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Rescue Mission
 Sponsors of retirement savings plans are only six steps away from improving their education programs for
 plan members who are approaching retirement.              By Katherine Aziz

As retirement becomes more a reality and less a faraway          • Should I transfer my pension to a Locked-in Retirement
dream, many older employees become anxious. While a              Account (LIRA) or take the monthly pension?
minority see retirement as an endless vacation, a glorious       • Does it still make sense to contribute to a RRSP?
period in which to do all the things they had no time for           Sponsors of retirement plans will also want to antici-
while working, most are nervous about how they will              pate the questions your employees won’t think about ask-
spend their retirement. About to lose their security and         ing now, but will come up with later, saying, “Why wasn’t
salary, and fearing they haven’t saved nearly enough, these      this explained to me before?” Here are examples of ques-
employees are uneasy about their finances: they’re embar-        tions to anticipate:
rassed, they haven’t planned, and they don’t know enough         • Does the pension amount reported on the pension state-
about their pension plan. Truth be told, the majority of         ment consider a survivor’s pension to a spouse after death
Canadians are in this group—a group that doesn’t even            (or will there be some further reduction for this benefit)?
know the difference between Old Age Security (OAS) and           • I am married—which survivor benefit should I take
the Canada Pension Plan (CPP), let alone the options             (60%, 75%, 90%, 100%)?
offered by plan sponsors in company retirement savings           • I am single and have no dependents, so why take a sur-
plans. It’s a grim reality.                                      vivor benefit?
    There are certain events in life when you can get some-      • If the amount is transferred to a LIRA, what’s with this
one’s full attention, and imminent retirement is one of          Pension Adjustment Reversal (PAR)? Are you calculating
them. It takes a life event of this magnitude to wake up         my pension correctly?
employees and force them to take notice.                            Wouldn’t it be better for the employee to understand
    As thousands of baby boomers approach retirement,            these concepts in advance of retirement?
more and more of them will turn to their employers for
answers to some very difficult questions. Are plan spon-         THE NEED FOR PLANNING
sors prepared to help them as they wake up to the realities      Plan sponsors cannot effectively answer a plan member’s
of retirement?                                                   questions without first understanding that member’s over-
    “If only I knew this ten years ago!” is a common reac-       all situation. With remuneration packages providing
tion from employees attending their first retirement plan-       salary, bonus, benefit plans, retirement options, company
ning seminar. Certainly, it’s better to start retirement plan-   stock saving plans and stock options, there is a need for
ning earlier, but a sound training program will help             financial education to tie it all together.
retiring employees make important decisions with long-              Financial planning for retirement and educating
lasting consequences. And sponsors should provide objec-         employees are essential. Merely informing them is no
tive professionals to assist in making those choices.            longer good enough. They need to understand how they
    Here are common questions that employers can expect          will be affected by the multitude of rules and plans.
to start hearing from employees as they near retirement:         Through education programs, the company benefits from
• Can I afford to retire?                                        the goodwill and harmony created by helping these
• What if the pension plan or employer goes bankrupt?            employees, and employees will see for themselves how
• There are so many options, how do I know which one is          well they have done with the various company benefits
best for me?                                                     offered over the years.
• The markets crashed, my pension funds are down, I moved           So where to start? To begin with, sponsors should take
all my money to money market funds. Am I safe now?               a holistic approach. Sponsors and employees would be                                                                                      FEBRUARY 2004      57
well-served to use a financial planning process used by top     and what they owe, and to assess their cash flow by
professionals for guidance.                                     reviewing their income and expenses. The employee will
   Financial planners use a six-step process to any area of     learn to read and understand these statements, to assess
financial planning that concerns an individual. In fact, the    what they say and to comprehend how the company
financial planning approach to investing puts investment        plans have helped their financial situation.
planning at the end of process, tying it together with the
client’s goals and personal situation. This supports the the-   Step 2 – Identify goals: “When do you plan to retire
ory of investing with sound policies and adds discipline to     and how much income do you need?”
managing within the overall portfolio. This six-step            Employees need to ask themselves the following ques-
process could be a handy tool for plan sponsors in design-      tions: Where will I live? Will expenses be higher or lower
ing or updating their education programs. It can show           in the new retirement lifestyle? This is very personal stuff
employees the big picture and the available financial           and it has to be thought through carefully by an employee
options. It can teach employees how to assess their own         and his or her partner.
financial situation, and show how their pension plan is
just part of the overall picture.                               Step 3 – Identify financial problems and opportunities.
                                                                The employee must visualize life in retirement. Instead of
SIX-STEP PROCESS                                                looking at the current year’s cash flow, look at the differ-
Step 1 – Clarify the employee’s present situation:              ent circumstances in retirement and the new cash flow
‘Where do you stand today?’                                     situation. They should identify all sources of retirement
Plan sponsors should start by showing how members can           income, including not only company pension benefits,
take stock. Employees need to learn to build a snapshot         but also OAS and CPP and any rights to pension benefits
of their financial net worth, by listing what they own          from previous employers. Cash inflows should be com-
Sponsors and employees would be well-served to use a financial
planning process used by top professionals for guidance.

     pared to the total needs or expenses to identify any short-     Income-splitting techniques can put more money in a
     fall or surplus. Retirement assets such as RRSPs and            family’s hands by reducing its combined tax bill. Also, the
     LIRAs should be identified—how will they supplement             years just prior to retirement will often see extra cash flow:
     income in retirement?                                           severance packages may be offered, mortgages and loans
        Following this assessment, then the topic of turning         are paid off, the kids may be gone, inheritances may come
     retirement savings to income can be explored, explain-          along. Directing future savings to a spousal RRSP is just
     ing the use of RRIFs, annuities, laddered bonds, etc.           one way to split income between spouses in retirement
     This is also where problems can be identified and               and to catch up on unused RRSP room. And if you can
     opportunities considered.                                       identify a Pension Adjustment Reversal for your plan
        Though plan members have enjoyed some great stock-           members, they can plan for further RRSP catch-up con-
     savings benefits, over the years these same benefits may        tributions at retirement.
     pose some risk. Concentrating investments in the
     employer’s stock may be a fine way to build wealth, but         Step 4 – Looking at alternative solutions and options.
     retirement calls for diversifying for greater safety. Often a   The various alternatives offered by the pension plan—take
     large part of the portfolio is invested in shares of the        a lump sum or ongoing pension, increase the survivor
     employer’s company. If so, there is a need to diversify,        benefit, take a bridging benefit—may be assessed and
     which dictates selling carefully while investing elsewhere      compared in the context of the employee’s overall situa-
     to balance out the overall portfolio to a better mix of         tion. By seeing the company plan as a part of their bigger
     fixed income and equity.                                        picture, the employee will be better equipped to make the
        Normally, the ideal situation in retirement is to have       right decisions regarding their company plan options and
     both spouses earn equivalent incomes—to have both take          having it fit in to their personal situation.
     advantage of lower tax rates, of tax credits and deductions.       What about early retirement? The cost of early retire-
ment is a double whammy—there are fewer working              tion. Retirement cash-flow projections can help set the
years to build for retirement, yet there are more years      best levels of spending and saving.
that savings must last. (Not to mention the actuarial
pension reduction when the employee retires before an        Step 5 – The Action Plan.
early retirement age.) But it may be that by offering vol-   A self-motivating action plan is the key to ensuring
untary early retirement, some employees will find they       retirement goals are reached. It sets the responsibility for
can afford it and make an informed decision to retire        who does what—the employee alone, employee and
early. Others are comforted knowing they can afford to       employer, or a third party; and identifies when each step
retire, but will choose to continue working because they     must be completed.
like their jobs.
   Once the employee’s financial situation becomes           Step 6 – Periodic review.
clearer, investments can be planned in an informed way,      An important part of retirement planning is to review and
to build for future needs, while making cash flow avail-     revise the plan periodically, account for changes in person-
able when needed. For example, if the expected pension       al circumstances or the economy, for new goals and
covers most of their retirement needs, retirees may opt      unforeseen events. The plan provides a benchmark that
for a fixed pension and see it as the fixed income por-      allows the employee to monitor financial performance.
tion of their investment portfolio. This will permit other
funds to be focused on growth equities or real estate.       HOW SPONSORS CAN HELP
   For most employees nearing retirement, a balanced         Employees have a hodgepodge of RRSP, pension and
portfolio with a diversified asset mix of cash, fixed        investment accounts. The 1990s saw employees with
income and equities is important to ensure the money         investment portfolios that were far too risky, changing
lasts the 15 to 30 years in retirement. Just how much is     only after the markets tumbled to portfolios that were
needed will depend on the employee’s unique situa-           far too conservative. Educating employees, and empow-
                                                             ering them with the tools, discipline and ongoing coach-
                                                             ing is critical to any organization offering savings plans
                                                             and choices. In this way, plan sponsors can help their
                                                             members repair the damage to saving plans from the
                                                             bear market.
                                                                So how should sponsors organize financial education pro-
                                                             grams? The trick is to determine what education program
                                                             best serves which employees in a certain period of time.

                                                             Who? Plan sponsors should start by identifying the diverse
                                                             group of employees in their organization. Also, what
                                                             opportunities are unique to managers at different levels
                                                             and different stages in their careers? Employees should be
                                                             grouped by the plans they participate in (by income levels
                                                             if possible). Begin with those within two years of retire-
                                                             ment, then move to those within 10 years of retirement,
                                                             and those with 10 or more years from retirement.

                                                             When? The process should be undertaken now, begin-
                                                             ning with those within two years of retirement, and then
                                                             moving back systematically until the needs of employees
                                                             who are retiring in 10 years or more are addressed.

                                                             What? The program should cover government benefits as
                                                             well as the company’s pension and savings plans. It
                                                             should address employees’ specific questions and help the
                                                             employee follow an organized approach to analyze their
                                                             own financial situation, set realistic goals, develop a per-
sonal action plan, and put the plan
into action.

How? Starting with group work-
shop sessions is often most popular:
a series touching on the different
areas of financial planning (compa-
ny benefits, net worth/cash flow,
retirement, estate issues, invest-
ment, tax) spread over one or two
days works well. After this, sponsors
should arrange for one-on-one
meetings between the financial
planner and each employee to apply
the information taught in the edu-
cation series to their situation and
respond to more specific questions
from the employee.
   The employees come to this
meeting having completed at least
steps one and two of the financial
planning process on their own,
leaving steps three and four to be
discussed with a financial planner.
They leave the meeting with their
action plan. In the years following
this meeting, the financial planner
with whom the employee developed
a relationship should be accessible
to them to assist in making clear
financial decisions.
   Employees have lost faith in the
financial system, in governments,
their employers, and the investment
community. They are worried and
their financial insecurity can reduce
job productivity and teamwork. For
too long, employers have avoided
investing in financial education and
hiring independent financial profes-
sionals for unbiased advice. Now is
the time to provide professional sup-
port to employees approaching
retirement. It is the least plan spon-
sors can do.                       BC

Katherine Aziz is a licensed Financial
Planner in Quebec, a Certified Financial
Planner and principal with Kerr Financial
Corp. in Montreal, a fee-only planning firm.