Employees may have a “set it and forget it” mentality towards their retirement plan. But that’s not really an option for employers: Group retirement plans need to be monitored, audited and updated, lest they fail compliance and regulatory guidelines, and see employee participation decline.
The need for change doesn’t happen in a vacuum. As employees head towards retirement, they may need direction on how to spend their retirement savings. Younger employees may need incentives to stay invested with the plan.
And sponsors may need to look at alternate ways of funding their retirement plans in order to improve retention and cut costs.
Here are four ways to help optimize Canadian group retirement plan participation and engagement while making sure the plan remains affordable:
Improve retention with a tiered contribution design
Traditionally, employers will offer 50% to 100% matching of employee contributions up to a certain amount, such as 5% of salary.
However, a tiered contribution plan makes it more likely that employees will stick around to get a higher match.
For instance, in years one to five, an employer will match an employee’s contributions at 100% but only up to 3% of salary, while that maximum goes up to 4% in years six through 10 and 5% after 10 years.
This matching upgrade at five and then 10 years rewards employees for their loyalty, while encouraging them to increase contributions over time.
Implement a deferred profit sharing plan
A deferred profit sharing plan (DPSP) gives employees the opportunity to share company profits. There are several advantages to a DPSP for employee and employer alike:
- A vesting period of up to two years, encouraging employees to stick with the organization
- The company recovers 100% of its contribution if the employee leaves before the vesting period is complete
- Tax savings for the employer, as contributions are paid pre-tax and are tax deductible
- Employees who leave the company after the vesting period can convert their plan into a RRSP, tax free, or another investment vehicle
Make target-date funds a mainstay of the investment lineup
Target-date funds simplify choice and make it more likely for employees to participate in the retirement plan.
Usage of target-date funds in Canada has grown from 7% of workplace retirement plans in 2010 to 30% in 2020, and its popularity continues to grow. Target-date funds are easy to use and understand, while appealing to employees who don’t want to overthink asset allocation, as the portfolio mix changes to reduce risk over time.
To simplify things even further, target date funds make for a popular default investment option that correlates with their target retirement date.
Make target-date funds a mainstay of the investment lineup
As Canadian Baby Boomers enter retirement, the shift continues from asset accumulation to decumulation, or spending savings in retirement.
Even for investment-savvy employees who have saved well for retirement, it can be unclear what they should do once they leave the workforce. Common questions include:
- What happens to retirement accounts in retirement?
- How do retirement accounts translate into income that lasts?
- What is most tax efficient?
- How do workplace retirement savings mesh with Canadian Pension Plan and Old Age Security benefits?
In this vein, organizations can provide employees with educational resources to guide them through their post-working years.
Workshops, webinars and printed materials can help employees learn how to manage their income once they leave the workforce — and keep them engaged while they’re doing their jobs.
Source: HUB International
