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Insights

Contrarian views, news and international intrigue

By Andrea Davis

Investment education 101...or not

Sponsors of defined contribution (DC) pension plans may be falling down on the job when it comes to educating their members about the plan. A recent survey from William M. Mercer Limited reveals that 39% of DC plan sponsors offer no investment education at all. Interestingly enough, however, almost half of those surveyed said they plan to add individual investment or retirement counselling to their investment education programs in the next 12 months.

The fact that more than one-third of plan members are not receiving any investment education didn't surprise one of the report's researchers. Many employers who introduced DC plans five or 10 years ago were not as aware of the fiduciary responsibilities accompanying such plans as they are today.

"The trend we're seeing now for newer plans is that there's definitely more of a formal roll-out and that often sets the tone for further ongoing education initiatives with employees," says Colin Ripsman, a senior investment consultant at William M. Mercer in Toronto. "But there are a lot of plans that have been around for a number of years that were introduced in a different environment."

The survey of 206 Canadian plan sponsors covered DC plans, including registered pension plans, group registered retirement savings plans and deferred profit sharing plans.

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The future of DC

The future of defined contribution (DC) plans means more of everything: more investment choice, more flexibility, more education.

The trend towards more investment choice is already well-established in the U.S., where it's not uncommon to see DC plans that have dozens of managers and hundreds of funds.

"Right now there are very well-established alliances between recordkeepers and money managers. As menus in DC plans continue to expand, the strength of the bond between a recordkeeper and any single money manager will be weakened, simply because there are going to be more of them," says David Mather, managing director, institutional investments at SEI Investments in Toronto.

As investment choice increases for plan members, so too will movement among funds and fund managers. "That obviously has consequences for a fund manager because it means his cash flows are more volatile," says Mather.

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The early bird catches the worm.

In a survey of 206 defined contribution plan sponsors, 91% of respondents cited "the importance of starting to save early" as a topic addressed in their investment education programs.

SOURCE: William M. Mercer Limited

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VIEWPOINT

DC Plan Dilemma

To give, or not to give advice? That is the question.

By Elspeth Flood

Defined contribution (DC) plans, which include group registered retirement savings plans, have become a popular alternative to traditional defined benefit plans. For plan members, DC plans promise greater autonomy and portability. For plan sponsors, the DC option promises easier administration and a fixed cost. This last advantage is crucial--the DC plan's cost is fixed because the member now bears the investment risk.

Members of DC plans may find they have an account balance well over $100,000--their pension plan account could be their largest asset. And if they are given a choice of investment options, they have to make investment decisions. Because the employer sponsors the plan and encourages (or requires) the employee to participate, and because the member might otherwise have no investment experience, it's important that the plan sponsor provide the member with enough education to make informed decisions. If they don't, they could be legally liable.

But there's a difference between investment education and investment advice. If the plan sponsor tells a member, "you should invest in stocks instead of bonds because stocks should do better than bonds over the long term," and then the stock market crashes, the plan sponsor could be legally liable. The plan sponsor must make investment education available--but avoid giving advice.

Members may need basic nuts-and-bolts education about investing: How important are investment earnings to my retirement income? What are stocks, bonds, GICs? How are they different? What are mutual funds? What are the differences between mutual funds? What is risk? What rate of saving and investment earnings do I need to reach my retirement goals?

Providing the tools to answer these questions is not giving advice and should not expose the plan sponsor to liability. Educating members does, however, require considerable expertise in more than one field so, unless the plan sponsor's primary business is investment, it is appropriate to use experts to provide this education.

But what about the members who want advice, and have no desire to become experts in investment? How can plan sponsors help them without giving advice or making decisions for them? What the plan sponsor can and should do is provide access to competent, independent outside advisers. The plan sponsor might pay for this advice or negotiate a reduced economy-of-scale price for members to pay. Or the plan sponsor might simply offer the member a dollar or hours amount to visit the investment adviser of his or her choice.

The important criteria for selecting an adviser are competence and independence. Nowadays, a wide range of individuals call themselves investment advisers. A potential purchaser of these services should look closely at the experience and qualifications, including professional designations, of the individuals offering investment advice. Independence is also important. There are many investment advisers who offer free service, but they are not independent--many are selling investment products.

DC plans promise their sponsors ease of administration and predictable costs, but they also bring a new responsibility to educate members for the new task of investing for their own retirement income.

Elspeth Flood is a partner in Satanove & Flood Consulting, an investment, pensions and communications consulting firm in Vancouver.

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The DC century

This new century could be deemed the era of defined contribution (DC) plans, when many plan members will retire having only ever contributed to a DC plan. While most Canadians are contributing to defined benefit plans (the largest plans are traditionally DB plans), the number of members covered under DC plans has steadily risen since 1988, according to new research from Statistics Canada. Between 1996 and 1998, the number of Canadians covered by DC plans grew by close to 20%, the largest increase over the past 10 years.

Despite the growth in the DC area, defined benefit plans still have a lock on the number of members covered. While DC plans made up 54% of all registered pension plans as of Jan. 1, 1998, they covered just over 636,000 members, or 12.5% of the total.

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DC plans gaining ground

While the majority of Canadian plan members continue to be covered by defined benefit plans, defined contribution (DC) plans are making headway. According to research from U.S.-based Greenwich Associates, the proportion of Canadian pension funds that now have DC plans fell from 39% in 1996 to 36% in 1997, rose to 41% in 1998 and increasedagain in 1999 to 53%.

The survey of 280 pension funds reveals that as many as 12% of funds expect to add a DC plan in the near future. The research also showed that public sector plans are increasing their use of DC plans. The proportion of public sector plans using a DC component has nearly doubled, from 12% to 23%, in just the past two years.

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THE TALK

"If people understood the industry, it wouldn't make them nervous."

Denise Castonguay, president and chief executive officer of Excalibur Investment Strategies on the public perception of hedge funds following revelations that Toronto-based Phoenix Research and Trading Corp. suffered huge losses in its hedge funds.

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Buyer beware

The Internet may be growing in popularity as a way for employers to offer plan members quick answers to pension- and benefits-related questions, but the majority of Canadians still have concerns about privacy when it comes to using the Internet.

A recent survey reveals that 80% of Canadians who have access to the Internet, either at home or in the workplace, are concerned about the release of their personal information to other organizations when making purchases online.

The survey, commissioned by consulting firm Ernst & Young and law firm Donahue & Partners Barristers and Solicitors, found that 56% of Canadians are either certain or believe that their personal information has been given to other organizations without their consent.

In Quebec, where privacy legislation that applies to the private sector has been in place since 1994, residents were the least likely to be concerned about the release of their personal information. Only 51% of Quebec residents expressed concerns about the release of their personal information when making purchases on the Internet.

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Saving the system

Benefits plan sponsors staggering under the weight of ever-increasing drug plan costs may be buoyed by the results of a recent survey on healthcare. The 1999 National Survey of Health Care Providers and Users found that 82% of Canadians say they support the idea of having those who can afford it pay for a reasonable portion of their prescription drug costs.

While 79% of Canadians agree that this country has the best healthcare system in the world, 55% say their confidence in it is falling.

When questioned about the impact government policies may have on patient care, 67% of respondents said they opposed reducing access, quality and choice in provincial drug benefits plans to cope with cost pressures.

To help keep the system afloat, 73% of Canadians would be willing to use their own financial resources if timely access to healthcare is not available and feel they should have the option of seeking private care.

Patients aren't the only ones concerned about the healthcare system. The survey revealed that 70% of doctors and 60% of nurses also admitted to losing confidence in the system.

The survey was conducted by polling firm Pollara, The Coalition of National Voluntary Organizations and pharmaceutical company Merck Frosst Canada & Co.

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BUZZWORD

SUPER CREDIT

A flexible benefits term. Refers to the credit from which plan members draw to pay for the benefits of their choice.

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Tree-hugging investments

In an effort to help pension funds see the benefits of socially responsible investing, U.K.-based environmental group World Wildlife Fund (WWF) has published research that draws a positive correlation between good environmental management and stock market performance by forestry companies.

The study shows that logging and forestry product companies that carry certification from the Forest Stewardship Council (an international non-profit organization based in Mexico) tend to provide better returns to investors than companies that aren't FSC-certified.

According to WWF's report, Swedish forestry companies that were FSC-certified achieved a 62% greater return on investment than non-certified Finnish companies between 1994 and 1998. The sample size used in the research was small, however; four Swedish companies were compared to four Finnish companies.

Nonetheless, WWF is using the study to encourage pension plans, and U.K. plan sponsors in particular, to use FSC certification as one of their criteria for making investment decisions.

Starting this summer, U.K. pension plans will be required to declare their social and environmental policies for investment.