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The Fundamental Promise – Going Beyond Semantics

By: Joan Johannson

Does investment advice fall within the underlying promise of the DC plan to assist the member in saving for retirement, or are members merely looking for financial advice? Joan Johannson, of Canada Life, looks at this fundamental question.

Recently there has been an escalation in interest around the education or advice debate. Which do sponsors and members need and what are the implications?

This is fuelled, to a great extent, by the volatile economy of the past 18 months. The sudden losses, after years of unprecedented growth, came as a shock to members and sponsors alike. We had enjoyed a period of growth for so long that pundits had begun questioning the theory of business cycles and introduced the term, The New Economy, indicating that the new elements represented by the fast growing technical sector, for example, were rewriting economic philosophy. Long live prosperity.

During this period, many people first entered the equity market and, if asked as to their risk tolerance, had little downside experience for personal benchmarking of their own break point. After all, investing seemed simple with such sustained growth. The demand in the Defined Contribution business was for self-directed programs and new equity sector investment alternatives. The debate then raged around the appropriateness of day trading for mutual and segregated funds. These concerns are long behind us now.

With the fresh experience of a downturned marketplace, sponsors and members have discovered that investing is not all that easy after all and new concerns have arisen around accountability and liability. This is the source of renewed interest in education versus advice. Often we hear that what members truly want is specific advice around investment alternatives. We hear that the sponsors are concerned about potential liability should the resulting investments do poorly. Questions are raised as to:  Who pays for the advice?  Does this affect determination of liability?  What kind of governance program would be required to ensure consistent quality?  What educational criteria and experience should be required of advisors?  Who should provide the advice service for the sponsor?

Having participated in these debates, it becomes clear that one of the first issues to be clarified is terminology. It seems that when sponsors are discussing advice, and when members ask for advice, they are often referring to the wise guidance of a specialist who will ensure they have considered all angles and alternatives, looking at the full picture. This is very different from turning to a specialist to advise what specific investment to make from a range of alternatives. This latter, investment advice, might well be expected of a broker or registered representative. This is, however, very different from financial advice which can, in fact, go far beyond a plan sponsor’s fund and company stock selection to encompass such topics as tax advice, estate planning, and insurance.

The question then becomes, does this investment advice fall within the underlying promise of the DC plan to assist the member in saving for retirement?

In fact, in dealing with these issues sophisticated sponsors have, in many cases, provided an array of solutions for their members, from fund performance information to education in the fundamentals of investing, through topical seminars, selfhelp guides and tools, advanced calculators, and even one-to-one financial guidance. At what point is enough really enough?

This issue goes well beyond semantics to an understanding of the underlying purpose of the DC plan – to assist and enable members in their efforts to save for a reasonable retirement income. The key phrase here is ‘to enable.’ The actual decisions and end result remain in the hands of the member. To look beyond this to investment advice, even direction, is to overstep this fundamental promise and muddy the waters of responsibility, leaning more towards a Defined Benefit model. In this DB model, the investment directions and results are in the hands of the sponsor or trustee who has liability for the consequences, given the fundamental promise of the DB program: to provide a defined financial result no matter the performance of the underlying investments.

To DB or not to DB, that was the question originally answered when the DC plan was established. By all means, sponsors should enable their members with reasonable access to tools and sources of education, across all media.

However, I submit that advice, in the case of DC plans, might at most be extended to forms of financial advice sought directly from an individual’s personal advisors and should not encompass specific investment advice, leaving determination and direction where the DC plan always intended, in the hands of the member. This preserves the integrity of the plan purpose, offers the best protection from an extension of liability to the sponsor, and still serves the diverse and changing needs of the plan membership. The issue really is deeper than definitions and speaks to the underlying premise of why the sponsor chose a DC solution for their plan.

Joan Johannson is group marketing & business development solutions vice-president at Canada Life.

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