TORONTO • There’s a lot of talk that Canadians aren’t saving enough for retirement, but pension experts complain that even when workers are offered a leg-up by employers willing to match their contributions, many of us aren’t taking advantage.
Statistics are hard to come by, but anecdotal evidence suggests significant money is left unclaimed because employees can’t or won’t — or simply don’t understand how to — take full advantage of their defined-contribution (DC) pension plans.
“We feel we bang our heads against the wall on that,” said Sue Reibel, senior vice-president of group benefits and retirement solutions at Manulife Financial Corp. “This is a great opportunity to enhance their savings.”
DC plans don’t guarantee a promised income in retirement as do similarly named defined-benefit plans. But most come with matching employer funds up to a certain percentage — and the opportunity to take advantage of lower management fees and investments that aren’t available to individual retail investors.
You’d be surprised at how many people are in that situation that aren’t taking advantage of it
In a typical example, an employee who put in $2,000 would receive a matching $2,000 contribution from his or her employer. If the employee put in nothing, she would receive nothing from her employer.
Some companies offer the added perk of partially match additional voluntary contributions.
Yet, Canadian pension professionals and consultants say, a surprising number of people aren’t contributing enough to capture the immediate matching funds that would give their retirement savings a boost.
“They’re leaving money on the table … You’d be surprised at how many people are in that situation that aren’t taking advantage of it,” Ms. Reibel said in an interview. They’re “essentially leaving a pay raise on the table.”
It is difficult to get an overall picture of the numbers and dollar figures involved, but, by way of example, she said about 40% of employees at one of the biggest pension plans administered by Manulife are not taking full advantage of the employer fund-matching.
Dan Morrison, a senior consultant in the retirement practice at Towers Watson Canada in Calgary, said one of his firm’s clients, a pension sponsor, regularly pays out just 40% to 50% of available matching funds to employee plans.
“The problem is widespread,” he said.
Experts seem unsure why, as Mr. Morrison put it, there is “a scarcity of hard data” to illustrate this trend, but there are signs such research may soon be under way.
In 2005, a well-known U.S. academic study, called $100 Bills on the Sidewalk, found that 20% to 60% of employees in the study’s population lost as much as 6% of their annual pay because their retirement savings contributions were below the employer-matching threshold.
In a telling statement that may help explain the under-use of such savings options, the authors of that study noted that “providing employees with information about the free lunch they are forgoing fails to raise the contribution rates.”
Experts say healthier DC pensions in Canada would lessen the savings crisis hitting middle-income earners and narrow the gap between the “haves” and “have-nots” — those with defined benefits and those without.
During the past few years, DC plans have been steadily replacing the traditional defined-benefit plans that guarantee a promised income in retirement. Employers are keen to offload the risk associated with promising pension benefits that will be paid years down the road.
Only 47% of the organizations in a recent Towers Watson survey still have an active defined-benefit plan.
But some companies sweeten the pot of the newer DC plans by partially matching any voluntary contributions from employees, sometimes at a rate of 50¢ for every $1 contributed.
The mandatory combined employer and employee contribution to a workplace DC pension is often about 10% of pensionable earnings, and topping-up to a limit of 18% of earnings is an option for many employees that have them.
“A number of plans will allow you to make extra contributions,” said Mr. Morrison. Even when employers don’t offer to match additional voluntary contributions, employees can still “get the benefit of the better management fees” of a group savings plan, he said.
The maximum combined contribution is $24,930 a year. Unlike an RRSP, the amount of room doesn’t carry over from one year to the next.
Still, employees often fail to take advantage, with some suggesting they simply need the money for daily living expenses.
However, studies in the United States have shown that putting the onus on employees to opt out of making contributions — or out of small annual increases to their contribution level — leads to higher savings, said Paul Forestell, leader in the Canadian retirement business at human resources consultant Mercer.
“We see a lot of inertia in defined-contribution plans,” he said, adding that such auto-enrollment or auto-escalation could increase the number of Canadians taking full advantage of DC plans.
Some employees opt to contribute to an individual RRSP with more choice — albeit with potentially higher management fees. Or they divert the money entirely to other uses such as paying down a mortgage.
“This, from an economic perspective, is [also] a form of ‘topping up’,” noted Michael Wolfson, the Canada Research Chair in Population Health Modelling at the University of Ottawa.
Nevertheless, the perceived widespread failure to grasp the full benefits of DC plans, combined with no easy fix in sight to boost the retirement prospects of the middle class, is prompting Canadian experts to take a harder look at the phenomenon.
Bill Morneau, executive chairman of human resources consultant Morneau Shepell, said his firm is looking at using its client database to research the issue. The inquiry would focus on “the factors that lead people to be more or less inclined to make additional voluntary contributions,” he said.