It is well documented that the retirement savings landscape has seen significant shifts away from Defined Benefit (DB) and toward Defined Contribution (DC) plan arrangements in the recent past. Unlike in DB arrangements, the member bears the investment risk in DC plans, so it is no surprise that member engagement in DC plans is getting increasing attention, as are the issues that stem from low member engagement. Oma Sharma, Partner at Mercer, examined these associated risks and what sponsors can do to mitigate them. Using litigation and regulatory developments in the US and UK she also outlined steps that can be taken to avoid similar issues in Canada.

Supported by some persuasive statistics from the Benefits Canada 2013 CAP Member Survey, Oma explained that the majority DC plan members are not prepared for retirement or engaged with their plan; they also rely heavily on the employer and have extremely high and unrealistic expectations for long term investment returns (14.3% per annum).

What is causing disengagement? It can stem from a variety of sources, including apathy, procrastination, uncertainty and myopia, which in turn can be detrimental in the members’ ability to retire with the lifestyle they desire. This opens the door for future litigation which is evidenced through cases in the US and UK.

From a plan sponsor and administrator perspective there is a genuine risk of a breach of fiduciary and statutory duties, which can be for reasons such as the failure to provide information or educate members, and failure to provide suitable investment options and investment advice. They can also be liable for negligent misrepresentation due to the provision of inaccurate information or the failure to provide material information.

From a practical perspective, the consequences of disengagement can lead to inadequate contributions levels, improper investment decisions and employee stress about retirement preparedness. This can have a negative impact on workplace productivity and long term succession planning when individuals delay their retirement.

To help mitigate these risks Oma proposes that sponsors and administrators ensure the plan design is appropriate, the investment options are suitable and a thorough and detailed member communication strategy be developed.  A plan’s demographics should be reviewed regularly to ensure what is being offered remains appropriate and members are being communicated with in the most effective way.

These issues are expected to rear their heads more prominently as the baby boomers reach retirement, so it is vital sponsors do all they can to mitigate any potential risks.