding and following retirement. For example, by adopting a decumulation strategy which integrates effective communication/education during the period leading up to retirement with the assistance members need to efficiently convert to the post-retirement payout phase, it may be possible to add significant value to an existing DC plan without any further changes. The above steps proposed by Jean-Daniel are an excellent starting point.
Plan sponsors and administrators may wish to review their DC plans to explore these and other ways to increase plan value by better assisting members to attain their retirement income goals through more effective decumulation strategies.
In Part II and III of this series we have focused specifically on how decumulation strategies can increase DC plan value. In Part IV, our final instalment in this series, we will discuss other methods to increase DC plan value, such as the use of auto-enrolment.
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.