Canadians increasingly want control over their own retirement savings plans, and this presents an opportunity for advisors to help clients manage their pensions, according to Tina Di Vito, head of the Bank of Montreal’s Retirement Institute.
Di Vito presented the results of a recent BMO Retirement Institute study on pension plans on Tuesday. The study showed that the decline of workplace pensions, and the shift in remaining pensions towards defined contribution plans, has put responsibility on individuals to manage their own retirement savings.
“The trend to fewer and fewer workplace pensions is continuing,” said Di Vito. “The onus is really on the individual now to take charge of their retirement, to plan for their retirement years, to save appropriately, because everyone’s retirement will be different and there really is no one-size-fits-all.”
Canadians actually like the idea of managing their own investments, and don’t consider workplace pensions too important, according to the survey of working individuals aged 25 to 64. Only 7% of those surveyed said a good workplace pension is the most important factor to consider when evaluating job opportunities. Nearly half of respondents consider salary the most important, and 22% said flexible work arrangements is the top consideration.
Only 9% of respondents said it was very likely they would leave their current position for another one if the new employer offered a better workplace pension or savings plan.
Despite the market volatility of recent years, BMO’s research suggests that defined contribution plans are popular among working Canadians.
“Employees wanted them so that they could invest their own money and do better than what they could be earning under a defined benefit pension plan,” said Di Vito. “Essentially, they figured that they’d be able to invest the money, and at retirement time, they’d have a bigger nest egg and a bigger pension than they might be entitled to under a defined benefit pension plan.”
In reality, however, many Canadians don’t have the time or investment knowledge to take an active role in managing their own plan. As a result, many members of workplace DC pension plans end up choosing the default investment options.
This may be a mistake, according to Di Vito. She explained that the default options tend to be quite conservative, and for many Canadians, they won’t generate sufficient returns for retirement.
“I consider that mis-managing your own personal finances,” she said. “By not taking any action, you are taking one of the worst steps that you can in terms of investing your money.”
This is where an advisor could play a major role in helping clients choose the investment options that are most appropriate for them. Di Vito said an employer-sponsored pension plan should be managed as part of a client’s broader financial plan.
“You cannot look at pensions independently from your financial plan,” she said. “When you’re thinking about how to invest that money, you need to think about how are you investing all of your other savings.”
Advisors could also add value by simply helping clients understand how their workplace pension works, Di Vito suggested. She pointed out that it’s become common for workers to switch jobs many times throughout their careers, which makes it challenging for them to keep track of the plans and options available to them.
Indeed, half of those surveyed said they’ve already had five or more employers since they started working, and 20% said they expect to work for 10 or more employers over their careers.
“Because they’ve got multiple employers over their lifetime,” she said, “they continually have to learn and adapt to the new pension plan that they may be part of at that new workplace.”