RBC Moving To Retirement Benefits, American-Style Next Year

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Royal Bank of Canada is moving to an American-style, employee-driven retirement program as of January 1, 2012, when its defined benefits (DB) pension plan will no longer be available to new employees.

U.S. investment banks have long ago washed their hands of these kinds of guaranteed pension regimes, which have been costly to employers while putting retirement savings and investment choices under the control of the employee.

"I don't know of anyone who gets a pension anymore in U.S. investment banking; I think it's all 401(k)s now," Richard Lipstein of Boyden Global Executive Search in New York told eFinancialCareers.

"In my recruiting, there's often talk of unvested stock as deferred compensation, or cash, but that's all," he says.

The changes do not extend to RBC employees outside Canada, Alexandra Jacobs, RBC's global head of employee communications, told eFinancialCareers.

Still, this is an important shift. Even though TD Bank, Canadian Imperial Bank of Commerce and others say they're sticking with their existing pension plans for the time being, "The trend in Canada is to reduce the number of DB plans in place overall so RBC will pay particular attention to the feedback after this move," observes Janice Detta Colli, a Boyden managing director in Toronto heading its financial services practice in Canada.

News of the change came in an internal memo from RBC chief human resources officer Zabeen Hirji recently.

Companies across Canada are phasing out defined benefit plans in favor of defined contribution plans to mitigate their pension funding risks, the recent Globe and Mail reports, adding that "the potential future savings are significant for a company like RBC, which has more than 50,000 employees in Canada."

Clearly, RBC employees will be losing an important perk.

Traditional DB pensions put the onus on employers to guarantee employees will earn a certain benefits level in retirement. Defined contribution plans such as the U.S.-style 401(k) transfer the risk to employees who are encouraged to put away a certain amount of their earnings on a tax-deferred basis for retirement and invest it-usually across a series fund options on their employer's menu.

Employers often match employee contributions to help inspire such investment, as RBC already does today. RBC also plans to take several steps to make the DC plan still more enticing, going forward by contributing more in retirement savings plan on its end.

"Royal Bank is just the latest Canadian company to shift its pension system since the last recession struck in 2008 and interest rates dropped, eroding the value of many corporate pension plans," Canadian Business writes, noting that Air Canada also wanted to move all new hires to less costly defined contribution plans as it struggles with a $2.2 billion solvency deficit. An arbitrator's ruling is forcing the airline to shift to a hybrid system composed of both systems instead.

Other Canadian banks admit they are watching RBC's move.

"We look at many factors when we review our programs, and Royal's decision would be only one of many factors," said Gabriella Zillmer, senior vice president at Performance Alignment and Compensation for the BMO Financial Group, told Canada Business.

TD Canada Trust, CIBC and the National Bank of Canada also said they have no current plans to switch pension systems, however.

Quebec-based Laurentian Bank switched from a defined benefit to hybrid system for its unionized employees three years ago. It also has a defined contribution system for non-union workers.

Enhancements Will Be Made To Defined Contribution Regime

The good news for RBC employees is that current employees who are already in the defined benefit plan can remain in it or opt to switch to the company's defined contribution plan, which it is beefing up.

RBC's Jacobs told eFinancialCareers, "On July 1, 2012, the Defined Contribution (DC) plan will be enhanced through an automatic RBC contribution, higher matching contributions and higher annual RBC contribution limits."

Moreover, she said, "After July 1, 2012, DB members will be permitted to switch to the enhanced DC plan; however, DC members will no longer have the option to switch to the DB plan. Eligible employees who have not yet joined the retirement program by June 30, 2012 will be automatically enrolled in the enhanced DC plan on July 1, 2012."

The set of investment choices will include target date funds, which are designed to automatically adjust overtime to reflect participant's changing needs based on retirement age and goals.

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