Canadians are working harder than ever, and many are worried that they won’t have put away enough money for their retirement. As life expectancies and costs of living increase, it becomes increasingly difficult for people to understand how much money is sufficient to retire comfortably. The government has implemented a forced savings plan in the form of the Canada (and Quebec) Pension Plan, which will increase its required employer and employee contributions beginning January 1, 2019. But what can private employers do in order to increase employee saving?
Organizations are eager to assist employees in reaching their savings goal, not just from a paternal aspect any more, but because they see the value of having a financially healthy workforce. A focus on financial wellness leads to more productive employees, as those who have significant financial stress tend to be more distracted during working hours (Willis Towers Watson, 2017/2018 Global Benefits Attitudes Survey). Many organizations offer employees the ability to participate in an employer-sponsored retirement savings plan, such as a defined contribution pension plan (DCPP), group registered retirement savings plan (RRSP), deferred profit sharing plan (DPSP) or other group savings vehicle to help them secure their financial future. Such plans may offer employer matching contributions, select investment options and lower fees to members. Typically, younger, less-educated, and lower-income employees are less likely to join, and even highly paid, educated workers sometimes fail to take advantage of these beneficial programs. This is a troubling trend. By not enrolling in a plan or not maximizing the employer’s matching contributions, the employee is leaving money on the table, which only reinforces the growing trend of a lack of retirement readiness amongst Canadians.
Auto-enrollment features can help
In response to the disappointing level of employee participation in retirement savings plans, auto-enrollment in plans has gained increasing popularity in the United States, but the approach has not yet caught on as broadly in Canada. Auto-enrollment is when the employer automatically enrolls a new employee in its retirement program, typically giving the employee the chance to opt out. The prevalence of auto-enrollment in regard to defined contribution plans in the U.S. has grown from 52% in 2009, to 73% in 2017 (Willis Towers Watson, 2017 U.S. Defined Contribution Survey). Plan participation rates in those plans that adopt auto-enrollment are 90%, compared to 68% for those that do not. Auto-enrollment has two effects: participants join sooner and more participants join. Organizations that do not feature auto-enrollment in their plans are more likely to face workforce planning issues due to older workers not being able to afford to retire.
The fact that very few employees drop out of the plan once enrolled supports the notion that auto-enrolment actually meets employees’ needs. Although the low dropout rate may be partly due to inertia, the fact that so few drop out suggests that workers are not discovering, to their dismay, that they are suddenly saving more than they had wanted.
Another related feature gaining popularity in U.S. plans is auto-escalation, which increases employee contribution rates up to a predetermined level automatically over time or as compensation increases (such as to the level that would attract the maximum employer contribution). In the U.S., 60% of plans provide an auto-escalation feature, which is up from 54% in 2014 (Willis Towers Watson, 2017 U.S. Defined Contribution Survey). When combined with auto-enrollment, this design can dramatically improve both participation rates and savings rates.
Why not in Canada?
Part of the reason that Canada features less auto-enrollment and auto-escalation is the prevailing legislation. We might reasonably expect that governments would encourage features in retirement plans that shift the burden of retirement savings from public programs to private/corporate programs. Unfortunately, the labour and employment standards legislation in many provinces prohibits an employer from deducting or withholding amounts from an employee’s pay unless authorized by statute or explicitly by the employee. For example, the Employment Standards Act in Ontario stipulates that the employee’s authorization must include the amount or provide a formula that would allow calculation of the amount to be deducted.
While such requirements create challenges for employers interested in introducing auto-features, those challenges are not insurmountable. Covering off new employees is relatively straightforward, as any employment offers can include the required authorization. For existing employees, a method for obtaining written authorization and communicating the change would need to be considered, among other matters. This may be well worth the effort and has the potential to be well received, given the potential benefits for all concerned.
In addition, it is encouraging to note that the legislative landscape is gradually changing. For example, pension legislation in both Alberta and British Columbia now specifically permits pension plans to require employees to become plan members as part of the terms and conditions of employment, subject to prescribed notice requirements and opt out rights. By creating a legislative and business environment that encourages saving and financial wellbeing, government and employers can help individuals better prepare for retirement.
A Changing Landscape
Saving for retirement is a difficult endeavor, with many individuals unsure as to how much to save. Further compounding that issue is the challenge employees face remaining focused on the long-term financial objectives of retirement savings while balancing the desire for short-term needs and desires. This environment lends itself well to the implementation of auto-enrollment and auto-escalation in order for organizations to assist employees in reaching their savings goals.
The shift in prevalence from defined benefit plans to defined contribution plans in Canada over the last generation has decreased employers’ funding risks, and has also decreased their flexibility in workforce management. The industry has focused on financial wellbeing and education on retirement readiness, and one of the most effective ways to assist employees in retirement readiness and employers in workforce management is by instituting auto-features in plans. By relaxing the regulations on auto-features and increasing their prevalence in retirement plans, employers will be able to implement auto-features for current employees, in addition to new hires, for an increase in employee saving and all the benefits that come with it.
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