Most retirement savings arrangements simply aren’t user friendly. This can be especially true of many common “pension plan” designs, which leave members filling in some considerable blanks. Specifically, members of typical Defined Contribution (DC) arrangements are tasked with figuring out how to accumulate adequate savings and then retire with reliable income. This requires a high level of expertise and financial acumen that the vast majority of Canadian pensioners do not have.
Let’s consider the experience of a Canadian DC plan member or Group RRSP participant under what is commonly accepted as a well governed and administered arrangement. During enrolment, a member is guided through a series of questions to determine their investment knowledge, risk characteristics, risk appetite, and retirement goals. Upon completing a lengthy questionnaire, the member is then asked to select their:
- contribution level,
- asset allocation, and
- individual investment funds.
They are told they can do this by considering available employer matching contributions, their risk appetite and tolerance, the various available assets classes, quoted investment fees, the select group of individual investment funds, management expense ratios, and, of course, their retirement goals.
During a member’s working career, they are encouraged to regularly review their completed questionnaire, contribution level, asset allocation and utilized investment funds to ensure that they continue to meet their investment objectives. Further, they are prompted to review provided retirement savings educational materials.
Most of this “education” deals exclusively with how a member should invest their retirement savings. Little, if any, support is available to the member to help them answer the other big questions around retirement savings, including:
- How much income will I need in retirement?
- How much do I need to save to attain my desired income?
- When can I retire?
At retirement, things get even more complex. A member is most often required to transfer their funds out of their workplace arrangement into the retail investment sector to access their savings. How to accomplish this, along with all of the associated investment and risk decisions, is left to the member to determine. Support from the plan administrators is no longer available and the member is encouraged to seek professional investment advice at their own expense.
This is a lot to ask of any employee or retiree. Forcing retirees to seek out and pay for trusted professional advice, or to make these important decisions on their own, is wrong. Imprudent decisions can make or break a comfortable retirement.
To be fair, most DC plan providers have spent a significant amount of time and money developing engaging interactive web applications to guide individuals through the maze of noted investment choices. But this solves the wrong problem. The burden shouldn’t be on the member in the first place to make these crucial decisions.
The Ideal Canadian Pension Plan (ICPP) was designed to be better. One of the ICPP’s mandates is to ensure a worry-free member experience. We want our members to feel confident in their retirement, both during the accumulation phase and as retirees.
The ICPP is a no-choice collective DC pension plan, meaning members are not required to make investment decisions. Instead of the complex determination of asset allocation, investment style and risk tolerance essential to traditional DC arrangements, a member is simply asked to determine their retirement benefit targets. In particular, they are asked to answer three questions:
- When do you want to retire?
- How much income do you want in retirement?
- How do you want to receive your retirement income?
Most individuals are well equipped to answer these questions. Even so, the ICPP has appropriate default benefits built into its design. If a member cannot answer the above questions, the ICPP still provides regular lifetime retirement income with appropriate inflation protection.
The ICPP administrator provides information relating the member’s target retirement income benefits to the contributions needed to fund them.
The ICPP administrator provides clear, ongoing communication to the member. Instead of focusing on an account balance and investment performance, communications from the ICPP emphasize:
- the amount of a member’s targeted retirement income that has been currently funded, and
- the amount expected to be funded by the selected retirement date.
This straightforward messaging ensures members have a clear picture of how much retirement income they can expect to receive as they work toward clear, achievable target(s). It allows the member to change plans or alter contributions if the emerging results do not match the member’s goals. The communication does not need to focus on investments because the plan administrator manages the investment process.
Once a member retires, the support continues. Communications regarding the recommend pension withdrawal amount and minimum/maximum withdrawal limits are provided as part of our ongoing assistance to retirees. They can also contact our experts at any time with questions or concerns. In other words, ICPP members are not left to “go it alone” once they reach retirement. Instead, they can enjoy their retirement years knowing they will receive regular lifetime income.
The ICPP is a robust pension solution that has improved member communications to be clear and streamlined. Ultimately, these enhanced communications lead to better retirement outcomes for our members.