Defined contribution (DC) plans are focused on saving for retirement. But from a plan member’s perspective, what’s missing is how to effectively manage and spend these savings during retirement.
In the recent webcast, Are Variable Benefits the Right Solution for Your DC Plan?, Tyler Smith, vice-president of actuarial and investment solutions, and Susan Watson, associate consultant, individual financial services at Coughlin & Associates Ltd., addressed the challenges associated with financial wellness and DC decumulation. According to Smith, “37% of employees aren’t sure they will be able to retire on time because they’re not sure they will have enough money saved.”
Advice from financial advisors and institutions is available; however, fees can reduce pension income at a time when retirement dollars are already stretched thin due to longer Canadian life spans. To date, options have been limited to Life Income Funds (LIFs), locked-in retirement income funds or annuities. But that’s changing. “As the workforce in DC plans matures, we have seen a greater focus on providing retirement income solutions for these members,” Smith said.
Enter Variable Benefits
One emerging solution is variable benefits, which allow members to stay in the DC plan when they retire and draw income from the plan during retirement. Variable benefits are like LIFs in that members make monthly, annual or ad hoc withdrawals and there is a minimum and maximum withdrawal amount.
Advantages for plan members include professional investment oversight, the potential to invest in alternative asset classes and lower overall investment fees. The flexibility of variable benefit payments is also appealing. Payments can be started and stopped for members under age 72, and members may leave the plan and transfer their assets at any time. During uncertain times, like the pandemic, they can draw benefits with the option of returning to work. “Members can dip their toes in retirement instead of diving in headfirst,” Watson noted.
Who Can Offer Them?
Larger plans may be in a better position to add variable benefits, given the additional cost and administration required. The plan’s cash flow and asset mix could also be impacted. “The risk tolerance and the needs of a retiree may be very different from your active membership,” said Smith. “But as trustees and as a plan sponsor, you have that duty to reflect the needs of all your members in the plan and to wear a hat that reflects both your active and retired members. You may need to take a look at that and adjust your asset mix.”
Legislation also varies across jurisdictions, which complicates administration for plans with members in multiple provinces. Variable benefits were first offered in British Columbia in 2004, and other provinces followed suit. Although they are currently allowed in all jurisdictions except New Brunswick and Newfoundland and Labrador, it has taken some time to get there. It wasn’t until 2018 that variable benefits were offered in Quebec, and Ontario didn’t allow them until last year. “We’re at the point now where we have critical mass,” Smith added.
The Next Chapter
According to Smith, “Adoption in Quebec and Ontario is significant because those provinces make up a large number of the registered pension plans on the defined contribution side. This could start to push variable benefits to be a more prominent benefit for a lot of plans.”
Ongoing education, communication and support are crucial to ensure that members understand all the details. Members must also be comfortable with the possibility of benefit payments changing from year to year.
Overall, according to Watson, variable benefits are growing in popularity. “From a member perspective, they have been welcomed. For many members who have been part of a pension plan for their entire working career, they are very comfortable maintaining their assets as part of the plan. If not, they have the option to transfer their money elsewhere.”
To learn more, watch the webcast Are Variable Benefits the Right Solution for Your DC Plan? or read Smith and Watson’s article in Plans & Trusts.
Bryan Zoran, CEBS
Director, Educational Programs—Canada, at the International Foundation
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