When people with a defined contribution pension scheme from their employer approach retirement, they are faced with a big financial dilemma.
The money they and their employer have been saving, sometimes for years, to prepare for this day is about to be handed over to them, often in a very large lump sum. They have to find a way to get an income stream from that money that will last the rest of their lives.
It's a decision most people aren't ready for.
"For the vast majority of people, this is the biggest financial decision of their lives, bigger than than buying their house or selling their house," says John D'Agata, director of pension and benefits at McGill University. He says some retirees from McGill have $500,000 to $1 million in their plan.
"You've been doing something else all your life and it's a steep learning curve. You won't necessarily have the knowledge to make such an important decision," he told CBC News.
Retirees were expected to go to their bank or insurance company and negotiate a pension solution on their own. An annuity or life income fund (LIF) which provides them with a monthly income might be one option.
McGill has begun offering its retirees an alternative — a plan that is managed in the same way their pension savings were managed when they were working, but which offers them a way to withdraw a monthly income.
The advantage for retirees is much lower management fees than they'd pay for a LIF or RRSP/RIF at their bank or insurance company.
"This could represent quite a significant savings relative to what they'd be able to get on their own," D'Agata said.
McGill is not the only employer with a defined contribution pension thinking about providing an income stream in retirement for former employees.
About 27 per cent of Canadian employers with defined contribution plans were either helping out their retirees with a group plan or considering such a move, according to human resource consultants Morneau Shepell.
That's based on an online survey done between mid-June and the end of July, with input from 255 organizations representing a broad cross-section of industry sectors.
Defined contribution plans, in which there is no guaranteed benefit at retirement, have been replacing defined benefit pensions for the past 20 years as employers seek less complex and expensive pensions, according to Randal Phillips, executive vice-president at Morneau Shepell.
But the pitfalls of these plans are being seen with the current wave of retirees, he said.
In the past few years, annuities or life income funds have not been an attractive option for retirees looking to invest a lump sum, because interest rates are so low.
Many put off buying an annuity, hoping rates will rise, and have to become savvy quickly about other retail investment products to manage the money from their pension, Phillips said.
Employers who have defined contribution plans are starting to look for some kind of group retirement option to help out former employees, Phillips said.
Regular stream of income
These group plans could provide a regular stream of income as do defined benefit plans, but the company is not assuming the same risks as it would with a defined benefit plan, in which benefits are guaranteed.
The Western provinces allow retirement benefits to be paid directly out of an existing defined contribution plan. That means retirees can keep the same investment mix they've held as they worked and the plan grew.
Another alternative is a group RIF, which can be created from a group RRSP, Phillips said.
Phillips said employers benefit from a continued relationship with their retirees, as well as encouraging those who are still working by showing they have options for their pension.
The main benefit is those lower management expense ratios enjoyed by group products, which can be 1.5 to two per cent of assets annually in some retail products, he said.
"That can make a real difference in return on retirement income over a period of 20 years," he said.
Ontario and Quebec require employees to take their pension as a lump sum, but some companies are making an offer similar to McGill's, in which retirees have the option to reinvest in a new group plan through their employer.
The choice is always there to take the whole pot and invest it yourself, said D'Agata, but many retirees would prefer not to.
He said the university, which has a hybrid plan that also includes a defined benefit, is lobbying the Quebec government to change its pension rules to allow benefits to be paid directly out of a defined contribution plan.