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Are Managed Accounts Next?

By: Rick Headrick

From information to education and beyond, plan sponsors are challenged by the dilemma of ensuring their plan members can manage their own retirement savings programs. Rick Headrick, of James P. Marshall, Inc., a Hewitt Company, reviews these efforts to date and suggests managed accounts may be the next approach in Canada.

Capital accumulation plan sponsors are concerned about the extent of their obligation to provide financial education to members. Is it enough to provide information, or must they actually educate members – or even provide them with advice? When Hewitt Associates conducted its Trends in Canadian Retirement Programs survey, one of the most prevalent comments from plan sponsors was “How much financial education is enough?”

Plan members are also concerned about whether they are making the correct investment decisions in order to ensure they have sufficient retirement income. Retiree respondents to the same survey expressed their apprehension clearly in their comments, often stating that they wished they’d had more financial education and received it earlier. One retiree even suggested that retirement planning should be offered as part of the high school curriculum.

If one were to look at the range of options available to plan sponsors to help members make better financial decisions, doing nothing would certainly fall at one end of the spectrum. And this option would likely have some appeal for plan sponsors, with their concerns around the legal liability and cost of providing information, to say nothing of the processes and procedures involved to select and monitor a provider, if they decide to look to someone else to provide financial information.

Certainly many plan sponsors are genuinely concerned that their plan members have sufficient retirement income. However, in this post-Enron age, plan sponsors may find this paternalism elevated by the courts to a duty to at least provide members with access to financial information so as to ensure they are making informed, if not wise, investment decisions.

The Joint Forum of Financial Market Regulators seems to agree that plan sponsors have some obligation. Its Capital Accumulation Plan (CAP) guidelines recommend that CAP plan members have the information and tools needed to make informed decisions. However, given the fact that these are just guidelines – to say nothing of the fact that they are somewhat vague – it remains to be seen whether these principles will carry any clout.

At least for the moment, it appears that plan sponsors have some discretion, not only as to the extent of the information/education/ advice they provide, but also as to the manner in which it is provided. The

Evolutionary Scale

Assuming a CAP plan sponsor has opted (or been compelled) to do something to provide information to its members, what are the degrees of involvement open to it?

The diagram, The Financial Information Spectrum, shows the various degrees which can be offered to plan members.


Some plan sponsors take on the job of providing financial information and education to their plan members themselves. These efforts may take the form of, for example, articles in internal newsletters or on company intranets.

While this is the easiest and likely the least expensive solution for ensuring plan members receive some information (assuming they read it), it may not be the safest route to take. After all, the information provided is only as good as the source. If organizations are not in the business of providing financial advice, they should likely look for external assistance when providing information. Plan sponsors may want to add some sort of disclaimer to any information provided in order to limit their liability, whether the information was generated internally or externally.

But does this sort of generic advice really meet the spirit of the CAP guidelines? Does it really provide plan members with “the information and tools needed to make informed decisions?” If not, plan sponsors may want to move further along the financial information continuum or at least provide this service as an additional feature of a larger financial education program.


There are two primary sources of financial education programs for CAP plan members: recordkeepers of Defined Contribution plans and independent financial planners.

The investment education provided by recordkeepers is usually part of a bundled service – part of their recordkeeping agreement. Their programs are generally comprehensive and informative and delivered online and at plan member meetings. In recent years, these programs have been tweaked to strive for compliance with the spirit of the CAP guidelines.

In addition, some independent financial planners offer retirement saving education seminars for plan members. These programs may be more in-depth than those offered by the recordkeepers and are often tailored to a specific audience. Their focus also tends to be on retirement planning or even full financial planning, as opposed to more specific investment education.

For example, T.E. Financial Consultants, a financial advisory company, offers separate courses and workshops for those at various stages of their careers – one for those at the start, another at mid-career, and a third for pre-retirement employees. The courses cover a variety of topics, everything from general information on saving for retirement to a more specific focus on matters such as saving for the education of children and estate planning.

More than just education, these courses generally offer some financial modelling, as well as opportunities for members to develop their own financial plan, with limited input from the course instructors.

“Many plan sponsors are taking a proactive role in providing retirement planning education for their members, even without a clear fiduciary duty to do so,” says Jury Kopach, senior vice-president, corporate services, for T.E. Financial. “One reason is undoubtedly because members really appreciate it and see this education as a real benefit.”

The drawback of this more in-depth education model is, of course, cost. However, a plan sponsor should weigh this immediate additional cost against the possible cost of being sued by disgruntled plan participants in the future. Moreover, when the program costs to educate an employee are analyzed, they generally amount to less than the price of a cup of coffee a day.

Online Investment Advice

In the United States, plan sponsors have been looking to the Internet to provide investment advice to their plan members. The chief differentiator between this route and the education sessions discussed above is the online modelling tools that are available, enabling plan members to enter their own data, adjust variables, and get immediate advice on investment choices – the online advice provider actually tells members what investment funds to invest in. In addition to this self-service aspect, online tools offer the advantage of being accessible round-the-clock, so that members can examine various scenarios with family members present.

The provision of online investment advice has not caught on in Canada for two reasons:  a lack of providers of the service  plan sponsors have been reluctant to enter the arena of investment advice, online or otherwise.

Face-to-face Investment Advice

Plan sponsors may also facilitate oneon- one sessions with a financial planner for plan members to enable them to get personal investment advice. Plan sponsors may pick up the cost of these sessions themselves (particularly as an executive perquisite), offer them as part of a flexible benefits program, or make them available to plan members at a reduced price.

Financial Planning Advice

At this point along the evolutionary scale, plan members receive more than just investment advice – they get an entire financial plan. The plan might cover everything from investment of personal assets to tax planning.

Some recordkeepers will provide access to advice (on top of education) at the request of the plan sponsor. This service might be paid for by the plan member or possibly by the plan sponsor out of the assets of the fund. And, of course, this service is also available from financial planners.

What’s Next?

Financial information has evolved from the mere delivery of facts and figures to education and then to advice. At each stage, the plan sponsor has assumed a broader role in the plan member’s retirement planning, though its involvement has primarily been that of a facilitator, providing access to more comprehensive tools and advisors.

There are indications that we’re not yet at the end of the evolutionary scale. One solution that is gaining popularity in the United States is managed accounts. Amanaged account provides personalized investment advice and a portfolio management service for participants. Managed accounts have evolved primarily from automated online advice solutions, where those who didn’t want to use the tool directly could delegate to someone else and have them implement the advice given on an ongoing basis.

Where plan members opt into the managed account program, they send information to the provider, such as age and outside assets, in order to determine the appropriate asset allocation. The provider’s money managers then monitor each account. Basically, participants hand control over their retirement assets to an advisor to make investment decisions on their behalf. Participants receive individualized communications, typically including quarterly account statements.

Stacy Schaus, practice leader for personal finance with Hewitt in Lincolnshire, Ill., states that, while managed accounts have gained some attention in the U.S., plan sponsors are still testing the waters. The fact that the service is generally free to plan sponsors and ‘affordable’ to members is attractive to plan sponsors. However, many will wait and see how those who have jumped on the managed account bandwagon fare. Key issues will be whether members actually use the service and whether they stick with it if they do use it. Members may not take advantage of the program, especially if it is optional and they have to pay for it themselves, and/or they don’t realize that they are not saving enough for their retirement. If plan members don’t use the managed account service, sponsors may still be responsible for members’ insufficient retirement income even though they made a managed account program available.

There is also the potential for liability if the managed account provider mismanages members’ funds. “The risk lies in whether the plan sponsor has any responsibility to monitor the activities of the managed account provider,” says Schaus. “Undoubtedly, sponsors will want some form of indemnity agreement with the provider as part of the contract to provide managed account services.”

Should we expect to see managed account programs being offered to plan members in Canada? Maybe down the road, says Kopach. “We’re not as far along the ‘evolutionary scale’ as they are in the U.S. Plan sponsors are still grappling with the whole issue of whether or not to provide advice. Removing discretion from plan members altogether with the use of managed accounts may have some appeal. Much will depend on the American plan sponsor experience.”

Stay tuned, history tells us that if something becomes popular for DC plan members south of the border (recent examples include lifecycle funds and increased investment choice), it eventually heads north.

Rick Headrick is a lawyer and consultant with James P. Marshall, Inc., a Hewitt Company.

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