Asset AllocationNovember 23, 2021

Retirement Plans Are Key for Business Efficiency

A good pension plan can give companies a competitive edge in a tight labor market, according to a recent report.

Reported by Michael Katz

A tightening labor market and a new post-COVID-19 perspective on an employer’s role in ensuring retirement security are among the trends that have increased the importance retirement plans have on a company’s success, according to a new report.

As finding and retaining talent becomes increasingly difficult for companies—particularly small ones—new or expanded retirement savings offerings could increase their competitiveness, said the report, which was released by the Canada-based Healthcare of Ontario Pension Plan (HOOPP) and financial technology company Common Wealth.

“The COVID-19 crisis has also catalyzed new discussions about the role that work, and employment in a broad sense, should play in ensuring a reasonable level of financial security,” the report said.

The study focuses on at how businesses can improve their bottom lines by offering retirement savings plans and identified five key drivers it says determine the efficiency of various retirement arrangements:

Saving. People tend to save less, save later, and save less consistently in a purely voluntary system than under a collective plan with mandatory contributions or automatic enrollment.
Fees and Costs. Investment management and administration fees for good pension plans tend to be significantly lower than the costs of retail investing and advice.
Investment Discipline. Investment decisions made by professionals tend to produce better results than those made by individuals, who “have a striking ability to do the wrong thing.”
Fiduciary Governance. When investments are managed on a nonprofit basis by in-house professionals with a fiduciary responsibility, they tend to perform better than retail funds.
Risk Pooling. Most individual investors adopt costly strategies to avoid outliving their money. By contrast, a good collective retirement plan can create efficiencies by pooling longevity and investment risk.

The information for the report came from interviews with Canadian employers, industry and academic experts, a survey of more than 800 private-sector employers, and modeling to assess the business value of offering retirement plans.

By modeling various kinds of plans, the report said there is significantly more compensation efficiency for an employer looking to maximize financial value for its employees in workplace retirement models that incorporate the five drivers, particularly if all five are in one plan.

“There has been talk recently about whether Canada will see a ‘Great Resignation’ of employees leaving their jobs in pursuit of better benefits and pay,” Steven McCormick, senior vice president, plan operations at HOOPP, said in a statement. “Many employers may be asking what will set them apart in recruiting valuable talent. Our research suggests retirement savings plans can provide that competitive advantage.”