The CAP Guidelines Today
By: Janice Holman
In the eight months since Capital Accumulation Plan sponsors were required to be compliant with the Joint Forum of Financial Market Regulatorsʼ voluntary guidelines, a number of changes have taken place in these plans. Janice Holman, of Eckler Partners, examines some of these changes.
The Joint Forum of Financial Market Regulatorsʼ CAP Guidelines were an eye-opener to plan sponsors who had primarily established a plan as a ʻfavourʼ to employees. Such plans were originally seen by employers as an easy benefit to provide at little cost (a.k.a. risk) to the organization. The employer was merely helping employees save through payroll deductions.
The arrival of the guidelines, however, changed all this. All plan sponsors who offered a CAP, including those offering it as a ʻcoreʼ benefit, discovered that they were, going forward, responsible for ensuring that this benefit, which was designed to be low maintenance, did not land them in hot water.
As a result, eight months past the January 1, 2006, deadline for plan sponsors to be compliant with the ʻvoluntaryʼ guidelines, we have seen some dramatic changes within the CAP industry.
Here are the biggest changes we have seen within CAP plans since the formalization of the guidelines:
- Better governance
- Determination of a plan purpose
- Reduced fund options
- Change to default fund option
- Plan design changes
- Plan closures
- Conformity of plans
- Increased communications to members
- Improved services and products from providers
Improved Governance Practices
The first and most significant change as a result of the guidelines is improved governance processes for CAPs.
In some cases, this involved improvements to existing governance processes, in others, the creation of new processes.
We have seen many plans either create new governance procedures or take the action of formalizing and tweaking what was currently in place.
In most cases, this has resulted in the establishment of a formal group responsible for oversight, a schedule of when various monitoring activities will be conducted, and a clear articulation of roles and responsibilities.
Creation Of A Purpose
The plans that the guidelines targeted – those without formal structures or governance – needed to determine why they existed in the first place, if that purpose was still valid, and what role the current CAP fills in the compensation employeesʼ receive.
Many plans were established without much thought as to why and what impact the CAP could have on the organization. The advent of the guidelines forced plan sponsors to think of why they offered the plan, what its purpose is, and to clearly articulate it.
Reduced Fund Options
The guidelinesʼ recommend the formalization of a fund option policy which sets out the number of funds, type of funds, criteria for selection, and ongoing monitoring of the funds. This has had a very large impact on plans.
Plans that existed during the ʼ90s fell victim to the ʻmore is betterʼ approach and, in many cases, offered all the funds on their carrier ʼs platform.
With the advent of the plan sponsorʼs responsibility to monitor and actively defend the fund options offered, many plans have undertaken a review of the options and subsequently reduced the number of options – in some cases dramatically.
Changes To The Default Fund
By establishing a purpose for the plan and reviewing the fund options available, plan sponsors were then left to evaluate the appropriateness of the default fund offered by the plan.
In most cases, the default had historically been a money market fund. For plan sponsors who took a long-term perspective and offer a plan that limits withdrawals, then the purpose and the default were no longer in sync.
Many plan sponsors have moved to change their default fund option to be consistent with the plan design and purpose. The most common alternative continues to be a balanced fund offering.
Plan Design Changes
Further to a change in the investment options offered in the plan, some plan sponsors have realized that the fundamental plan design may not be supporting the newly-determined purpose.
In such cases, plan sponsors have taken the step to align design with objectives. This has involved such things as changing the type of plan offered, introducing or tightening withdrawal provisions, and changing eligibility criteria and participation rules.
One of the outcomes of the guidelines the Joint Forum was surely not anticipating was plan closures.
Some plan sponsors, mostly small organizations or businesses where the plan was provided to a small group of employees, have opted to close their plans and offer alternative forms of compensation. For them, the amount of work required to perform the proper governance, even to create the foundations of the plan, outweighed the benefit provided to members.
In addition, due to the small size of such plans, the group discounts available were not substantial.
Therefore, these plan sponsors either pay the employees an increased salary or facilitate a payroll deduction and forward the contribution to an employeeʼs individual account at the financial institution of choice.
For larger plan sponsors, who may be responsible for overseeing many different plans, the guidelines gave them the impetus to align all their plans as much as possible.
This conformity of plans allows the plan sponsor to execute their governance responsibilities in a much more efficient manner and, in some cases, has improved the plan resulting in a reduction of fees from the carriers.
Whether plans are merged or kept separate, they can be governed by one body and administered as one larger plan.
Increased Communications To Members
The guidelines highlight and articulate a plan sponsorʼs responsibility to communicate effectively with their members. Most importantly, since the guidelines do assign responsibilities to the members, plan sponsors are compelled to pass this message along.
The above-mentioned effects of the guidelines, in most cases, have also resulted in some plan changes which in turn need to be communicated.
With the formalization of standard, expected roles and responsibilities, plan sponsors now view the plan as a liability that needs to be managed. Communications become an even more critical tool in their efforts to do so. While information was always important, plan sponsors are now ensuring it is delivered and they are being more proactive in engaging members.
Improved Services And Products From Providers
As the CAP market has evolved, so too have the products and services available.
Most carriers have invested substantial amounts to ensure their products are CAP Guidelines compliant in order to maintain their competitive position.
Tasks that required substantial investment (such as the reporting of fees to members) were brought to reality by the launch of the guidelines. Better statements, improved online education, and better enrolment processes are all outcomes of the guidelines.
In particular, the investment community, after many years of offering funds more suited to Defined Benefit plans, has responded by creating products better suited to members of CAPs. These new investment products help sponsors achieve their fiduciary responsibilities by aligning what we have learned about member behaviour to products that will help members achieve better retirement savings.
Joint Forum Achieves Objectives
In general, based on what we have seen, the Joint Forumʼs main objectives have been achieved. These are to:
- Outline and clarify the rights and responsibilities of CAP sponsors, services providers, and CAP members.
- Ensure that CAP members have the information and assistance they need to make informed investment decisions in a Capital Accumulation Plan.
- Ensure that there is a similar regulatory result for all CAP products and services regardless of the regulatory regime that applies to them.
We have seen plan sponsors move to apply the same level of governance to Group RRSPs, DPSPs, and Flexible Benefit RRSPs as was traditionally provided for pension plans. Now that the guidelines have been out for more than two years and effective for eight months, most plan sponsor have completed, or are close to completing, their review of their plan management and have come into compliance with the guidelines. Certainly the governance foundation has been laid and the strategy created with the implementation following throughout this year.
With the foundation of proper plan management laid and past errors corrected, we can look forward to solutions to improve the success of the CAPs we sponsor.
Leading Our Plans To Success
However, plan sponsors may still have to go further to ensure their members are better prepared for retirement.
A great deal of research has been done on member behaviour, what incentives members respond to, and various techniques available to improve the success of CAPs. By success, I mean providing members with enough knowledge to ensure they can plan and enjoy a comfortable retirement.
The three inputs to the ʻsuccessʼ equation are the same as they were before the implementation of the guidelines:
- how much money is contributed
- how long the money is invested
- investment returns earned
The next stage in the evolution of CAPs needs to address these.
Plan sponsors concerned that too paternalistic of an approach may increase their liability, run the risk of not creating solutions that positively impact a memberʼs success in their CAPs. Failing to offer auto enrolment, compulsory participation, automatic contribution increases, simplified investment selections, limitations on withdrawals, or auto rebalancing may be more harmful than a more hands-on approach. Why not take the route that provides for a positive outcome and allow members to opt out, than to take the route that could result in a negative outcome (voluntary participation, money market default options, withdrawal provisions, voluntary contribution amounts that arenʼt changed over time) and wait for members to opt in? Isnʼt it better to encourage the benefit, instead of allowing a memberʼs inertia to detract from the benefit you are trying to provide?
Letʼs hope that after investing the resources necessary to lay a solid foundation, we continue to build on what we have learned, evolve the solutions, and ultimately improve the success of CAPs.
Janice Holman is a senior consultant with Eckler Partners Ltd.
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