Early Enrollment

Most plans have an eligibility period on their plans before employees can join the plan.  The research shows that plan participation is greater when the wait period is shorter like 3 months.  Plans that have a 1-year wait period or longer tends to have lower adoption rates in to the plan.  Everyone gets busy over time and when wait periods are longer than one year, people just tend to forget.

Mandatory participation

It’s pretty intuitive but plans that have mandatory participation grow more and thus have better long-term success.  According to the data, participation drops dramatically when membership into the plan is voluntary:

-       54.7% participation on Defined Contribution Pensions

-       43.6% participation on Group RRSPs

Participation levels tend to go up with more and better financial education programs.  A proactive HR team, encouraging corporate culture and systems to remind employees about opportunities to participate in the plan also help improve participation in group RRSP plans and pensions.

Meaningful contributions

Again, it’s pretty obvious to think that higher employer matching makes for a better plan not only from the employees perspective but also from the plan’s perspective.  According to the CAP report, the average employer match in 2012 was:

-       5.6% for Defined Contribution Pensions

-       3.8% for Group RRSPs

When polled, members viewed the their group retirement plan as their primary source of retirement income which is why workplace savings programs are so important to helping employees retire.

Withdrawal restrictions

Plans with no withdrawal restrictions tend to grow at a slower rate.  In the past few years, we have seen high withdrawal rates create significant problems.  In a couple of extreme cases, we have seen some employees in their 60’s who could not retire because they had a lifetime habit of withdrawing their RRSPs from employer sponsored plans.

Some employers don’t feel it’s their responsibility to monitor the use of their employees money but many times, employees need to be protected from their own worst enemy.

Related article: Understanding Withdrawal Restrictions

In my experience, I feel very strongly about incorporating withdrawal restrictions or withdrawal consequences to discourage members from cashing out their retirement funds to facilitate their day-to-day living.

Investment selection

Choosing the right investments and the right number of investment options is a blend of science and art.  On one hand you want to make sure a plan offers enough choice to ensure that all employees have access to viable options that suit their personal needs.  At the same, time giving employees too much choice leads to more complexity confusion and clutter.

Related article:  How many investment options do you need in a Group Retirement Plan?

In my experience, 90% of the employees I have encountered are passive investors that do not have the time, knowledge or expertise to make investment decisions on their own.  That’s why at the bare minimum, plans need to offer a good target date investment option and/or an asset allocation option for these passive investors.  Offering a good streamlined investment menu that does not overwhelm members is an excellent way to improve group retirement plans.

One other aspect of investment selection is choosing a good investment default options.  At one time, money market funds were the default option of choice.  The idea was that the money market fund would be a parking place for their money while they decided what they wanted to invest in.  The reality was that many of these members never made those investment decisions and too many people left their money in these low return accounts.

Over the years target date funds have become the most popular default option.

My five cents

As someone who spends a lot of time helping companies improve their group retirement programs, I think these 4 recommendations from the 2013 CAP report and excellent strategies for a more successful plan.  The only other strategy I would add to the list that was not mentioned is the importance of lower fees.  One of the advantages of a group retirement plan is the ability to negotiate fees dues to the scale of a plan.  Employers can negotiate lower fees as the plan grows in size.  If you don’t know how to negotiate lower investment management fees, a qualified pension consultant can help.

Video:

Jeff Aarssen (Great-West Life) highlights strategies for group retirement plan success from CNW on Vimeo.

The post Building a successful Group Retirement Plan appeared first on Group Benefits Online.

Before I show you the stock market historical data, I want to put forth my disclaimer: This data has been accumulated over many years and I cannot guarantee the accuracy of the data.  I think the data is still interesting so I hope you can find some interest in it.

Let’s take a look at the distribution of performance

Interesting observations on a calendar year basis (from 1938 to 2012):

Like most distribution charts, most of the calendar year returns fall between -10% and +30%.

Generally speaking, markets spend more time making money and less time losing money

• Markets have been positive 73.3% of the time
• Markets have been negative 26.6% of the time

Investing is less about perfection and more about probabilities.

• Investors who buy and hold have a historical probability of making money 73.3% of the time. This is good data for passive investors. 
• Investors who are trying to out guess the market need to win more than 73.3% of the time to do better than the markets.  That’s pretty challenging.

Markets tend to rebound after bad years

• The TSX has experienced back-to-back negative years only twice over the past 75 years.
• The TSX was negative 19 out of 75 calendar years.
• 17 out of those 19 years, the market bounced back with positive return in the following calendar year
• The average return of years that follow a negative year was 14.3%
• Internationally the data is very similar but there has been a little more volatility and also greater downside risk.

The bottom line is that markets have a very high chance of rebounding the calendar year following a negative year.

That’s just a few of my observations.  Do you see any interesting observations I may have missed? 

The post Stock Market Historical data appeared first on Group Benefits Online.

Pension and RRSP contribution limits

• The new limit for RRSPs for 2013 is 18% of the previous year’s earned income or $23,820 whichever is lower less the Pension Adjustment (PA).
• The limit for Deferred Profit Sharing Plans is $12,135
• The limit for Defined Contribution Pensions is $24,270

Remember that contributions made in January and February of 2013 can be used as a tax deduction for the 2012 tax year.

More articles on RRSPs

• How to find out your exact RRSP limits
• The proper use of RRSPs: the one formula approach
• Lesser Known Facts of RRSPs
• Do Spousal RRSPs still make sense?
• Advantages of Self-Directed RRSPs

TFSA limits

• The TFSA limit for 2013 is increasing to $5500.
• The cumulative limit since 2009 is $25,500

More articles on the TFSA

• TFSA Basics: Contributions and Withdrawals
• Understanding the Tax-Free Savings Account (TFSA)
• TFSA or RRSP: Why not do both?

Canada Pension Plan (CPP) data

Lots of changes are happening with CPP but here’s some of the most important planning data.

• Yearly Maximum Pensionable Earning (YMPE) – $51,100
• Maximum CPP Retirement Benefit – $1012.50 per month
• Maximum CPP Disability benefit -  $1212.90 per month
• Maximum CPP Survivors Benefit
  • Under age 65 – $556.64
  • Over age 65 – $607.50

2013 Reduction of CPP for early benefit – 0.54% for every month prior to age 65.  At age 60, the reduction for 2013 is 32.4%.  This reduction is being phased in over 5 years.

For more information on CPP

• Four reasons why you should still take CPP early (post 2011 rules)
• Three current debates of Canada Pension Plan
• How much will you get from Canada Pension Plan in Retirement?
• New proposed changes for CPP
• Will Canada Pension Plan (CPP) be there when you retire?

Old Age Security (OAS)

• Maximum OAS – $546.07 per month
• The OAS Clawback (recovery) starts at $70,954 of income.  At $114,640 of income OAS will be fully clawed back.

For more information on OAS Clawback:

• Minimizing Old Age Security Clawback

New Federal Tax Brackets

For 2013, the tax rates have not changes but the tax brackets have increased according to indexation. The new Federal budget this year could change these figures.

• $0 to $11,038 – Personal Exemption
• $11,039 to $43,561 – 15% marginal tax rate
• $43,562 to $87,123 – 22% marginal tax rate
• $87,124 to $135,054 – 26% marginal tax rate
• 0ver $135,055 – 29% marginal tax rate

Remember these rates do not include provincial tax.

For new provincial rates, visit the CRA site

• http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#federal

Provincial tax rates are also subject to change when the provincial budgets are released later in 2012.

For more information on tax rates

• Marginal Tax vs Average Tax
• It’s time to do some tax planning
• A List of things not taxed in Canada

The post New Financial Planning Data for 2013 appeared first on Group Benefits Online.

Data can always be interpreted many different ways.  Allow me to share some of my observations

Bond returns

Interest rates stabilized in 2002.  We did not see a lot of interest rate drops and as a result, bond returns have normalized.

There is an inverse relationship between interest rate changes and bond values.  When interest rates fall, bond returns increase.  When interest rates increase, bond returns fall.

Related article:  Everything you need to know about investing in bonds

Moving ahead, what do you think will happen with interest rates?  Will the increase, decrease or stay the same?  With current interest rates, it’s unlikely that we will see interest rates fall much more (although anything can happen).  Many people would argue that rates have nowhere to go but up.  However, rising interest rates can be very problematic for the economy when debt levels are at record levels and growing.

If I were a betting man, I would bet that interest rates are not going to move much from where they are which means bond returns will likely remain under 4% for the next while.

TSX Composite

In 2012 the TSX Composite shows a reasonable recovery from a tough 2011 (-8.7%).  In Canada the top 2 sectors were:

• Consumer Staples +22.6%
• Consumer Discretionary Sector +22.1%
• Real Estate +20.0%
• Financials +17.1%
• REITs +17.0%

At the other end of the spectrum, 3 of 13 sectors lost money:

• Materials – 5.7%
• Diversified Mining -5.2%
• Energy – 4.8%

All three of these sectors have now experienced two years of consecutive losses – maybe it’s an opportunity to buy low!

US Market

Despite all the economic concerns in the US around government debt and deficits, the US stock market has done very well for the past 4 years after the financial crisis in 2008.  2011 was the best of the last 4 years with a 13.5% return.

Will 2013 be another great year for the US markets?  The real answer is no one has insight on what future market returns will be.  That being said, I will share my opinion but disclosing that my opinion is only an opinion and is likely to be wrong.

As a stats guy, the US market has had 4 positive years in a row and based on probability alone has a higher chance of correction than ever.  Given the US debt situation, any bad news could trigger a market sell off so it’s important to be cautious.

International markets

It was a hot year for the international markets.  Every market around the world experienced positive returns.  At the top of the list (in Cdn Dollars):

• Germany +29.2%
• Hong Kong +25.4%
• China +20.4%

Only three markets produced single digit returns in 2012:

• Japan +6.0%
• Latin America +6.5%
• Canada +7.2%

As you can see, the International markets experienced a common Cold to Hot phenomenon.  The hottest returns in 2012 came from International Stocks (MSCI EAFE) but ironically; international stocks were the worst performing asset class in the previous calendar year.

One might argue that is a classic example of ‘buy low, sell high’.  Or it’s the story of ‘buy into pessimism and sell out of optimism’.  Whatever the case may be, most people tend to think in straight lines and as a result, they tend to chase the winners and dump the losers which is more of a buy high, sell low strategy.

My five cents

Markets do what markets do.  In other words the future is not predictable.  As much as I have given some of my personal thoughts and opinions, please consider these thoughts as entertainment and do not use them for to make future investment decisions.

In my own portfolio, rather than try to guess what the future will be, my preference is to rebalance the portfolio.  Today, that means selling some of the equities (Canadian, US and International) by taking some profits and putting them back into cash or bonds.  If I were a betting man, I might dump a little extra cash into the energy sector.

What do you think is in store for 2013?

The post 2012 Stock Market Review appeared first on Group Benefits Online.

The second train of thought is to tier the benefit plan so that different groups of employees have different benefits.

Types of tiering

There are many different ways to tier a benefit plan.  Here are a few examples:

1. By employee class.  Many companies give different benefits to different types of employees.  For example, many tiered plans give a higher level of benefits to managers and executives.  Other plans have a different set of benefits for hourly, salaried and commissioned employees.  Some companies distinguish their benefit structure based on whether their role is administration or sales.  Some employers need to be more competitive with some roles to attract and retain certain employees.
2. By geographic location.  Some companies have offices in different provinces where the competitive landscape for hiring and retaining employees is different.  As a result, a company may have a different set of benefits for employees in Ontario than they do for employees in Quebec and even a different set of benefits for employees in BC or Alberta.
3. By tenure.  One of my favourite ways to tier a benefit plan is to tier based on tenure.  In this strategy, the thought is that a long standing employees is more valuable that a brand new employee and one way to reward that employee is to enhance benefits the longer they work for the company.

Strategies to tier the benefit

When implementing a tiering strategy, it is also important to know some of the different benefits

1. Employee/Employer share of cost.  Some employers share the cost of the benefit with their employees while other employers pay for the all benefits (except disability for tax reasons).  One way to tier the benefit plan might be to change the cost share.  For example, one set of employees might have a 50-50 cost share but for other employees, the cost share might change to 75-25 or even 100% employer paid.
2. Addition of Benefits.  Recently we worked with a company that started with a very basic plan for new employees.  As they worked longer for the company, the got added benefits.  For example, they got basic dental for the first 2 years.  After 2 years, the dental plan included major work and after 5 years, the plan included Orthodontics.
3. Health Spending accounts (HSA).  Health spending accounts have become increasingly popular benefits.  Health spending accounts make it really easy to tier benefits because you can allocate different amounts of money to different employees.  In the same example above, employees under 2 years did not get a Health Spending Account.  After 2 years, they got $300 per year in their Health Spending Account.  After 5 years, they got $450 per year in their HSA and after 10 years they got $750 per year.
4. Group Retirement Plans.   When it comes to Group Retirement Plans like Group RRSPs and Pension Plans, the only cost to the employer is the employer contributions into the plan on behalf of the employee (often called matching).  The matching amount can be easily tiered as well.  For example, employees with less that 2 years got a 3% match, which means if the employee contributes 3% of their salary, the employer will also match by putting in 3%.  After 2 years, the matching might increase to 4% and after 5 years the matching could increase to 5% and after 10 years it might increase again.

This is far from a complete list in ways to tier a benefit program.  Instead it’s a list to help understand that there are many different strategies to tier any benefit plan.

Keep it simple

When it comes to tiering a plan, there is no right or wrong.  If you prefer to treat all employees the same, then great.  That being said, tiering can be an integral part of the compensation structure to attract, retain and reward employees.

If you want to implement a tiered plan, remember that simple is usually better.

One of the ways to keep it simple is to make sure the health, dental, insurance and retirement benefits are coordinated.  I ran across a company that had one consultant that implemented a tiering plan that was completely different than their Group RRSP plan because the bank was managing the Group RRSP separately.

Too many tiers and too many rules can be confusing and counter-productive.  In my experience it’s ideal to have 3 or 5 teirs at the most otherwise it becomes increasing complex for employers to manage the plan and also for employees to remember all the tiers.

Clearpoint Benefit Solutions is a boutique benefit company based in Edmonton with clients in BC, Alberta, Yukon and Northwest Territories.  Contact Clearpoint Benefit Solutions if you are looking to improve or review your current benefit plan.

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