Pension members admit they need advice

(October 20, 2004) Many corporate pension plan members are in dire need of financial advice, relying on their firm’s human resources staff to explain their options, according to a survey conducted by Decima Research for the Investor Education Fund.

“Pension plan members do consider their plan to be crucial to their overall retirement strategy; however ,about half don’t understand investment terms, which can be a problem when they’re in Group RSP plans or defined contribution plans,” says Terri Williams, president of the Investor Education Fund.

While poll respondents ranked “retirement planning” as their number one financial priority, 41% of Ontarians rated their understanding of investment information as “fair to poor.” Only 20% of all employed or retired Ontario residents rated their understanding as “very good to excellent.”

This represents an enormous opportunity for financial advisors, as plan sponsors seek outside help for their members. Smaller companies often struggle to meet the needs of their employees and find it far easier to establish a referral arrangement with local financial experts.

“A lot of smaller companies have arrangements with investment advisory firms where the employee can be referred on to them,” Williams says. She also points out that the Investor Education Fund’s website also contains a wealth of knowledge on pension funds for free.

“These people could really be missing some opportunities that their pension plans are offering them, but they may not know the details,” she says. “They may not realize the impact, for example, of putting extra money in when their company matches for free.”

Capital Accumulation Plan (CAP) Guidelines issued by the Joint Forum of Financial Market Regulators recommend that pension plan sponsors offer access to financial advice.

This is especially important for members of group RSPs and defined contribution plans, because these plans require the member to make financial decisions which could have a huge impact on their retirement.

“There’s a concern among small companies that they don’t have the resources to do this,” Williams says, but following the CAP guidelines can help to limit the employers liability, should the employee face problems in retirement.

“What some of the lawyers have been saying is that if you meet the guidelines, it may be a good testament to your attempt to actually provide them with the tools and resources,” she says. “The Joint Forum of Financial Regulators are expecting people to follow those guidelines.”

The poll offered some insight into how to deal with these clients, as many said they found investment information too full of jargon and would prefer to find it in “everyday language.” If an advisor can dump the jargon, while accurately relaying the information to the plan member, they will find it easier to manage.

“These may be very literate, very intelligent and well-educated people; however, they just haven’t had a need to learn about investing,” says Williams. “This is a very specialized topic.”

The other challenge facing the advisor is that respondents found investment information “boring and uninteresting.”

One example that should shake that indifference is in employer-matching programs. If the plan member is allowed to over-fund their plan by just 3% and receive a matching contribution from the employer, the advisor should demonstrate the effects that compounding will have on that “free money” over the 30-year life (for example) of their pension.

She says that even with defined benefit plans, employees might not understand such aspects as indexing to inflation or death benefits.

“I think one of the main challenges that plan sponsors do have is getting people engaged in their plan, really taking an interest and learning about it,” Williams says. “There’s a real opportunity for people to raise the level of interest in pension plans at the point of hiring.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(10/20/04)

Steven Lamb