DC Plans In A Rapidly Evolving World
By: Joan Johannson
The Defined Contribution pension plan world is once more attracting interest from plan sponsors looking for alternative ways to provide pensions to their members. However, Joan Johannson, of Integra Group Retirement Services, notes that today’s DC world is continually evolving with new investment selections, new tools and programs, and new electronic capabilities, to address member demands and legislation.
Over the past five years, the Defined Contribution (DC) pension plan environment has changed dramatically reacting to new investment options, market volatility, concerns surrounding potential liability, the ebb and flow of demand for self-direct, day trading and financial advice options, the impact of multiple mergers amongst service providers, evolving privacy legislation, and now the publication of the Joint Forum of Financial Market Regulators’ finalized Capital Accumulation Plan (CAP) guidelines. It is hard to imagine how the average human resources (HR) department manages to keep abreast of it all while also managing benefits, recruiting, and the myriad of other concerns faced on a day-today basis.
Moving With The Market
Market activity alone has dictated much of this change. With the seemingly endless upswing in the economy in the late ’90s, many HR departments faced demands for greater member control over investments.
This led to an increased interest in DC plans over Defined Benefits (DB) pension plans (which we are again experiencing today) as well as a proliferation of investment options and member interest in trying them out – sometimes trading daily! Just four years ago, there was much discussion of adding prohibitive fees for those members engaged in day trading as well as providing self-direct services for those who wished to access a greater investment selection than the sponsor could monitor and support. Both these trends leveled off some time ago with the bursting of the tech bubble and the end to the New Economy babble.
Suddenly, it was not so easy to be your own financial advisor. People nearing retirement grew fearful that their losses would not be recovered in time. Plan sponsor interest swiftly moved from increasing investment options to concern for potential sponsor liability due to potential funding inadequacy. This was a concern previously considered specific to DB programs and their unique promise of a guaranteed income upon retirement.
And so we find that swings in the economy become dictators of how we manage our programs and the services required. Today, a much more savvy HR team looks back with hard-won wisdom at the boom and bust cycle and focuses on simplifying communications and providing sufficient education and self-help tools to assist their members in managing their own portfolios. This all forms part of the good governance of a DC plan. The publication of the CAP guidelines could not be more timely. It speaks to an audience which is still very familiar with how a market cycle can influence us and affect our governance, be it on an upswing or the reverse.
The Web Swingers – Super Heroes In Your Plan?
There are other factors, however, which have also impacted our DC programs. One is the proliferation of personal computers in homes across Canada, often prompted by the educational needs of our children. One of our recent experiences involved a senior partner meeting with miners in a northern Ontario community. Aquick survey, at their request, indicated a preference for educational tools to be provided on the web as such tools could be used at their leisure and with their spouses involved. This is a plan member community that five years ago may not have been considered a group particularly appropriate for web-based communications programs. How times change! One possibility presented by the web is the ability to simultaneously provide the exact same implementation or educational seminar to all of your sites, across Canada. Everyone shares the same message, hears the same questions, and understands the same answers. What a relief to HR departments! Electronic attendance can even be confirmed and satisfaction tested immediately.
A Little Privacy Please
Consumer protection concerns have lead to the evolution of our privacy legislation. The underlying concept is to ensure that the public is aware of how their personal information is used and that individuals have given specific and recent approval for its use. However, in protecting the public, we sometimes make it more difficult for human resources management to also act in the best interests of their members. A case in point is member reporting. Demographic reports roll up information into classifications and do not disclose specifics surrounding a member’s personal investments. This can permit the HR administrator to determine, for example, if their members truly understand the need for more conservative investment strategies as they grow older. However, the issue becomes more controversial if members inquire about their individual plan specifics. Without prior written consent from this same member to acquire and use this information for these specific purposes, the administrator is unable to help. In such cases, it is important that the recordkeeper have the resources and the necessary absolute accuracy in their processes, to provide the assistance required.
As Greg Malone, a partner at Eckler Partners Ltd. advises, “On the one hand, we have new capital accumulation plan guidelines encouraging and mandating sponsors to provide education or access to it by plan members so that they may make informed investment decisions. And, on the other hand, we have new privacy legislation that may obstruct a sponsor’s ability to do so. The federal privacy act, PIPEDA, regulates activity for provincially regulated employers unless there is a comparable provincial regulation. This means that it does not cover information collected by an employer from its employees to administer pensions on their behalf.However, the relationship with third-party suppliers is considered commercial activity under PIPEDA and, therefore, the involvement of insurance companies, custodians, actuaries, lawyers, accountants, investment advisors, and others would all be subject to the act.” Plan sponsors should consider acquiring specific advice from their consultants when reviewing the service provider relationships to ensure all appropriate processes are addressed.
An Arranged Marriage?
A growing level of concern has been triggered by the numerous mergers that have occurred in the DC service provider industry as well as services for benefits in general. Only a few years ago, Royal Trust, London Life, Crown Life, Canada Trust, Clarica, Maritime Life, and Canada Life offered a variety of strong alternatives to plan sponsors and consultants shopping for a good service provider to replace their existing relationship. Today, these entities have been swallowed by much larger corporations resulting in a few immense corporations with swollen portfolios. In some cases, large sums were paid for these acquisitions and shareholder value can only be returned through massive layoffs and standardizing of processes. This lends itself to neither personalized service nor to customtailored programs specifically suited to a sponsor’s or member’s needs. Concerns have been raised as to the ability to continue with prior levels of service and to maintain pricing when handling such a large number of clients and with so little pressure to compete.
However, there are still alternatives to the big four and there is an increased need for consultants to provide the requisite analysis and support to clients that ensures they are truly selecting the best overall value for their plan and members and not just the most recognized brand name. Consultants have the expertise and knowledge to point out how all service providers are not alike. Trust based plans, for example, offer legally required and regulated features which clearly provide proof of good governance beyond anything required, to date, from the insurance based service providers.
Another area to consider is service. Some service providers customize educational programs to meet member needs. Some provide annual educational seminars for members on a range of life cycle tailored topics. Some keep in touch with the sponsor. Some encourage their call centres to spend the time required to really help members. However – in each case, some do not.
A good practice, if your firm has recently been forced to change DC service providers due to a merger, is to treat the new firm much as you would if they were on a finals list for consideration as part of a search. Watson Wyatt Worldwide advises “When financial institutions merge or are taken over, the implications for DC plan sponsors are not immediately apparent. .... However, inaction is not a viable option. Prudent DC plan sponsors will actively monitor the changing landscape against (specified) criteria1.” They continue to say that such sponsors would be well advised to proactively review the entire relationship particularly focusing on service levels, product provided, pricing, and administrative issues. Nothing should be taken for granted.
To CAP It Off – Good Governance
Parallel with these developments, we have also seen many highly regarded firms embarrassed due to problems around questionable corporate governance. In response, various colleges and universities, such as McMaster University in Hamilton, have produced programs designed to help board members understand and better manage their corporate responsibilities.
Into this environment, the Joint Forum of Financial Regulators has published its finalized paper on CAP Guidelines (May 2004). This is after years of development and consultation within the industry. While limiting itself to tax assisted investment or savings plans with more than one investment option, the CAP guidelines provide a thorough overview of the key steps required to define, develop, implement, and manage a retirement plan.
The guidelines walk a fine line between looking out for the member’s financial interests and providing clear indication of what might be considered reasonable and prudent conduct on the part of a sponsor. It is generally agreed that, in time, the courts will decide whether adhering to these guidelines constitutes a form of protection against liability should members look for grounds to sue due to funding inadequacy following retirement. However, given the comprehensive scope of the dialogue with the various proponents within the industry, there might well be grounds for an argument that this is what the industry would consider reasonable. To this end, the consulting community stands ready to assist plan sponsors in meeting the stipulations of the guidelines by the December 31, 2005, implementation deadline. As well, certain service providers are already well ahead of the mark in terms of meeting and exceeding many of the standards.
Again, this is a good time to review your own governance program and compare its provisions with stipulations in the guidelines. There is still plenty of time to bring your plan up to the new standards. Be particularly careful to document all decisions and processes and to include a schedule of seminars held and attendance at these seminars. Facilitating your member’s education is critical to the good governance of your plan.
A further tool for good governance is found as a legal requirement only in trustbased plans. This is the Member Trade Review. This is somewhat analogous to having an advisor sitting on your shoulder as you, the member, decide to change your current asset allocation and, perhaps, your allocation to funds from your contributions going forward. Where members are protected by the use of this tool, they are immediately advised if the new allocation, or trade, is NOT in keeping with their own, self-defined profile, including risk tolerance and investment horizon. In other words, the trade review confirms suitability based on the member’s profile. After all, when markets go up and down we can expect our members to follow suit and the only way to ensure they have every chance to ‘stay the course’ and not chase the markets is with a member trade review. For trust based group RRSPs, for example, this is the law and should be considered your number one tool for good governance!
Colin Ripsman, of Mercer Investment Consulting, advises “Another important governance area identified by the guidelines is the need to monitor your plan providers. The performance of your investment managers and recordkeepers should be assessed regularly against the formal criteria for selection and quick action needs to be taken to remedy any problems identified by the review.”
Financial Advice Or Guidance?
A question often raised, of late, is whether a sponsor should go the whole distance and offer not just communication of information, educational programs, and self-help tools, but also financial and investment advice. This too was greatly debated during the codification of industry values into the CAP guidelines. After all, the inherent premise of the DC program is to turn investment decisions over to the employee. It is the DB platform that takes this responsibility away and gives it to the sponsor. A constant question of sponsors coast to coast has been, if investment advice is provided what happens if, for example, the market experiences major reversals and a large number of retiring members are left desperately short of funds? Could they sue the sponsor who provided the advice or advisors? In the U.S, sponsors sometimes hedge their risk by offering multiple financial advisors to their members. But then one might ask, if they are not sufficiently qualified to select an investment are the members sufficiently qualified to select an investment advisor? Ripsman says “In the area of investment advice, the guidelines have provided little comfort or protection to plan sponsors. The guidelines do not require the plan sponsor to offer investment advice. However, where it is offered, the plan sponsor must prudently select and monitor the advice provider. Given the difficulty in effectively monitoring the quality of the advice, together with the absence of a safe harbour protecting plan sponsors who offer advice, we do not expect Canadian plan sponsors to take this route. In fact, the guidelines seem to anticipate this result by including in the member obligation the need to consider independent investment advice on their own.”
A Glimpse Of History & The Future
Yet all of these tools and services to facilitate the development of a good governance program are quite recent.
As a case in point, only five years ago a large international fast food retailer inquired as to what constitutes a good governance program in Canada, citing the guidance provided to plan sponsors in the United States by ERISA (Employee Retirement Income Security Act). At that time, there was no industry standard to quote. Contrast this situation with today and the newly-published, finalized, CAP guidelines. Of course, the DC world will still continue to evolve with new investment selections, new tools and programs, new electronic capabilities, and with member demands and legislation. But the guidelines were written to include a degree of flexibility that should go far towards transcending these changes.
The key is taking the time to ensure that your governance plan, its intentions, and its processes, are well documented and that the management of the plan is not a once every three years flurry of activity, but an ongoing part of your regular routine. Your service provider, working with your consultant, should be able to provide a full range of reports and customized services that will answer your specific governance needs and speak to the requirements of the CAP guidelines. The goal is twofold: to assist the members while protecting the plan sponsor.
And in the end, what do we really take away from all this? Perhaps it is that, in a constantly changing world, the one thing that does not change is the honest desire of employers to attract and retain good employees and reward them with assistance that benefits all well into retirement. And this is something for which the lucky third of all working Canadians with such a plan, should be very grateful.
Joan Johannson is managing director and senior vice-president at Integra Group Retirement Services.
1. From Insurance Company Consolidation: Impact on DC Plan Sponsors, Dec. 7, 2004. Published with approval from Watson Wyatt Worldwide
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