There is plenty of good news in Sun Life Financial's 2016 Designed for Savings report, which profiles workplace retirement programs across Canada. Waiting periods for employees to join these programs are shorter. Employers are matching employees' contributions to defined-contribution pension plans (DCPP) and Registered Retirement Savings Plans (RRSP) at higher rates. Plan members are holding well-diversified portfolios despite global market volatility. And employee contribution levels rose by 9% last year.
One area in need of improvement, however, is the participation of Millennial employees. According to Mazen Shakeel, vice-president of market development for group retirement services at Sun Life, younger employees are less likely to feel they can afford to participate in capital accumulation plans (CAP) such as DCPPs and RRSPs.
"It's important to look at contribution rates in two ways," says Shakeel. "One is in dollar terms, and one is in percent-of-pay terms. Regardless of how you look at it, the contributions for the 20- to 40-year-old group tend to be lower."
Shakeel cites two main reasons for lower Millennial participation rates: high expenses and lower pay. "You would expect that younger employees in the workforce may still have the 'hangover' of student debt and other financial obligations that they are focused on earlier in their careers. The other factor is that you tend to see lower pay levels in general at the younger ages. We tend to see a correlation between savings rates and pay."
This second factor may also help explain why the average female employee's CAP account balance totaled $58,000 at the end of 2015, compared to $80,000 for men. "From the data that we're looking at, those pay differences do exist," Shakeel says. "The differences in savings rates aren't as pronounced, but when you then project it out into account balances, lower contributions going in, in dollar terms, means lower account balances. And females live longer, so arguably they should have higher account balances to generate the income for longer lifetimes as well."
Among Millennials who do participate in CAPs and take advantage of their freedom to invest their contributions, Shakeel says they tend to take a hands-off approach. This is helped by the growth of target-date funds, which now represent 22% of CAP assets with Sun Life, up from 7% in 2011.
"In a significant percentage of plans, target-date funds have become the default," Shakeel says. "But we are also seeing a lot of people actively selecting target-date funds as their investment option, because it simplifies the process. Even in the last few years with increasing levels of market volatility, we have seen very low turnover in member accounts. They tend to sort of set it and forget it."
The use of target-date funds helps CAP participants take on the optimal level of risk, Shakeel says. "At younger ages, they are tending to have 70% to 90% exposure to equities, and that draws down over time as they get to retirement," he says. "But those that are either selecting their own mix, or using balanced funds, tend to have much lower levels of equity exposure --more like 50% or 60% -- at a time when they can probably take more risk. And that tends to stay flat over their careers."
When it comes to getting Millennials interested in saving for retirement, Shakeel says financial literacy matters--and employers are often the ones to provide it. "They're educating their workforce, trying to encourage members to take advantage of workplace plans, but balance their different competing demands for their savings goals," he says.
Sun Life has been a leader in the use of "gamification" -- the application of game design to encourage engagement with a product or service -- to deliver financial literacy lessons. The company's money UP! program is available through the Sun Life Mobile app (available for iPhone and Android), currently rated five stars in the App Store and winner of the 2014 Morningstar Award for investor education.
"We've seen a really positive impact for those that go in and play the game," says Shakeel. "We've seen higher levels of savings and greater diversification from an investment perspective. We're continuing to invest in solutions to make it easier for digitally-savvy employees to join a plan and take full advantage of matching opportunities."
Sun Life has also found that financial advisors help Millennials see the benefits of contributing to CAPs. "We strongly believe that advisors do play a role, even for those that may not have saved a lot, just to help them make some budgeting decisions that will position them not just for the short or mid-term, but also for the longer term," Shakeel says.
For Millennials who remain deterred from contributing because of student debt and housing expenses, Shakeel says it doesn't have to be an either-or proposition. "Depending on how the plans are structured, often there are options that allow employees to withdraw money, for example, from an RRSP under the Home Buyers' Plan or under the Lifelong Learning Plan," he says.
With 83% of employers (up from 76% last year) matching contributions to DCPPs, and 53% (up from 47% last year) matching contributions to group RRSPs, Shakeel says Millennials are "leaving money on the table" by declining to contribute to CAPs. "Our suggestion would be that they first look to their workforce plan," he says. "If they are planning on saving, whether it's for retirement or otherwise, those matching opportunities can be extremely valuable."
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