By Sheryl Smolkin
August 25, 2014
When employees retire, their defined contribution pension plan will not pay them a pension. By age 71 at the latest, their investments will be liquidated and unless they purchase a life annuity, they will have to figure out how to make the lump sum transferred to their personal locked in retirement account, life income fund or registered retirement income fund last for the rest of their life.
If money is invested at retail rates, their retirement income could be 20 to 30 per cent lower than if they could leave their money in their employer-sponsored plan at institutional rates with professional portfolio management. There are ways that employers can help former employees get a better deal during the “decumulation” phase, but to date, few organizations have even considered them.
John Pors, founder of The Decumulation Institute works with defined contribution plan sponsors, record-keepers and investment managers to find ways to strike a balance between the competing objectives of plan sponsors who are looking for ways to help plan members without taking on additional fiduciary risk.
He says one reason most employers do not get involved in the decumulation process for former employees is because they don’t really think through what their hands-off attitude actually means for members’ income. “Attitudes toward DC plans were formed many years ago, at a time of high expected rates of return and low DC knowledge, so income considerations at potentially low interest rates were not a concern.”
Ontario, like several other Canadian jurisdictions, has pending pension law amendments that will allow DC plan sponsors to retain employee balances in the pension plan and pay variable pension benefits out after age 71 in the same way as from a personal registered retirement income fund. Where DC plans offer this new payment option, retired members will be able to stay invested in the same funds with the same low investment rates available to them during their working career.
But Janice Holman, the defined contribution plan leader with consulting firm Eckler Ltd., does not anticipate a high take-up rate. “I think only very paternalistic organizations will seriously consider offering variable pension benefits. They are afraid of potential liability if they continue their relationship with former employees.”
Most financial institutions also have “rollover” plans for retirees of their group clients where members can generally invest in funds similar to those they were familiar with during their working career. The rollover plan fees are lower than retail fees but higher than those they paid when they were on the job.
Holman says depending on the assets in the group plan and the balance in individual employee accounts, investment fees in employer-sponsored plans for active members may be between 3/10 of a per cent (30 basis points) and 7/10 of a per cent (70 basis points). Fees in the group rollover plan could range from 90 basis points to almost two percent and as high three percent in individual plans with banks or other financial institutions.
Yet she frequently advises clients who have been able to get an even better deal for their retirees. “With several of our clients, the insurance companies have not just discounted the fees for the rollover products. They have actually agreed to maintain the same fees as for the employer’s plan for active employees. That’s huge,” she says.
She also notes that a few larger employers have even set up their own group registered retirement income funds so DC plan members can seamlessly move from accumulation through the decumulation phase of retirement savings and investment at no additional cost.
The conversation around the role of DC plan sponsors in the decumulation phase has only started to heat up over the last few years. But Pors believes there are lots of reasons why properly educating retiring employees about transfer options and helping them to get a better break on investment fees makes good business sense.
“Employees who are worried about their financial security in the last 10 years of their careers are not going to be as productive,” he says. “Do companies really want 67- to 72-year-old workers on their payroll who are only there because they can’t afford to retire?”