Five Good Ideas ®
Five Good Ideas for building financial health through the workplace
Published on 28/10/2020
With over 40% of Canadians living paycheque to paycheque, more employers are asking what they can do to increase the financial health of their staff. Alex Mazer and Nora Beatty of workplace retirement plan provider Common Wealth share their five good ideas to help you build financial security in the short and longer term. As an employer, you will come away with ideas you can take to reduce financial stress for your employees; as an individual, you will learn ways to make your hard-earned savings go further.
Five Good Ideas
- Make the business case for employee financial health (HINT: it’s not just “nice to do”)
- Take advantage of Tax-Free Savings Accounts
- Keep fees low
- Provide education on accessing government benefits
- Make savings automatic
- Healthcare of Ontario Pension Plan, Common Wealth and the National Institute on Ageing, “The Value of a Good Pension: How to improve the efficiency of retirement savings in Canada” (2018) (learn about the surprisingly large financial value of a good workplace retirement plan – and what makes a plan “good”)
- John Stapleton, Open Policy Ontario, “Toolkit: Low Income Retirement Planning” (2020) (learn about the importance of the Tax-Free Savings Account, and other strategies to maximize income in retirement for modest earners)
- Larry Bates, “T-Rex” fee calculator (see how much of your returns are being eaten up by high fees)
- Prosper Canada, Financial Relief Navigator (find out what government benefits you might be eligible for)
- Ontario Securities Commission (access financial education tools and resources approved by one of Canada’s most prominent financial regulators)
Full session transcript
Note: The transcript has been edited for clarity.
Elizabeth: While many of you are dialing in from across Canada, I’m speaking to you from Toronto, and I would like to begin today’s session by acknowledging the land where we live and work, and recognize our responsibilities and relationships where we are. As we are meeting and connecting virtually today, I encourage you to acknowledge the place that you occupy.
Maytree is on the historical territory Huron-Wendat, Petun, Seneca, and most recently, the Mississaugas of the New Credit Indigenous Peoples. This territory is covered by the Dish With One Spoon Wampum Belt Covenant, an agreement between the Haudenosaunee and the Ojibwe and allied nations to peaceably share and care for the lands and resources around the Great Lakes.
With over 40% of Canadians living paycheque to paycheque, more employers are asking what they can do to increase the financial health of their staff. In today’s session, Alex Mazer and Nora Beatty of workplace retirement plan provider Common Wealth will share Five Good Ideas to help you build financial security in the short and longer term. As an employer, you will come away with ideas you can take to reduce financial stress for your employees. As an individual, you will learn ways to make your hard-earned savings go further.
Alex Mazer is co-founder of Common Wealth, a mission driven business that works with associations, unions and groups of employers to provide workplace retirement plans. Before Common Wealth, as Director of Policy to the Ontario Minister of Finance during the global financial crisis, Alex helped deliver major reforms to Ontario’s retirement system, including laying the groundwork for the enhancement of the Canada Pension Plan.
Nora Beatty is Director of People Operations, Common Wealth. She is passionate about people and connecting innovative people’s strategies to better business outcomes. This is a great pair for discussing this issue today. Their full bios and details about today’s session are available on the handout that you can download. On the handout, you will also find today’s Five Good Ideas and resources. So, without further ado, over to Alex and Nora.
Alex: Thank you very much, Elizabeth. It’s a real pleasure to be here. I’m very grateful to be included in this series. I just will put in a plug for those for whom it’s the first Five Good Ideas session you’ve attended. This is a fantastic resource. You can go back on the website and see all the Five Good Ideas presentations and resources from past presenters. I really enjoyed going through some of those and encourage others to do that as well.
I really appreciate the work that Maytree does, making that accessible and freely available to so many people. We’re really excited to be here today. What gets us out of bed in the morning is actions people can take to strengthen financial health and improve financial security. I have to say I’m really heartened by the turnout today.
Money is a hard thing to talk about. It’s often something that people procrastinate about, and it’s fantastic to see so many people today attending. I just want to say something, which is that even by attending a session like this, you are taking an important first step. There are a lot of people struggling out there, it may be your employees, it may be you. You’re taking an important first step to learning more about what you can do for yourself or others in your community to help strengthen their financial security. I want to just recognize that as an important step that you’re taking, you’re taking time out of your day to attend, and I hope we can provide some value to you and the people that you serve through this session.
I do want to mention that what we’re going to present today will include a lot of ideas about how to strengthen financial security. This is really meant to be financial education, as opposed to individualized advice. We don’t have all the details about your situation or your employees’ situations. So, we’re going to try to provide some general rules of thumb that we think are useful, but this is education as opposed to financial advice. I’m going to turn it over to my colleague, Nora, and we’ll get started.
Nora: Thank you. The first good idea that we’re going to share is how to make a business case either for yourself, or if this is something that you need to do for your leadership team, for employee financial health.
Idea #1: Make the business case for employee financial health (HINT: it’s not just “nice to do”)
What gets me really excited about this section of our presentation is that I saw the same trend happening years ago, around health benefits. It used to be something that was just a box to check off for most employers, but very few really looked into it. The industry was a little bit opaque. There weren’t that many options out there.
Over time, more and more employers started to realize that their employees cared about benefits, and that they could differentiate themselves from other employers and also help their employees focus on their work by taking the time to look into the kinds of health benefits they could provide. We then saw a huge shift in the market in terms of what was available. The market responded with creativity and innovation, in terms of what was available from a health benefits perspective. I’m excited to see the same thing happen, or start to happen in the case of employee financial health, because this is just as important.
There are a few layers to this. We’re going to call it a cake of financial security, or building the case for financial security at the workplace. The first layer is acknowledging and accepting that there really is a crisis among Canadians today when it comes to their personal finances.
I think it’s being highlighted, and perhaps amplified and aggravated, by the pandemic. But the crisis definitely existed long before, and it will likely exist long after, if we don’t take intentional steps to address it. Just a few statistics that I wanted to share about this: almost half of Canadians live paycheque to paycheque. That’s a big number. Many Canadians who are near retirement have household savings of only $3,000, which is just insufficient for their retirement needs.
A third of Canadians don’t have access to a workplace-based plan, and we’re not even talking about effective, or tailored or efficient. We’re just talking about access to a plan, that’s a pretty big number.
And then almost half, so four in 10 Canadians, aren’t saving at all. And these things are quite deeply related. But you know, they should help convince you that this problem is real, it exists, and it’s probably impacting people you work next to every day, whether you are aware of it or not.
We are saying there is a general financial crisis, but the second piece is that even among those who are saving, Canadians struggle with retirement saving in particular. It’s complex, the industry’s a little bit opaque, and the information isn’t always readily available. This leads to frustration. And the reasons or the sentiments around the frustration can differ depending on age and stage.
For the younger workforce retirement seems so far away, and there’s so many more immediate things that people are worried about or interested in financially, like dinner out with friends or a new sweater. People have a hard time in those earlier stages of their lives thinking about retirement, all the way through to people actually approaching retirement.
Whether they’ve saved or not, they think – “Well, I don’t know if I’ve actually saved enough. How do I know if I’ve saved enough? What am I going to do if I run out? Most do not really have a clear sense of what is sufficient and what is out there. So, they continue to struggle from the early stages of their careers, all the way through to retirement.
The third layer is around the actual solution. A workplace-based plan seems to be the most effective when it comes to producing better retirement outcomes for people. We’ll say people in general, but obviously employees or members of that plan, compared to if they are left to save on their own.
Based on research that we did with HOOPP (Healthcare of Ontario Pension Plan) and the Aspen Institute, we found that employees are financially fit, or people are 15 times more likely to save, if they have access to a plan through their workplace that takes a payroll deduction. So, they’re not really having to think about it actively. It’s just being taken off their payroll. That goes up to 18 times if they’re enrolled automatically at the time that they’re offered the job.
Those are crazy numbers; those could make a really big dent in those first four stats that we shared. Not to mention other reasons that workplace-based plans tend to provide better outcomes. There is group purchasing power. Obviously, the plans tend to have better rates, and better access to advice and things like that. If they’re through group versus if you are somebody with not a huge amount of money trying to save on their own.
Most people just don’t save on their own, similarly to investing in health benefits. Many of us, especially in Canada, because we have socialized healthcare, if we don’t have access to private health insurance through our workplace, very few people go out and purchase it on their own. Retirement savings is like a very similar thing. People just don’t do it on their own. It’s seen as something that’s done through your workplace, or not at all. So, it tends to be much more effective for Canadians, if it’s offered through their place of work.
And so, we’ve got this three-layer cake that builds the case for employers to care about the financial health of their employees. What does it actually mean? The picture we are trying to paint here is that there is a very real problem that your employees are probably dealing with. Employers are uniquely positioned to help solve this very real problem.
If you help solve this problem, your employees are one step closer to being able to bring their whole self to work. Engagement research, happiness research, satisfaction research demonstrates this. The eNPS scores (employee Net Promoter Score) that people are scoring for their workplace, have all shown that when employees can bring their whole self to work, when the anxieties of home are being cared for and supported through their workplace, they tend to stay longer. They also tend to be more engaged, more creative and more innovative, which are all great things for employees, but also for the workplace.
We’re sharing this information with you in terms of like making the case for employee workplace retirement plans, but the truth is many employers are already starting to catch on, similarly as they did for health benefits.
A recent study by the Bank of America showed that back in 2012, 33% of employers said that they felt responsible at all for caring about their employees’ financial health. That number is shot up to 78% in 2020. So over eight years, that’s a 45% increase in employers saying that they care about, or they feel responsible, for the financial health of their employees.
I’d love to believe that that’s out of the goodness of everybody’s hearts. I’m sure that in some ways it is, but it’s also because of the evidence that shows by helping employees take care of things that are personal issues, they can bring more of themselves into the workplace. Workers can focus and just do better, and they stick around longer and all of those good things we talked about.
One last thing to note, before I hand it off to Alex, is that I think the position that a lot of employers find themselves in is like, “Great, I buy it. I want to help my employees show up at work better.” I want to support them, and I care about this.” Then they go out and they look around, and it turns out the plans aren’t that great for them. They’re expensive, they don’t have good outcomes for their employees. The truth is that existing workplace plans aren’t exactly designed for all.
We still need to do a lot of work to get them there. Unfortunately, smaller- and medium-sized employers, and low- to modest-income earners are largely underserved by the current workplace retirement plan offerings. We as a company are trying to change that. There are others who are working hard to do that.
I think a lot of what Alex is going to cover here is, if you are convinced of the merit of workplace-based retirement plans, how can you think about effectiveness and the real benefit of a plan for your employees? We’re going to share four more good ideas that you can apply as you’re looking at workplace-based plans, but also personally. These would work just as well for somebody who’s trying to tackle this problem for themselves. And with that, I’ll hand it over to Alex.
Idea #2: Take advantage of Tax-Free Savings Accounts
Alex: Great, thank you, Nora. So, the second idea we wanted to share is about taking advantage of Tax-Free savings accounts. Now, a lot of people are aware of Tax-Free Savings accounts. They’ve been around for a little over a decade, but they’re underused and they’re misunderstood. We could make a lot better use of them, both in the workplace environment, and also in people’s personal finances. So, I’m going to explain a little bit of why that is.
The first thing I wanted to share is that part of the reason the tax-free savings account was created is because RRSPs can actually be quite bad for people living on a modest income. I’ll explain why, but if you want to learn more about this one, a great resource is the work that John Stapleton has done in collaboration with the Metcalf Foundation about retiring on a low income. He’s a very valuable guide. He does education sessions in public libraries across the province, and he’s a real expert on this and has taught us a lot about it.
In a nutshell, RRSPs end up resulting in the claw-back of people’s benefits and retirement government benefits that are aimed at modest-income people. This can end up being a very bad deal for modest-income people. Much of the financial services industry is not well-trained on this, in part because they’re not well set up to serve modest-income people. So, it’s really just a caution to say that if someone is making less than $50,000 a year and doesn’t have a pension, and particularly if they’re likely to get the Guaranteed Income Supplement, they will be much better off saving in a TFSA.
Now, to explain a little bit more about how this works, just the basics of this. People may be familiar with RRSPs and TFSAs but they may not fully understand the difference. The difference from a tax perspective is really when tax is applied. With an RRSP, you get a deduction up front, you basically don’t pay tax on any of the contributions you make. That’s a nice thing in the here and now. But you do pay tax later when you withdraw the money from what’s called a RRIF. So, you’re taxed on that. And it also affects your government benefits, your Guaranteed Income Supplement (GIS) and your Old Age Security (OAS).
Whatever income you’re taking out of an RRSP will affect those government benefits. And especially for the GIS, the claw-back rate can be very high.
With the TFSA, you are taxed on those contributions. So that forms part of your taxable income, when you contribute to the TFSA. Like an RRSP, there’s no tax on investment returns. So that’s a great feature of both programs. And then the nice thing with the TFSA is when you get to retirement, any money you take out doesn’t attract any tax, and it has no effect whatsoever on your government benefits, your OAS and your GIS. So that’s a really important thing to take advantage of, especially if you’re living on a more modest income.
To explain a little bit more about how this works, let’s take an example of two people in retirement. One person is taking out $500 a month from a TFSA. The other is taking $500 a month from a RRIF, which is really the retirement part of an RRSP, you have to convert an RRSP into a RRIF. For the first person, they have no effect on their Guaranteed Income Supplement. They get the full amount, in this case $500, just as an example.
For the second person, they are subject to what’s call the GIS claw-back, which means that 50% or more of her GIS is reduced for every dollar of RRSP they take out. In other words, they’re taking out $500 from their RRIF and that reduces their GIS by 50%. You can see a significant decrease in income. That’s the feature of RRSPs that many people are not aware of when they’re told by their bank or whomever to put money in. If that person’s going to get GIS, there’s a big claw-back on the other end.
In terms of practical next steps of how you can use the TFSA, number one would be to actually look at adding a Group TFSA option to your workplace retirement plan, if you have one. Most workplace retirement plans are built around group RRSPs or pension plans. Very, very few use the Group TFSA. That’s starting to change slowly right now, but in our view, it’s changing too slowly, and it’d be great if more employers added this as an option.
If you yourself are making less than $50,000 a year, particularly if you don’t have a lot in savings or have zero in savings, and don’t have a pension plan, strongly consider using the TFSA as your primary retirement savings vehicle. Don’t top up an RRSP, but use the TFSA as your primary vehicle, because it is a very effective retirement savings vehicle to preserve OAS and also to have income tax free in retirement.
If you earn more than $50,000 a year, there’s still a use for the TFSA, but it’s more of a top-up. You know, it might be a supplement to your RRSP savings and an additional strategy of over and above your pension or RRSP.
Idea #3: Keep fees low
Our third good idea is about fees. Frankly, in Canada, we pay some of the highest fees in the world. Canadian investors, particularly those that are middle-income and below have been getting ripped off for a long time. This is one of the ideas in finance retirement. There’s a lot of complex stuff here, but keeping fees low is a pretty easy to understand idea. It’s something that everybody can work on, to try and get more bang for their buck in their savings.
One thing that not a lot of people know is that Canada is a world leader in high fees. We have some of the highest fees in the world. This has been shown by many studies. We are well above the US, well above the UK, well above Australia and other kind of comparable nations. Two main reasons for this: one, we don’t have that much competition in financial services. It’s dominated by a small group of banks, large banks, and insurance companies. The second reason is our consumer financial protection is actually comparatively weak. We don’t require a lot in terms of fee disclosure.
Many people do not understand that they pay anything in fees, or even what those fees are. Again, that’s starting to change, but it’s happening quite incrementally. So there is a role for employers and individuals getting educated on how much they’re paying and what the impact of that is on their future retirement income.
There’s a very helpful tool if you want to understand the impact of fees. A gentleman named Larry Bates, who is a former banker, left the banking sector and started to write books about how people can better protect themselves when investing their money. Larry is very passionate about lowering fees and he’s built a calculator, which he calls the T-Rex Score. This shows how much of your savings, and how much of the investment gains you earn are going to fees.
I’ve used his calculator here to demonstrate somebody who’s investing $100,000 at a 5% rate of return, which is considered a reasonable return. This person is paying annual fees of 2%, which is the Canadian average over a 25-year span. In this example, the fees are actually eating up more than half of the total investment gains. So, the T-Rex Score is 46%, which is basically what you get to keep. The rest goes to the financial institution in fees. That’s a really significant amount of money.
If you look at a typical person paying high fees, or typical Canadian fees, versus paying lower fees, it can mean retiring five years earlier, or a significant amount more in retirement income. You can see this looks like small differences, 2% versus 1% versus 0.6%, but they really add up over time.
What can you do from a fee perspective? First of all, it’s important to understand how much you’re paying. If the group you’re working with doesn’t disclose that to you, you have a right to know. It may not be required by law, but if they don’t want to tell you that may raise some questions about whether you want to work with them.
There are also opportunities to seek out lower-fee providers for your employees’ group savings plan. As smaller employers tend to pay much higher fees, there is more competition that’s happening now. That’s a good thing to dig into. Work with your provider to figure out what you’re paying today and just see if there are opportunities to lower that, either with that provider or by shifting providers to somebody else so that your employees get a better deal.
This is especially important now, because many people expect returns in the future to be lower than they have been in the past. When returns are a bit lower, the cost of high fees is even more significant. In the same way that people get a real benefit from compound interest on their investments, that’s a positive thing, there’s also a negative, what some people call the tyranny of negative compounding. The longer you have money invested, the more of a penalty you pay for having higher fees.
The other thing is for your own RRSPs and TFSAs, find out how much you’re paying. Add it up, what does that cost you in dollar amounts? How much is it likely to cost you over a longer period of time? Use Larry’s calculator and think – “Am I actually getting value here?”
Many people would argue, well you’re getting advice, you’re not just getting the investment product, you’re also getting advice. But is it good advice? And is it actually advice that’s aligned to your interests, or is it really somebody who is there to try and sell you products?
Idea #4: Provide education on accessing government benefits
Our fourth idea is about providing education in accessing government benefits. I think it’s fair to say there are a lot of government benefits out there. Almost everybody is going to be able to access some government benefits. Very few people understand these programs. So, there’s a lot of value, you could argue, this is one of the best bangs for the buck you can get as employer, because you’re helping your employees access free money.
I’ll talk about a couple of different kinds of government benefits. The first is government retirement benefits. A lot of people talk about our retirement system in terms of pillars. The first pillar is really government benefits. This includes Canada Pension Plan, Old Age Security, and the Guaranteed Income Supplement. For a middle-income Canadians, these are going to constitute probably 50% or more of somebody’s income in retirement. So they’re really, really important.
Normally, almost nobody understands these programs. There are choices you can make with respect to these programs to help you get more money out of them. A lot of people don’t understand that. Helping people to understand that makes a big difference.
As an employer, you pay into CPP. You are actually providing a pension plan to your employees through CPP. Because the CPP is being enhanced, your contributions are going up. So, it would make sense for you to actually educate your employees on the benefit you are providing by paying into their CPP. That’s not a tax, actually, you’re mandated to do it, but it’s a benefit to your employees that they’re going to receive. You can think about that as part of your total comp and you’re going to be doing a service to employees as well in educating them about what they’re going to get in future.
We don’t have a good understanding as a population of these programs, despite their importance. Many people think the CPP is not sustainable. Actually the Chief Actuary of Canada says it’s sustainable for the next 75 years. It’s considered to be one of the most sustainable and well-run public pension plans in the world. Many Canadians don’t understand they can wait later to take their CPP and OAS. And that the longer they wait, the more they get in annual benefits. You can wait as long as age 70. Many experts say that waiting is the best strategy for many people, yet only 1% of Canadians do this. Helping people understand that, especially as they’re approaching retirement, you can actually get over a $100,000 more, probably, depending on who you are by waiting. So it’s worth at least having people consider that.
Most people don’t understand how much they’re going to get from these programs. It’s pretty hard to do retirement planning if you don’t know where a significant chunk of your income is going to come from. That can also reduce financial stress, by the way, if people feel actually that there are going to be some guaranteed benefits they are going to get from the government. They may feel a little bit better, that they at least have that base.
Few people understand the interaction between these vehicles. As we talked about earlier, the interaction, for example, between the Guaranteed Income Supplement and TFSAs, and OAS and TFSAs.
So what can you do to help?
We talked about retirement benefits. There are also benefits people can access right now. There are many programs, some of them are temporary with COVID. Some of them are more permanent programs that many of your employees could access.
The non-for-profit Prosper Canada, you may be familiar with, has built a very, very helpful tool called the Financial Relief Navigator. This is a tool that anybody can access for free, to help them understand what benefits they might be entitled to. It’s got some tools for short-term COVID related benefits. It’s also got some tools for longer-term benefits, and this is a tool you or your employees can use for free by one of Canada’s leading organizations when it comes to financial inclusion and financial health. So I’d encouraged people to use that.
Educational savings is a key thing that people need some help with. And one government benefit is the Canada Learning Bond, which is really for modest income families to help save for their kids’ education. Those families are eligible for a grant of up to $2,000 per child. There are over a million children in Canada that are eligible, but don’t get this grant because people don’t apply, they’re not aware of the program. So I want to make you aware of a resource called SmartSaver, which is a not-for-profit that we work with sometimes. They are devoted to helping people access these grants and to open RESPs. They have a very simple-to-use digital tool which allows people to open an RESP very easily with a range of financial institutions of their choice.
There’s no fee, there’s no minimum contribution, and you can get the Canada Learning Bond. So, this is a good thing to incorporate into your financial education at work, because again, it’s free money from the government, and it helps people obviously save for their kids’ education, which is an extremely important thing for them and their family.
Don’t ignore government benefits when you’re thinking about your workplace savings program. It’s not just about the savings you offer, but it’s also educating people on those government benefits. Look at ways to provide education on the benefits people can access now, particularly in light of COVID, and temporary benefits that people may be able to access, but don’t understand.
Also for yourself or your employees, think about the potential benefits of deferring Canada Pension Plan or Old Age Security, do the math yourself. There are a number of calculators out there to help you with that, or talk to somebody about whether that might make sense for you.
Idea #5: Make savings automatic
So, our fifth idea is a very simple one, but it’s a powerful one. It’s about making savings automatic. As Nora said, many people defer savings. They don’t like to deal with it. It’s not necessarily a fun thing to do. If you can make it automatic, that’s a very powerful way to increase your, or your employees’ financial health.
A few years ago, a gentleman named Richard Thaler won the Nobel prize for economics. A lot of his work has been around developing behavioural nudges to help people improve their financial lives. He said that basically the best application we’ve had so far of all the lessons from Behavioural Economics, which have taught us so much about human nature, have been in improving retirement savings.
So there are proven interventions that are backed up by very robust science and evidence that we can apply in the workplace today to help people get better outcomes. One example of this is a technique called Automatic Escalation. Richard Thaler, who invented this technique, along with some other researchers, call it Save More Tomorrow. And that’s really what it is. It’s pre-committing to automatically increasing your savings over time.
Many people are starting from zero or starting from a low amount. They can’t afford to save the 10% or 15% of their pay that they would eventually need to save to be retirement-ready. Automatic Escalation allows them to get started with a lower amount and then automatically increase those amounts over time. This technique has been very, very successful in the US, the UK and other jurisdictions, and in getting people to increase their savings rate across the income spectrum.
Modest-income, middle-income, upper-income, it’s worked. People at the end of the day have been very happy that it’s helping them. Sometimes people think this is kind of like negative option billing, but actually it’s money that you’re saving for yourself and your family. And people appreciate the help in doing that.
I’ll show you an example of what this actually looks like within a plan. This is within our system about how this looks, but this is an example of somebody that, you know, we’re calculating should be, probably saving around $900 a month to be retirement-ready. But, maybe they’ve got student loans, they’ve got other near-term challenges. They can only afford $300. So what we’re doing here is we’re putting them on an automatic schedule to increase every year that amount until they kind of catch up to that level. And then we’re kind of keeping pace with inflation after that. It happens automatically, you can opt out of it at any time. There’s nothing you need to do. That way we’re making it automatic. We’d love to see more of this adopted across workplace savings plans in Canada, because we’re behind a lot of these other jurisdictions.
What can you do to use automatic savings in the workplace? First is payroll deduction, which Nora talked about. It’s a very, very powerful tool. Just not seeing the money is super helpful to people. If you facilitate payroll deduction, even if it’s just voluntary savings, that can be very helpful. Make signing up easy. The more friction you can take out in signing up for a retirement plan, which people find very overwhelming to begin with, the easier it’s going to be.
You can minimize the number of choices. Generally, we find that the fewer choices you make someone select, the better the outcome and the more likely they are to sign up. If you have 40 different investment choices and you don’t know anything about investments, you just often get overwhelmed. You may decide the choices are too hard, you’re not going decide. Instead, if as an employer you say, “You know what? We have a default for somebody who’s your age, and this is what most people choose,” that makes it easier for your employees. So, try and streamline that. Then see if you can use something like Automatic Escalation to help you or your employees save more tomorrow.
I did want to mention a project that we’re collaborating on with Maytree and a number of other foundations and organizations in the community sector. This is really an effort to bring together a lot of these ideas into a portable plan, that’s accessible to a lot of the groups Nora mentioned, that had been left out of the traditional retirement savings system.
These include small- and medium-sized employers, small- and medium-sized not-for-profits, small businesses, freelance workers, and people in the gig economy. We are trying to bring together a program that combines automatic savings, low fees, education on government benefits and the portability to suit the modern economy.
We’re going to be launching this in the first quarter of 2021. There are probably some folks on this webinar that are already signed up. We have one hundred employers from across the country who are signed up for this already. If you’re interested in learning more, you can contact us through the website that’s listed here and find out more about how you can be part of this program beginning in 2021.
So just to recap our five good ideas: Nora talked about the strong business case, that’s actually behind improving workplace-based financial health. We covered the advantages of TFSAs particularly for modest-income earners. We talked about the impact of fees and how that can mean hundreds of thousands of dollars more retirement income, if you’re able to use lower fees for your employees. We talked about the importance of understanding government benefits, both in retirement and today, and how that’s essentially free money that you can generate for you and your employees if you better understand these programs. And finally, we talked about the power of automatic savings, harnessing some of the insights from Behavioural Economics to help people save more tomorrow, to help them save more automatically and to overcome some of the features of human nature that make it very difficult for us to save for the future.
We’ve listed some resources here. These are available on the Maytree website. There are links to many of the things that we’ve mentioned in our presentation. I’ll also give a shout-out to the work that the Ontario Securities Commission has done in providing a really high-quality set of financial education resources on a broad range of topics from budgeting and lots of other things we didn’t cover today. So that’s a great resource for you and your employees. And with that, that ends our presentation, and we’ll look forward to the Q&A
Questions and answers
Elizabeth: Well, I’ll be the first to say that was terrific. That was just great. Alex and Nora, that was incredibly focused and accessible in terms of getting at things that many of us are really afraid to have conversations about, because it’s complex and it makes us nervous. So thank you for taking us through that. I thought it was a powerful business case. As you were finishing the business case, the first question came up from the audience. So we’re going to start there. And I think it’s an interesting question. Are we admitting that Canadians don’t have the willpower to save for retirement and we need to be compelled to do so through interventions by employers? There’s a second part to this, but we’ll start there.
Alex: Yeah, I can start and Nora can to jump in. I think there’s a lot of ground in between forced savings and leaving it all to the individual. It doesn’t have to be one or the other. If you look at some of the behavioral interventions, these are actually nudges to help people do what they want to do. If you actually ask Canadians what they want, many of them want to retire. Many of them think retirement savings are important. It’s not like you’re asking people to do something against their will, but they’re asking for help. And making it easier is really what this is about at the end of the day. I don’t think there are that many people out there who would say: “I’m looking to take a decrease in my standard of living in retirement.” But they need help in planning retirement. Employers can play an important role in providing that assistance.
Nora: I also think in terms of that notion of helping. It’s not so much that they need to be compelled. As we mentioned several times, the industry can be a little bit confusing. Financial stuff in general, not just saving for retirement, but just financial stuff in general can be really confusing. And we all just have so much going on. In one slide I talked about all the reasons to put off thinking about retirement savings. So instead of thinking that the only way people will save for retirement is if they’re compelled through their employer, think: this is something really important. People care about it. As Alex was saying, they want to do it. As an employer, you’re in a position to help in a unique way. Why not take advantage of that versus thinking about it as they just won’t do it unless they’re compelled to? I mean, I hope that’s not true.
Elizabeth: No, and you’re not treating them as a child. You’re actually just helping them do something that’s very complicated without supports around to make it happen. The second part is more technical. Secondly, do employers take responsibility for the rate of returns that employees get through direct intervention of employer? How do you navigate that?
Alex: Yeah, that’s a very interesting question, right? I think that in the past, we’ve put a lot of responsibility on employers for what you might call the operation of retirement savings and pension plans. So, in a world where employees stayed with the same employer for 40 years or 50 years, their whole career, you know, it made sense for the employer to take on responsibility for that whole life cycle. In the new world of work where people are changing jobs more often, we need to make it easier for employers. So we need to have structures where the employer doesn’t have to do all that much. It’d be great if the employer matched, it’d be great if the employer provided education, but they need a structure, especially if they’re smaller and midsize, where they can access something they can trust where they don’t have to choose all of the investments, monitor all the investments, take responsibility for that. Ideally, they don’t have liability for that kind of thing.
You’ve got a provider that is trustworthy, that has that kind of liability. The employee also has some of that liability too, by making choices. But you have to make the choices easy and you have to have smart defaults. Larger employers may want to take on that liability. They may want to have their own plan. And that’s great. And they’ve always had the capacity to do that, but for small and medium and for others, we need to make it easier.
Elizabeth: I’m looking at the time we said that we were going to wrap this up at 1:45, but the questions are coming in. So if you two are able to stay on the line a bit longer and engage in some Q&A, this recording will be available to others. And those of you in the audience who want to stay with us, we have it cut off before two o’clock. But we’re going to go a little bit longer, because there’s some great questions coming in, if that’s okay. That’s good? Excellent.
This question from Mark. My question is as an employer. If I set up a TFSA plan with the intention that it’s used for retirement, staff will have the option of pulling the money out immediately, which defeats the purpose. I understand this is part of a bigger picture with staff living in debt. But I just want to know if you’ve had any advice to ensure the TFSA was used for retirement versus current cash needs for staff. As for many of our staff, they would do better having a TFSA. I realized they can pull from an RRSP, but there is a penalty, there’s disincentive. How do you create a disincentive for withdrawing from a TFSA?
Alex: I might reframe that question a little bit, right? I mean, at the end of the day, I think the goal is we’re trying to improve the financial security of the workforce, the financial health of the workforce. And we know that there’s a strong link between the short term and long term. So, I would argue that the ability to withdraw penalty-free, tax-free from the TFSA is a feature, not a bug when it comes to retirement savings. We know that, actually, if someone is modest income and they know they’re not going to have access to money and they know that there’s going to be a penalty if they withdraw, they’re much less likely to save in the first place, because they’re concerned about that money being locked up. So there’s been a lot of studies since to show if you can help people build an emergency savings fund, that’s going to make them more likely to save for retirement with confidence.
There are ways of emphasizing retirement savings. You can’t lock up a TFSA, but you can communicate it as a retirement savings vehicle. You can make it the investment options, retirement-oriented, you can provide retirement education. You can talk about the value of compounding and leaving the money in. But I would discourage folks from having the attitude that any withdrawal is a bad thing. It actually might mean that those savings are helping somebody address the short-term need, which actually is helping you as an employer to increase the financial security of the workforce.
Elizabeth: Well, it’s recognizing that our financial security and insecurity may go up and down during our lifetime. And so it’s about that protection.
Elizabeth: And leaving it to their discretion. Nora?
Nora: I think it’s also about education. So helping people understand, as you said, our financial security goes up and down. What is a good enough reason to interrupt my retirement savings and take this money out of a TFSA? And then it’s trusting your employees. We don’t want to be sort of parental in this respect. We want to educate people. So we want them to be informed and then, you know, their financial decisions are their own, whether you’re withdrawing from an RRSP or a TFSA, you have to own that decision. But we’re encouraging, providing information for people to understand why it may not be the best idea to take it out of the TFSA for this one thing, but maybe it is.
Elizabeth: This question may be answered in the resources you’ve provided, but it might be a quick answer as well. From Brynn: Is there a resource you would suggest that explains the income threshold at which RRSPs become beneficial for people? Helpful to know that you’ve pegged it at around 50,000.
Alex: You know, that’s a somewhat debated question. I think the things that drive it really are a couple of things. One, is somebody likely to get GIS? That’s hard to predict when somebody is young, because you don’t know what their income trajectory is going to be. As they get older, about a third of Canadians get GIS. So it’s quite a few people. So if someone’s approaching retirement and they don’t have really much in the way of savings, it’s generally better to go in TFSA.
The other thing that drives it is tax rates. So if your tax rates are likely to be much lower in retirement, then RRSP tends to be quite a bit better. So during higher income years, your tax rates are going to be a little bit higher, and then that’s likely to drop in retirement. I think the resource we’ve shared, that’s probably most relevant to this is John Stapleton’s work, but you can also read things by people like Rob Carrick, who’s the Personal Finance Columnist for the Globe and Mail, who’s written quite a lot about TFSAs and where they’re appropriate.
Elizabeth: Great, thank you. The next question is from Patricia. For very small organizations, health insurance is often only offered if you have three or more employees. Are there similar restrictions for payroll deduction RRSP and TFSA plans? Is there a minimum?
Nora do you answer that?
Nora: Yes, there can be. Not to brag, but we don’t have that. We don’t have restriction on that, but there can be, it depends on who the provider is that you’re talking to is. Sometimes they have minimum thresholds and things like that. It’s again, very similar to that health space where it’s taken a long time to even get down to three. It used to be much higher than that. So hopefully that changes.
Elizabeth: Great. Here’s an interesting question from Isaac, very time sensitive. How do you approach adopting an automatic payroll deduction when employees may be especially struggling currently due to the pandemic? And again, our situation in life changes over time. How do you manage that?
Alex: Well, you know, I think it’s good to have conversations with your employees about this stuff. I mean, it’s a tough issue to talk about sometimes, but it can also be an opportunity to have a dialogue with your employees and show that you care about their financial lives. So, you know, it could be, “hey, we’re thinking about putting this in, but want to check with you about the timing, because we know people are struggling right now and have different needs.” Not to go back to the TFSA again, but that is one of the advantage of the TFSA. If you have payroll deduction for TFSA and people need the money, they can access it. And maybe during COVID, you want to change your messaging a little bit. So it’s less about, “you need to keep this money in for retirement a little bit,” but more “we understand people are struggling, and that’s why we want to use a vehicle that’s a little bit liquid and accessible to people.”
Elizabeth: Okay, here’s a question. This I think probably speaks to a lot of the people in our audience. I’m thinking specifically for small non-profits. What is the cost to the employer for providing retirement options? Like the ones you’ve described, what will it cost the employer?
Alex: Nora do you want to speak to that?
Nora: It depends on the plan you go with. The way that most or many plans are structured, those fees actually go to the employee and not the employer. So one of the things that Alex talked about was looking for those low fees. And often the reason that that becomes difficult to know for a workplace plan is because a lot of the cost is baked into the investment fees, and so it hits the employees. There are plans, you know, the marketplace is changing again, and there are plans emerging where the employer can offset some of those costs through subscription fees per employee, in exchange for a lower fee. So I guess the sort of clear answer is it can range from, it can cost the employer nothing, but that cost is going to be incurred by the employee. Or you can look for plans that you, as an employer, you can offset those costs for your employees in exchange for better rates, which again can lead to more effective outcomes.
Alex: One way to think about it, you want to make sure that if you’re introducing your program, it’s improving the quality of your compensation package, so the effectiveness in that package in attracting and retaining people, and then ensuring a productive, engaged workforce. So, I’d encourage you to think about it as part of total compensation, and maybe it’s even a substitute for salary. There’ve been interesting polls. There’s one done by HOOP Huq recently to say that most Canadians, over 75%, would be prepared to accept a lower salary in exchange for a high quality retirement plan. And your employees may be in that 75%. You need to make sure it’s high quality, but your biggest cost is likely to be any matching contributions you’re going to make. There are administrative costs that are sometimes associated with these things, but the big cost is if you want to match 3, 4, 5%. That obviously makes your plan more effective, but that would be the main cost.
Elizabeth: I’m particularly taken personally with your idea number four, which is education on government benefits through the workplace. Because I think that there is an extraordinary number of government benefits that get left on the table, that people never claim, or take advantage of. Do you have examples of good practices of how to deliver that kind of education in the workplace? Does that become an HR function? How do you provide that education in a way that is respectful, that respects the privacy of the employees, but also helps to connect them. Like, I think that the Navigator, the benefit screen tools that Prosper Canada has developed, has been just terrific in that way. And so how do we begin to put that in place, operationalize that, in our workplace?
Alex: Nora, do you want to start up?
Nora: I think you need to know your workplace, and, presumably, you know your workplace best. So there could be different ways. If you have an HR department that is seen as a trusted resource and a source of confidentiality, I think it’s great to come from them. I mean, obviously I’m an HR, so I’m a little biased, but I think it’s great to come from them because they’re often already seen as the ones who care for these kinds of things when it comes to your employees. And they’re trusted to provide this kind of information.
If you either don’t have an HR department at all, or there are other reasons why it may not make sense to have this information come through them, I think actually reaching out to organizations like Prosper Canada and SmartSAVER and all of those organizations, and Alex can speak to this more. They’ve been more than happy to share that. And sometimes having that third party come in and share that information makes it feel just far enough away that, if you need it, you don’t feel like you’re having to expose yourself to your employer in a way that you may not be comfortable with.
So again, it comes back to the culture of your organization and how they would feel about you. You know, what is their relationship like with the leadership in the HR department before you? I have this mantra that you don’t want your message to be lost in its delivery. So it is critical. I love that question. It’s critical that you think about the best possible way to get that education, that information, out to your employees, versus wanting it to come from one particular place over another. Alex, do you want to add anything?
Alex: I know this is an exciting area, right? It’s a new area. It hasn’t really been done in the workplace. But as government programs become more complex and more important in our lives, it’s going to become more of an opportunity to help people. So I don’t think we have a clear idea of exactly how to do it. Our philosophy has been, let’s work with experts that specialize in this. So for example, SmartSAVER, all they do is help people get the Canada Learning Bond and open RESPs, not a simple thing, actually. And they had developed really easy tools. So, you know, for Common Good, we partnered with them. Ultimately, we can provide education on government retirement benefits because that’s the area that we know, but we don’t know education savings, and ultimately it would be great if providers, if this became kind of a standard thing that your provider did, they’re just providing that education. It’s turnkey for the employer. The employer doesn’t have to become an expert on GIS. I mean, it’s pretty complicated, they’re busy, and they can just look to their providers to help with that stuff.
Elizabeth: It’s like we have employee assistance programs, EAPs, that provide all kinds of supports and advice and that type of thing. And I remember at the beginning of the pandemic, ours sent us a message saying, if people need online counselling or other things, this should be an element like that, where you can just easily access it and it gets delivered. And it’s a third party. So there’s not that awkwardness of my employer judging whether or not I need a benefit.
Alex: The other idea is tax filing, tax filing clinics. There are groups out there that provide free tax filing clinics. Some of them are doing that through the workplace. There could be more of that. That’s a fantastic opportunity because so many government benefits are linked to filing taxes. Many Canadians don’t know exactly how to get the most when they’re filing, because again, taxes are not easy, and that’s something people don’t want to talk about. So that could also become a form of workplace benefit.
Elizabeth: I think we’re going to leave it there. As you were talking, I learned a lot today. I learned every time I listened to you guys, so thank you. And I think my sixth, my personal, good idea is I need to just do the math. I need to sit down and do the math. What is it actually going to calculate out? Because I think I’m typical: I think about the savings in the abstract, but do I actually have the hard numbers in front of me? And there’s this weird phobia I think for getting to do the numbers and figure out what am I losing to the fees, what’s projected, all of those things. And it’s do the math anyway. Sorry, Alex, do you want a final word?
Alex: I was just going to say, I think it’s a great suggestion, Elizabeth, right? For everybody, I mean, if you take the ideas we talked about, each one of them could be worth tens or hundreds of thousands of dollars to people. So if you think about the value you could get from that hour or two you spend just starting to do the math or taking that next step, it’s well worth it. That might be one of the best hours you spend for your own financial health.
Elizabeth: And most of us have a bit of time right now in quarantine. Nora, do you want a final word?
Nora: No, thank you again so much. This is really fun.
Elizabeth: All right, well, I want to thank both of you for a great session, a good conversation, great answers to the questions, and just tremendous content. Thank you to our online audience for joining us today. As I said, this is going to be posted on our website. Thank you for taking the time. Everyone is busy and I know everyone is kind of zoomed out. So taking the time to join the Zoom, we appreciate it. If you haven’t done so already, please sign up for our Five Good Ideas newsletter at www.maytree.com. That way you will find out when our next session will be and who our next guest speaker will be. And it’s in the chat room right now. Thank you Aretha. And to everyone, have a wonderful afternoon. And thank you for joining us.
Nora Beatty is the Director of People Operations at Common Wealth. She is passionate about people and connecting innovative people strategies to better business outcomes. Nora’s journey in HR started at Oracle, and since then she has had the opportunity to join some of the most exciting tech companies and start-ups in the city. Before joining Common Wealth, Nora built out and led the People function at Hubdoc, and supported the deal team during the acquisition by Xero. Post-acquisition, Nora took on a broader operations role, supporting some of the GTM initiatives, while also leading the People function.
Alex Mazer is a Founding Partner of Common Wealth, a mission-driven business that works with associations, unions, and groups of employers to provide value-for-money, collective retirement plans that combine user-friendly technology, digital retirement planning, low-cost investments, guaranteed lifetime income, and a fiduciary duty to members. The company’s focus is on constituencies that are uncovered or under-served by traditional employer-sponsored retirement arrangements.
Before co-founding Common Wealth, Alex served as a management consultant at McKinsey & Company and in various public service roles. As Director of Policy to the Ontario Minister of Finance during the global financial crisis, Alex helped deliver major reforms to Ontario’s retirement system, including laying the groundwork for the enhancement of the Canada Pension Plan. He is a graduate of McMaster University (as a Loran Scholar), the University of Toronto, and Harvard Law School (where he served as an editor on the Harvard Law Review).