Following the ebbs and flows of the Baby Boomer generation (born between 1947-1964) can be an interesting and insightful experience whether you are of this generational slice of the workforce pie or not. Baby Boomers continue to be studied, surveyed, and analyzed for their preferences, buying habits, and saving patterns. Regardless of the industry, the behaviours of this demographic makeup of our society simply can't be overlooked and particularly not with 10,000 North American Boomers celebrating their 65th birthday every day for the next 20 years. (Source: Pew Research Center).
In the pension and benefits world, the life event milestones of Boomers demand greater attention and strategic thinking. More focus is being placed on what benefits coverage will be appropriate as well as how to best to draw down on investment income in their post workforce participation world. With decumulation, the question becomes not whether a person saved enough for retirement, but how best to draw down regular income post workforce participation and not run out of money before death. It comes down to balancing acceptable risk versus a sustainable withdrawal rate.
There are various methods to help people draw down on their investment assets. Looking at the cost, risk and flexibility as well as understanding the person's personal preferences related to their finances is important. As this topic heats up, some questions to consider when planning a withdrawal from workforce participation include:
1) Are there any debts that should be paid off so there are no payments taken from retirement income?
2) How much if any of a "rainy day" emergency fund is needed?
3) Are there any funds to be set aside for specific bequests?
4) What other assets should be factored in (e.g. house)?
5) What type of expenses exist and how should they be broken down based on essential (necessary for survival), basic (ability to travel south each winter) and discretionary (like make charitable donations)?
When addressing the decumulation strategy, thought should also be given to one's 1) private pension, 2) government sponsored benefits, 3) any continued workforce participation, 4) taxation, 5) investment costs, interest rates and the rollercoaster ride given by stock markets.
There are several decumulation methods and each varies when it comes to cost, risk, and flexibility associated with them. They include:
1) working with a financial advisor
2) lifetime annuity or term annuity
3) draw down pension and/or target date funds with a decumulation feature
4) home equity release
5) Shifting investments to TFSAs
6) RRSP "meltdown" - making RRSP withdrawals earlier in life if you'll face tax at a lower rate than anticipated in the year of your death.
Increasingly, approaches to addressing decumulation will take center stage where accumulation discussions previously dominated. There is much to unbundle and address on the decumulation topic particularly as it pertains to what can be withdrawn on a tax-free basis and the different age limitations related to annuitizing or converting assets. We invite you to contact us to discuss what decumulation strategies would work best for your corporate pension plan arrangement as well as best practices related to educating your plan members.
We're here to help so you can focus on what you do best.
How many people do you know who don't think they have to pay out of pocket for hearing aids or home care hospital stays? Perhaps more than you can imagine as
according to a 2014 Canadian Health Index, 89% of Canadians believe they are fully covered for all costs associated with hospital stays and psychiatric treatment.
In addition, 4 out of 5 Canadians don't expect to pay out of pocket for nursing home/long-term care resident, hearing aids, and home care. Confusion exists because there is complementary coverage provided by both government and employer health plans, yet some common necessary medical services are not fully covered.
To help address the confusion, a series of healthcare guides organized by province and address coverage options and personal costs were developed. These guides include information pertaining to Disability, Home Care, Long Term Care, Palliative Care, Prescription Drugs, and Travel Emergency Medical.
A 2014 study prepared by Fraser Institute found that because Canadians may not be billed directly for medical services, they do pay for some of it via Canada's tax system. This scenario also creates a dampened awareness and appreciation for the true costs born by Canadians because there is no dedicated health insurance tax.
The Fraser report revealed that in 2014, a typical Canadian family with two parents and two children paid to $11,786 for public health care in insurance. The cost related directly to the size of the family. The report also showed that in the last decade, public health care insurance for the average Canadian family has increased 53% and 1.5 times faster than average income (34.7%) and more than three times as fast as the cost of food (15.6%).
The more employers have a sense for what employees believe about government sponsored benefits coverage, the more they can do to help educate them and build a stronger appreciation for employer-funded benefits coverage and the need for savings in light of many of the perhaps unexpected out of pocket public health care costs.
Communication strategies are an integral part of benefits and savings awareness campaigns. In many cases, it is the ability to surface misunderstandings about coverage and costs that pack a significant punch and provide the motivation to change employee behaviour. There are many reports such as the Sun Life Health Index and the Fraser Institute Study that we review, summarize, and bring to our clients attention. For additional information or support for your benefits communication campaign, we invite you to contact us. We're here to help so that you can focus on what you do best.
In Part 1, we covered the various elements of a insured funding arrangements for a group benefits plan. In Part 2, we address self-funded arrangements also known as Administrative Services Only or ASO. With this arrangement, the plan sponsor is completely responsible for ALL of the financial - claims and related expenses - as well as the legal aspects of the group benefits plan.
This arrangement means there is no insurance and the risk is placed on the plan sponsor or employer. In a nutshell, the insurer handles the administration of the plan as the employer has outsourced this responsibility. Typically, ASO arrangements are provided for extended health care, dental care as well as short term disability benefits. With benefits such as life insurance and long term disability, most companies under 1,000 employees will continue to fully insure these benefits.
When plan sponsors assume the risk under an ASO arrangement, they generally benefit from lower administration fees partially attributed to the elimination of the reserve charge and risk charges. For larger employers, this can result in noteworthy savings. In the past, plan sponsors with over 250 employees or more were considered strong candidates for this type of self-funding arrangement. With increased competitition and improved technology, group size thresholds have dropped so that small and mid-sized employers may consider an ASO funding arrangement.
Adopting a self-funded or ASO arrangement can be more risky, but it offers the potential for greater administrative cost savings. Variances in monthly claims fluctuations can seem daunting compared to the stability of claims expense management for a policy period with an insured arrangement. A decision to insure or self-fund a plan should not be made lightly.
Knowledge is power. The more you understand the differences, risk factors and choices available, the more confident you'll be about your funding arrangement and group benefits plan design. Call or email us if you have specific questions about funding arrangements and what's best for your group plan. We're here to help so that you can focus on what you do best.
Making an important decision is always easier when you're well informed. Sometimes getting all the details you need to feel confident about your choices can be challenging.
Knowledge is power. If you don't understand something, how can you make an informed decision? When it comes to employee benefits, there is a lot to understand.
With group benefit plans, there are different funding arrangements to consider. How a group's claims and experience are paid for is called 'funding'. The optimal funding arrangement factors in: the number of employees, the plan sponsor's risk tolerance and past claims experience. This two part blog focuses on the difference between an insured versus a self-funded plan. Let's focus on the various types of insured arrangements first.
There are differences in terms of the type of insured arrangements such as: non-refund accounting, refund or retention accounting (a mix of fully insured and self-insured). It's likely easiest to address funding arrangements when we think about extended health and dental benefits.
There are a few general rules of thumb that guide decisions for small to medium sized employers. Most small business in Canada generally prefer a fully insured funding arrangement where the insurer bears the risk. In return, the insurer charges a rate based on the employee's status (single or family). The arrangement is such that the insurer funds the cost of the benefits, which includes claims incurred, reserves, claims adjudication charges, administration, premium tax and advisor compensation*.
Terms that get tossed around when discussing insured funding arrangements are:
Here's an easy example to help explain a fully pooled or non-refund accounting arrangement:
With funding arrangement decisions, insurers generally have minimum requirements or thresholds in terms of the group size and premium generated by the benefit plan and the unpredictability of the benefit. Often, larger size groups with greater premium requirements are considered for refund accounting arrangements.
In part 2 we explore self-funded arrangement known as Administrative Services Only (ASO) plans. Have questions about funding arrangements and what's best for your plan? Call or email us. We're here to help so you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.