Mercer’s Bernadette Chik explains why flexibility is becoming the key battleground in DC plans
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're exploring the assets and retirement solutions that make up defined contribution (DC) plans.
Canadian workers enrolled in defined contribution pension plans could retire up to three years sooner if employers embrace a trio of innovations that Mercer Canada has modelled in its latest retirement readiness barometer.
The findings land at a moment when Canadians are under pressure from two direction, particularly as another one of Mercer's research findings - Inside Employees' Minds - found that the ability to cover monthly expenses and the ability to retire are the two dominant concerns across the workforce. The barometer set out to test whether emerging changes in DC plan design could move the needle.
"There is a trend to add flexibility into these DC plans," said Bernadette Chik, Mercer Canada's defined contribution leader. “There’s this conversion to include more flexible plan designs to help address holistic financial well-being of workers. So it's not only helping members save for retirement but also addressing some shorter financial goals. The traditional retirement program or DC pension plan is structured in such a way where an employee and an employer would contribute to the program and that money is locked in and set aside for retirement. That doesn't resonate for everyone today.”
She points to three areas the firm studied: flexible plan design, the inclusion of alternatives in target date fund portfolios, and a new product class — variable payment lifetime pensions (VPLAs) — enabled by Quebec regulations that took effect January 1 this year.
Flexible plan design is the innovation Chik returns to most often, and the one she says employers should act on first. According to Chik, many workers are focused first on day-to-day costs, which is why more flexible DC plan design matters. In her view, when plans allow members to direct savings into options such as an RSP, TFSA, or non-registered account, people are more likely to see the plan as relevant to their lives.
"When you create a program that's more flexible, so for example, adding in things like an RRSP or a TFSA or a non-registered account, members become more engaged in their retirement program," she said. "We find that when we create that flexibility, they're more likely to participate, participation rate goes up and also they tend to contribute more to the program to maximize the company match."
Over time, that earlier and deeper engagement can leave members in a stronger position for retirement, Chik added.
She also argued that plans work better when they reflect the financial reality of the workforce rather than forcing everyone into the same rigid model. If employees feel a plan helps with both short-term pressures and long-term goals, they are more likely to value it and use it.
Higher earners could also gain five or more years of retirement readiness while lower-income workers depend more on government benefits to fund their retirement, Chick noted. That's why improvements to the employer-sponsored pillar - where these DC innovations take effect - inevitably deliver a larger gain for higher earners.
But she pushes back on the idea that this leaves lower-income Canadians behind. Flexible plan design, she argues, is built to reach the workers who might otherwise opt out entirely.
"These flexible plan designs do further support those Canadians that are a bit more vulnerable who maybe could not have set aside that portion of money to participate in the program," she noted.
The point is that giving members access to their own contributions for shorter-term needs — while still capturing the employer match — removes one of the main barriers to participation for workers living paycheque to paycheque.
On VPLAs, Chik’s point was that the framework is now in place, but adoption will take time as the market develops and providers work out how to bring these products into wider use. Even so, she sees value in regulators opening the door to another retirement income option. The main appeal is that VPLAs could help members turn accumulated savings into steadier income in retirement, lowering the risk that they run out of money later in life.
She also pointed to changes inside target date funds, which remain one of the main investment vehicles in DC plans. According to Chik, managers have been refining these portfolios and making greater use of alternatives to improve the balance between risk and return. That evolution, she suggested, could strengthen savings outcomes over the course of a member’s career.
Taken together, her view is that flexible plan design, VPLAs, and more sophisticated target date fund construction are the main innovations now improving retirement readiness.
Chik emphasized employers don't need to adopt all three innovations at once as each one can move the dial on its own, depending on where an organization sees the greatest opportunity.
The starting point, in her view, is for employers to take a hard look at their existing program and ask whether its structure still fits the workforce it serves.
Beyond plan design, she argues that scrutinizing target date fund providers is a governance exercise worth the effort, since these portfolios have changed considerably in recent years. And while VPLAs remain early-stage, Chik sees them as something employers should be tracking.
Still, she underscores that VPLAs should be viewed as another tool in the retirement toolkit, and not just a silver bullet. But she argues that the growing range of options available to DC plan members raises a separate challenge: people need to understand what they're choosing between.
After all, more choice is only useful if members have the knowledge to act on it. Chik stressed that the responsibility cuts both ways - members need to engage, but they also need access to education and guidance from plan sponsors that equip them to do so.
"I think that further underscores the need for members to seek out that personalized, independent, qualified financial advice to help them navigate their decisions and to navigate the increasing choices of how to convert their savings into a stable income in retirement," said Chik.
