Help clients understand capital accumulation plans

Many Canadian investors need additional guidance to maximize the benefits of their capital accumulation plans, shows a survey from MFS Investment Management Canada.

While 72% of those surveyed say that they’re responsible for determining how much they contribute to their plan, 22% of plan members say they have no idea how best to diversify a CAP account.

“We have put a tremendous amount of responsibility in the hands of plan members, many of whom have little expertise in investing or retirement planning,” says Bradley Hicks, managing director with MFS Investment Management Canada Limited.

Read: Quarterly OAS amounts rise

The MFS survey also reveals 45% of plan members believe there’s no benefit to contributing more to a CAP than what is necessary to receive an employer’s matching contribution. Only 10% base their contribution decisions on how much they would need to reach their retirement goals.

“With the ultimate goal being retirement readiness, CAP members should focus on the factors within their control, which include taking full advantage of their employer’s matching contributions and considering the feasibility of contributing more than the minimum,” says Hicks.

More than half of those surveyed say that not contributing regularly could have a major negative impact on their CAP balance at retirement. However, 22% report that they stopped contributing to their CAPs for reasons other than a job change. Furthermore, 42% of survey participants say it wasn’t necessary to contribute to a CAP every year because they could always make up for it later.

Read: Canadian pension plans gain

“Plan members often struggle with investment decisions, finding investment menus overly complicated and not fully understanding concepts such as diversification,” says Shawn Cohen, director, Relationship Management with MFS.

The study also shows many investors don’t understand index funds — one of the most popular retirement plan investment options. In fact, 70% incorrectly believe index funds are safer than the overall stock market, and 56% believe index funds deliver better returns than the stock market. With regards to diversification, 80% of those surveyed say having a little bit invested in each option in a CAP is the best way to diversify while only 13% say investing in a target date fund is an ideal way to diversify.

Read: Retirees sue New Brunswick over pension changes

Near-term needs are also having a negative impact on Canadian retirement plans as 45% believe taking a withdrawal from a CAP is a good option when one needs money. Additionally, 62% of members surveyed say they wish it was easier to access money in their CAPs today.

“The necessary ingredients for successful retirement outcomes already exist, but many members do not understand the basics of their workplace retirement plans,” says Cohen. “Making small changes in contribution amounts and avoiding premature withdrawals can have a big impact on the retirement outlook for Canadian investors.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.