When asked to choose the top challenges facing their defined contribution (DC) plans, Canadian sponsors overwhelmingly cited limited member understanding (77%) and poor investment returns (71%), according to a recent survey from consulting firm Mercer.

Mercer’s2009 Global DC survey included 193 Canadian plans among 1,500 responses from 33 countries.

Almost 90% of respondents indicate they are making it a high priority to improve member understanding and education, and just over 50% say they will change investment arrangements to reduce costs and/or improve investment returns over the next two years.

Over half of Canadian plans in the survey have been in place for more than 10 years, while those implemented over the last three years represent only 9% of responses.

“Maturing DC plans are staying the course,” says Jean-Daniel Côté, Mercer’s defined contribution retirement leader.

Few Canadian plan sponsors said they have made, or are planning to make, reductions or suspensions of DC plan contributions. In fact, 92% of respondents say they have decided not to make any changes to DC contributions in the near future.

“This should be reassuring for Canadian DC plan members,” adds Côté.

Two-thirds of survey respondents offer between six and 13 investment options to members, and one-third said they are considering the addition of target date funds over the next two years.

“Canada continues to lag the U.S. in offering these funds,” says Oma Sharma, Mercer’s DC investment consulting leader.

The majority of Canadian DC plans have a default fund option in place for members who do not provide investment directions. However, default fund selection varies widely, with 36% of respondents’ plans using a balanced fund, 23% a money-market/short-term fund and 19% a target date fund series.

“This indicates how existing DC plans differ from new ones being implemented”, said Sharma. “New plans are much more likely to use target date funds as the default fund option. The good news is that most DC plan members are making an active investment decision, with two-thirds of survey respondents indicating that fewer than 20% of their DC plan members have defaulted.”

Contribution levels remain remarkably stable when compared to Mercer’s 2002 and 2006 DC surveys. The median overall maximum employer contribution for pure DC arrangements is 5% for non-unionized, management plans, and unionized plans, but 6% for executive plans. The median employee maximum contribution for all employee groups is consistent at 5%.

The 2009 survey reveals a disconnect between plan members’ actual reactions to the recent market turmoil and plan sponsors’ perception: 45% of survey respondents indicated they felt that their members’ foremost reaction was to change their personal DC asset allocations, whereas in reality (as generally indicated by Canadian DC record keepers), plan members made few changes to their investments.

Roughly 60% of survey respondents indicated that they have already added or are considering adding a group TFSA to the DC plan mix within the next two years.

“DC plans are in constant evolution, and plan sponsors still need to think through the long-term repercussions of 2008,” said Sharma. “2010 will be a key year for plan sponsors to assess the lessons learned and implement changes to improve the effectiveness of DC plans over the long term.”

IE