While policymakers in Ottawa and the provinces continue to offer up new tools to push Canadians to better prepare for retirement, workers are still failing to take advantage of hundred of millions of dollars of “free money” for retirement being offered up by the country’s employers.
Sun Life Financial Inc. estimates that Canadians are turning their back on as much as $3-billion that could go into their retirement coffers if they took full advantage of corporate pension plans and their contribution-matching programs.
“It’s kind of a staggering number,” said Tom Reid, senior vice-president of group retirement services at Sun Life Financial.
Many company defined-contribution pension plans top up employee contributions as they roll in with matching funds. The employee makes a contribution, and the company matches it, often up to between 3% and 6% of earnings. If there’s no contribution, however, there’s no bonus match, while a partial contribution only yields a partial match.
“I don’t think some [people] even know they’re leaving money on the table,” said Sue Reibel, senior vice-president of business development at Manulife Financial.
Employers are paying out just 40% to 50% of available matching funds, according to industry estimates.
About one million Canadians are now relying on defined-contribution (DC) pension plans, which provide retirement income based on market returns rather than the guaranteed payout of a similarly named but very different defined-benefit (DB) plan, according to Statistics Canada.
As a perk, many of these DC plans — which are increasingly popular with companies who are loath to make pension promises they might not be able to keep — have employer-funded matching programs. Some match what an employee contributes dollar for dollar, while others kick in 50¢ for every dollar contributed by an employee, and some have the option of additional matched contributions.
Pension experts are puzzled that so many people fail to take advantage of matching funds from their employers, given that the returns of a 100% of even 50% match would be hard to replicate elsewhere.
By way of comparison, Ms. Reibel notes it would take 15 years with annual returns of 5% to double a $5,000 investment in the stock market.
Group pension plans also tend to cost less to administer than an individual would pay in private investment fees. And because they’re deducted from payroll, pension contributions reduce taxable income, where other investments are made after tax.
Mr. Reid said simple inertia could be keeping many workers from taking advantage of these workplace plans.
“Where are they getting a better return on their money?” he said.
Even when people understand their workplace pension plans and the matching perk, he said, many find reasons not to contribute. Some people think they can’t spare the income, or would rather direct it to paying down a mortgage more quickly, or other investments.
He suggests Canada looks to examples in the U.S. and New Zealand, which have seen some success in automatically enrolling employees in plans. “We need to deploy a lot more smart defaults,” Mr. Reid said.
Other plans focus on “increasing the glide path to saving for retirement” by starting with small contributions and then gradually increasing them.
Ms. Reibel cited one Canadian multi-national that redesigned its plan so that employees in the pension plan were automatically enrolled at the maximum optional contribution level, and were required to opt out. Before the change, only 40% of employees made optional contributions.
After the redesign, more than half the employees, 55%, stayed with the maximum optional contribution. A further 20% of workers switched to smaller optional contributions where the employer still kicked in.
“It’s a totally behavioural-based outcome,” Ms. Reibel said.
Governments have been fixated on the fact that Canadians aren’t saving enough money for retirement and have been seeking policy-based solutions, particularly as defined benefit plans grow scarcer.
Canadians chronically under-utilize the amount of room they are given in retirement savings vehicles such as RRSPs, and the federal government has tried to encourage more saving through new instruments, such as tax-free savings accounts (TFSAs), which don’t tax gains on investments.
Ontario, meanwhile, is implementing a provincial version of the Canada Pension Plan.
And the federal government and some provinces have created a framework for pooled registered pension plans for employees without a workplace pension, but companies are not obligated to adopt them in most jurisdictions.
Source: Financial Post