Why DC plan sponsors still aren't ready for decumulation

According to several Canadian defined contribution (DC) plans experts, DC plans were never designed to get members through retirement because they were built to accumulate assets during working years.

As a result, that gap is now catching up with plan sponsors as the baby boomer generation hits its retirement peak.

Why education matters for retirement planning

Todd Peryk, a consultant at HUB International, sees the decumulation gap as a structural inheritance from the industry's shift away from defined benefit plans. He noted how DC platforms were designed for the savings phase, not to guide members through retirement income and that mismatch remains the core problem.

But he also argued the industry may be focused on the wrong priority.

“The bigger issue that needs to be addressed is that Canadians aren't saving enough,” said Peryk. “And I think when you look at the workplace savings landscape, less than 50 per cent of employers have a company sponsored retirement plan. To me that's a bigger issue. Getting the education out there and helping companies understand the importance of helping their employees save for retirement is the most fundamental aspect of who we are as an industry. Decumulation is great, don't get me wrong but we also need to get people financially stable to retirement.”

The shift from defined benefit to defined contribution plans has also handed responsibility for retirement income to individual members - many of whom lack the financial literacy to manage a lump sum over a 25- or 30-year drawdown.

Why plan sponsors aren’t ready for decumulation

Danielle Ferrone, a consultant at People Corporation said accumulation is more straightforward because everyone shares the same goal of saving as much as possible, and plan defaults like auto enrolment and target date funds do much of the heavy lifting.

Decumulation in and of itself is a different problem because “it looks different for everyone,” she said.

"You’re starting at different ages with different nest eggs or asset values. You have different expectations of what retirement looks like so all that variability is really hard for a plan sponsor to administer," she said, adding that some employers have simply opted out of the issue altogether.

"Part of the shift to DC is the sponsors have said, ‘I don't want to bear that responsibility’," said Sebastien Betermier, executive director at International Centre for Pension Management. As a result, plans downsized their investment teams, outsourced administration, and left members to figure out retirement income on their own.

He also acknowledged the annuity puzzle, noting that annuities exist and members can buy them. But in countries like Canada, they largely don't, which makes sponsors cautious about building products around a tool plan members have already rejected on their own.

He also noted the product landscape was barren for decades. Tax code changes made annuities within pension plans infeasible for roughly 30 years, and while VPLAs have now been reopened by government, the ecosystem — consultants, administrators, sponsors — needs time to absorb them.

"Pension plans don't tend to work at a rapid speed. They take their time," he said. “You need the ecosystem to switch to a new equilibrium, which is not that easy either. For all these reasons, we have a basic solution which is you have your own wealth, you figure it out and people have the choice. But given that we know that people make mistakes or aren’t necessarily equipped to make complex financial decisions, especially if they haven't been trained in doing it well, then we know that there is a lot of money left on the table.”

Inertia is a key obstacle for decumulation

Even after raising decumulation in client meetings, Peryk said the topic remains an afterthought for most sponsors, who view the post-employment phase as prohibitively complex to take on.

“Most sponsors are doing nothing,” said Peryk. “There's not a lot of strategies that are being put in place. I think some sponsors are looking at potential third party decumulation products, but even then, there’s not a lot of robust market options out there. A lot of times, if we're seeing a decumulation strategy built into plans, it's really allowing the retirees to leave their assets in the plan so they still maintain great fee and pricing investment options and then they just work on a drawdown variable payment schedule.”

Peryk believes the risk profile of decumulation is itself a barrier to adoption particularly as sponsors who step into the post-retirement space are taking on exposure to longevity risk. There’s also the question of whether that creates liability as sequence-of-returns risk adds another layer, he said.

If markets underperform during a member's early drawdown years, the damage to their retirement income can be severe and irreversible. Those concerns are enough to make most sponsors hesitant, he noted. Many still see their core obligation as getting employees to retirement in sound financial shape, with the decisions beyond that point falling to the individual member.

Still, Ferrone acknowledged plan sponsors are trying, with support from record keepers, insurance carriers, and consultants. Much of the recent momentum traces back to CAPSA's emphasis on education and access to advice.

The most common interventions she's seeing are age-specific education sessions for members 55 and older, covering topics like budgeting, CPP and OAS expectations, and the application process for government benefits, which many members don't realize requires action on their part. Those group sessions are then followed up with one-on-one advice, which Ferrone considers essential given how different each member's retirement picture looks.

When asked why having a decumulation strategy ultimately matters, Ferrone underscored delayed retirements carry real costs for employers, highlighting up to $50,000 per year per employee in higher salaries, benefits, and blocked advancement opportunities.

But the member-side problem is just as acute. Unlike DB pensioners who receive guaranteed income, DC members must convert a lump sum into a retirement income stream on their own, and most aren't equipped for it. Ferrone noted that fewer than 10 per cent of Canadians use annuities, which would provide guaranteed lifetime income. Instead, most retirees fall back on self-managed drawdown accounts but they're also withdrawing less.

"More commonly, they're taking the minimum amount required for withdrawal and they're doing it at earlier ages," she said, adding the behaviour points to deep anxiety about outliving savings.

She acknowledged that scale also compounds the challenge, particularly as on-plan RRIF and LIFF options require critical mass to run efficiently, putting them out of reach for small and mid-sized employers. And while new products like variable payment life annuities (VPLAs) are emerging, availability remains limited.

Fees make the gap worse, noted Ferrone as members who leave their group plan lose access to institutional pricing, and over a long drawdown, the difference can be significant.

"Fees are important when you’re accumulating and they’re equally as important when you’re decumulating,” she said. “For example, if you have a $700,000 nest egg and you're withdrawing $50,000 a year, the difference between 0.9 per cent fees versus 2.2 per cent fees would actually roughly add up to five years of additional income and 25 per cent of retirement income," she said.

What plan sponsors can do to include decumulation in plans

She drew a clear line between what sponsors can do now and what requires longer runways. The quick wins centre on education and advice promotion like low-cost interventions that can be delivered digitally or through something as simple as a lunchroom poster with a QR code linking to advisory sessions.

She suggests sponsors build an annual education strategy that includes advice promotion as a standing component and noted that one-on-one sessions work best when members can bring a spouse to address the full household picture.

According to Betermier, one of the most accessible near-term solutions plan sponsors can go to are VPLAs. While provincial adoption is still uneven, he believes the mechanics are sound. His preferred model is a default enrolment structure where members are automatically allocated 20 or 30 per cent of their wealth into the VPLA pool, with full freedom to adjust up, down, or out entirely.

"There's no mandating here but that can already push you a long way because now you can hedge some of your longevity risk," he said. “You don't have to worry about it. You're going to get a managed decumulation for you and then you can keep the rest as your more flexible account. It already segments the more flexible piece versus the more managed piece. If we can do it right, I think it would be a huge improvement.”

Still, Peryk underscored that progress on decumulation products will require the industry - particularly insurance carriers, who hold the bulk of group retirement assets in Canada - to meet plan sponsors halfway. While consultants have been pushing the conversation, most carriers have been slow to act without clear demand.

He also believes government intervention could also play a critical role.

“I think part of the responsibility in this is to ensure that our governments provide some sort of legislation that there has to be deaccumulation options built within to the landscape because it is important," he said. "We don't want to see people run out of money and not have an understanding on how to properly structure their retirement once they get to that stage.”