Is retirement still the right objective for DC pension plan design?

For more than 40 years, defined contribution (DC) pension plans have been designed with the primary goal of helping employees save for retirement. But times have changed, as have employees’ needs.

What are DC pension plans?

DC pension plans are employer-sponsored retirement savings plans in which members and employers contribute to individual accounts. These plans have traditionally been designed with the goal of preparing members for retirement by accumulating savings over time. However, as financial wellness becomes a priority for many, some plan sponsors and advisors are considering more holistic approaches that also address broader financial needs.

Why workplace retirement plans?

Workplace retirement plans have traditionally been implemented as a tool to attract and retain talent by helping employees save for retirement. Offering such plans requires significant investment from employers, including:

• Employer contributions.

• Staff to administer the plan.

• IT staff to manage payroll, contribution remittance.

• Time from members to engage with the plan, attend information sessions and educational seminars.

If the return on investment (ROI) for offering a retirement plan is measured by how effective it is in attracting and retaining talent, the logical questions for employers to keep asking may be,: “Is our retirement-focused plan design doing the job? Is it giving our members what they need?”

In other words, “Are we maximizing our ROI?”

How can DC pension plan design support financial wellness?

A well-designed DC pension plan can do more than just help members save for retirement — it can be a powerful tool for improving overall financial wellness. By incorporating a variety of features, sponsors can provide a more comprehensive financial support system that goes beyond retirement readiness, helping members manage immediate financial challenges while preparing for the future. 

Here are several ways a DC pension plan can support financial wellness:

1. Offer financial education: providing financial literacy programs that cover budgeting, debt management, and saving strategies can empower members to take control of their finances and help reduce financial stress.

2. Use digital tools for engagement: digital platforms can make it easier for members to access their plan details, attend webinars, and receive personalized advice, potentially leading to an increase in their engagement.

3. Provide access to financial advisors: access to certified financial advisors through the workplace allows members to receive tailored guidance on both short-term financial goals and long-term retirement planning.

Contribution structures and employer matching formulas

When establishing a DC pension plan, contribution structures are outlined in the plan document and must comply with applicable pension legislation and CRA limits. Contributions may be made by the sponsor, the member, or both.

Common employer matching approaches may include:

• Fixed percentage match: the employer matches a set percentage of employee contributions (for example, up to a specified percentage of salary).

• Graded match: the employer match increases as employee contributions increase.

• Stretch match: the employer matches different percentages of contributions up to defined thresholds (for example, 100% on the first portion and a lower percentage on additional contributions).

Matching formulas vary by employer and plan design. Actual contribution outcomes depend on participation rates, contribution levels, and regulatory limits.

DC plan design checklist

Consult this checklist to help ensure your DC pension plan is aligned with the latest financial wellness opportunities and member needs.

Clear plan objectives

• Ensure the plan is designed with both retirement readiness and financial wellness in mind.

• Balance short-term needs (debt management, emergency savings) with long-term goals (retirement savings, wealth building).

Financial education and literacy

• Provide financial wellness programs to enhance member understanding of budgeting, debt management, and retirement planning.

• Offer webinars, online resources, and workshops for members to gain financial knowledge.

Access to professional advice

• Enable members to consult with certified financial advisors for personalized guidance.

• Include tools for members to get retirement planning support and general financial advice.

Investment options for diverse needs

• Provide a variety of investment options.

• Ensure options cater to different risk profiles, from conservative to aggressive investors.

Digital tools and platforms

• Implement digital platforms for easy access to plan details and investment tracking.

• Allow members to manage their plan, view balances, and make contributions through mobile-friendly interfaces.

Communication and engagement

• Ensure members are regularly informed about the benefits of participating in the plan.

• Offer targeted communication based on member demographics and financial needs.

What challenges affect DC pension plan design effectiveness?

The effectiveness of DC pension plans is increasingly being questioned as the needs of members evolve. Several challenges are impacting how well these plans serve their purpose:

Challenge 1: member engagement 

Over the last few decades, the evolution from defined benefit (DB) plans to DC pension plans shifted a lot of responsibility for outcomes away from plan sponsors to plan members. This included responsibilities like choosing and monitoring their investments, deciding on their contribution levels, and setting their retirement goals. 

This required members to understand their plan and concepts like risk, rates of return, and goal setting. It also needed members to think about a goal that was so far in the future it might not even get on their radar until late in their careers.

And all this required member engagement—something the industry has been trying to solve over the decades using education, tools, materials, and, in recent years, digital channels, and advice. 

Challenge 2: changing employment trends

Changes in employment patterns and career paths can present another challenge in attracting and retaining talent. 

The traditional, well-delineated path of school, followed by work life, then retirement, has become less linear and features career changes, interruptions, return to school, and semiretirement. 

Challenge 3: financial stress 

Financial stress continues to be a challenge for Canadian workers, leading to more diverse financial needs. According to our research1, 58% of Canadian workers are stressed, with the top five financial worries being:

1. Inflation/increasing cost of living

2. Current economic conditions

3. Not having enough retirement savings

4. Not having enough emergency savings

5. Stock market volatility

And while financial stress is widespread across many demographics, certain populations are disproportionately affected by economic stress and uncertainty—the survey found that women, for example, are more likely than men to be adjusting their spending habits and less likely to be sure of their retirement plan.

With such varied financial preoccupations and more immediate needs, saving for retirement is only one of several concerns for employees. This, in turn, can affect their retirement readiness: According to the survey, 48% feel like their retirement planning and savings are falling behind. 

The opportunity: broadening the scope from retirement to financial wellness 

Workplace plans can move beyond a retirement-focused objective to a broader financial wellness goal, addressing members' diverse financial needs, such as budgeting, debt management, and long-term saving. This approach allows sponsors to support members' overall financial health, not just prepare them for retirement.

For sponsors, such an approach doesn’t mean overhauling their current plan design. They can evaluate their existing design and decide to what degree they want to adjust it using a toolkit that already exists:

• Offering financial wellness programs—they can offer tools, services, or education opportunities to help members feel more empowered. Education and financial literacy can be incredibly helpful because they can often be the unknown that generates stress. 

• Using digital tools to help members maximize their plan—digital channels can help with communicating plan benefits, delivering education through webinars, and giving members channels—like mobile—through which to engage with their plan. 

• Offering access to advice—our survey showed that one-third of workers are interested in getting access to a certified financial advisor through their workplace.¹

A more elaborate implementation could include introducing new tax types to help members save, reviewing investment products and contribution levels, and offering rollover and decumulation products to help them transition out of the plan. But any combination of the above measures can help move the plan towards a broader financial wellness focus.

Financial wellness and ROI

A financial wellness approach still includes retirement readiness, but also addresses members’ other, more immediate financial goals and concerns. And since this is what Canadian workers are looking for from their employer, it can make it more likely they’ll engage with their plan.

This broader focus can also make the workplace retirement plan more effective, as members may be less likely to approach retirement with debt and other financial challenges. 

In other words, a financial wellness-focused plan can drive better outcomes, maximizing the sponsor’s ROI.

Frequently asked questions