Is shopping for a good retirement plan getting too complicated?

A lot of ink (or perhaps, pixels) gets spent on why Canadians aren’t saving for retirement in sufficient numbers and amounts.

But an equally important question is raised in a recent article by three leading retirement experts – are the retirement products out there getting too complicated?

The article appears on the Common Wealth site and is authored by Jim Keohane, recently retired CEO at the Healthcare of Ontario Pension Plan, and Common Wealth founding partners Alex Mazer and Jonathan Weisstub.

The article asks if employers offering retirement programs – and members joining them – are being well served by the retirement industry. For starters, the trio writes, most group retirement plans offer a dizzying array of choices.

“The traditional industry’s focus on a high degree of investment choice is based on a flawed premise: that employees and plan sponsors have the desire and capacity to engage in the choosing and ongoing management of the investment of their retirement savings. If our goal is to help employees achieve retirement success in the most cost-effective way — which it should be — then a better focus should be not on choice but on simplicity,” the authors write.

Today’s typical choices for group plan members are far from simple, the authors note.

Service providers – typically banks and insurance companies – sell their services to employers “on the basis that they have hundreds of funds and dozens of managers to choose from,” the article notes.

Providers have thus become “supermarkets of funds, outcompeting each other for who could offer the greatest selection,” Common Wealth notes.

But there are downsides to giving employees – the folks who will actually want retirement income from these products – all that choice, the article warns.

A study by Columbia University in the U.S. found that “greater investment choice led to lower participation” in retirement programs, with plans offering 10 choices or less getting the highest participation.

Streamlining choices could result in greater savings – up to $10,000 U.S. per employee, found a study by the Wharton School.

And even highly-educated investors “make common mistakes,” such as paying too much in fees, when selecting investments for retirement, says research from Yale and Harvard.

Will the average person, the article asks, know what asset mix to select? Will they fall into the trap of trying to time the market? Will they “chase performance” by tending to choose investment products that have done well recently? The article goes on to focus on the higher costs end-users pay for having all that investment choice, which they pay for via higher fees.

The authors say a simpler way to go exists.

The use of “target date” funds is said to increase wealth by up to 50 per cent, the authors note, citing Wharton School research. Other simplification ideas include:

• Using “smart defaults” in retirement products, so those who don’t make a choice are automatically moved into a fund that is “appropriate for their age and desired retirement date.”
• Removing choices for employers, who have “little interest in becoming investment experts.”
• Using an “index-based approach” rather than trying to beat the markets.
• Work with “world class” providers, rather than smaller ones trying to create a supermarket of choices.

The authors conclude by pointing out that the goal of offering a retirement program is “helping people secure the best possible retirement outcomes for themselves and their families.” Boxing people into programs where they have to make complex investment choices can “cost employees tens or even hundreds of thousands of dollars.”

Save with SPP can personally attest to a lot of this. When saving on your own – especially if you don’t have any professional advice – you will tend to gamble a bit with your own future income. One remembers being told by friends, for instance, that Nortel “would come back,” and that money could be doubled by the then-booming tech market. Not so much, it turned out.

If you are looking for a simple, “set it and forget it” pension plan that takes care of tricky decisions for you, think about the Saskatchewan Pension Plan. With SPP, there are two funds to choose from – The Balanced Fund, or the Diversified Income Fund. Both funds are professionally invested for you. As well, the SPP is “full service,” in that after it has grown your savings, it provides you several options for collecting income when you retire, including lifetime annuities. Let the pros do the heavy lifting for your retirement – check out SPP today.

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