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© Copyright 2000 Rogers Media. The following article first appeared in the March 2000 edition of
BENEFITS CANADA magazine.
Defined Contribution Plan Summit
BY ANDREA DAVIS AND SONYA FELIX
The Defined Contribution (DC) Plan Summit 2000, hosted by benefits canada, brought together Canada's
leading thinkers in the DC industry--plan sponsors, providers and regulators--for an intense, two-day
session on the issues facing sponsors of DC plans. Held at Chateau Mont Tremblant in Mont Tremblant, Que.
this past January, plan sponsors and providers alike were challenged with a program of DC plan case
studies, discussions on investment choice, debates on fiduciary concerns and much more.
There were three recurring themes throughout the summit:
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the need to consistently repeat communications to plan members;
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in the absence of regulation, employers want to know what steps they can take to protect themselves
from liability; and
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advice--should employers offer it to plan members?
Our report is presented in five sections: Communications; Investments; Fiduciary Responsibility;
Regulation; and Retirement. Consider this a comprehensive look at the state of DC plans in
Canada.--Andrea Davis
Participants in the DC Summit 2000 included: Sudi Arora (Clarica); Lori Bak (Benefits Canada); Donna
Brazelton (Fed Ex Canada); Colin Carlton (CT Investment Management Group); John Clarke (Syncrude Canada
Ltd.); Randy Colwell (then with Clarica); Barbara Coulter (Integra Capital Management); Andrea Davis
(Benefits Canada); Mary De Paoli (Sun Life of Canada); Ciaran Devine (Canada Trust); Oswald D'Mello (Nortel
Networks Corporation); John Denham (IBM Canada); Lawrence Durling (St. Thomas University); Sonya Felix
(Benefits Canada); David Fisk (Frank Russell Company); Richard Garand (Alcan); Jack Gellar (Ontario
Securities Commission); Peter Gorham (Morneau Sobeco); Jeffrey Graham (Borden & Elliot); Stuart Graham
(Fidelity Investments); Bob Haber (Fidelity Investments); Christine Halse (McGill University); Stanley
Hamilton (University of British Columbia); Alex Harvey (Canada Life Assurance) Karen Hendrickson (Compass
Pension Trust); Craig Honey (Integra Capital Management); Cathy Honor (Sun Life of Canada); Tony Ioanna
(Canada Life Assurance); Allen James (ASA Global Services); Fred James (Canadian Football League); Stephen
Johnson (Integra Capital Management); Louise Koza (University of Western Ontario); Elaine Leufkens (Sony of
Canada Ltd.); Martin Lion (mPower); Garth Lockwood (Petro-Canada); J.B. MacIntyre (Imperial Oil Limited);
Harry Marmer (Frank Russell Company); Doreen Mattson (Pan Canadian Petroleum Ltd.); Maureen McCarthy
(Province of Newfoundland and Labrador); John Mealin (ASA Global Services); Sherallyn Miller (CAPSA); Brian
Morrissey (Sobeys Inc.); Adam Neal (Fidelity Investments); Jerry Nieczyporowski (General Chemical Canada
Ltd.); Dwayne Oake (Telus); David O'Brien (McCain Foods Limited); Patrick O'Brien (NBTel); Louise Ouellette
(Sun Life of Canada); David Patterson (Procor Limited); Randal Phillips (Morneau Sobeco); Beatrice Povolo
(Canada Trust); Ken Richards (Canada Life Assurance); Shandra Russell (TransAlta Corporation); Rick
Schwartz (Hewlett-Packard); Tercy Seares (Bridgestone/Firestone Canada Inc.); Mark Shoemaker (PPG Canada
Inc.); Stephen Steele (Ford Motor Company of Canada); Daniel Stone (Saint Mary's University); Debbie
Sulkers (Union Pacific Resources Inc.); Pat Suzuki (Suncor Energy Inc.); Jim Taylor (Associates First
Capital); Grant Ukrainetz (Mobil Oil Canada); Fred Vettese (Morneau Sobeco); Bev Walker (TransCanada);
Alison Watson (Clarica); Kevin Watson (Pepsi-Cola Ltd.); Alison Webb (Benefits Canada); Becky West (Frank
Russell Company); Paul Williams (Benefits Canada).
*** ***
COMMUNICATIONS
Communications in a DC plan
ather together a group of plan sponsors and leading thinkers in the defined contribution (DC) industry and
one thing becomes clear: communication is one of the biggest challenges the industry faces. Many plan
members have difficulty with basic financial and investment information.
Stephen Johnson, managing partner at Integra Capital Management, believes plan sponsors generally
overestimate the investment literacy of plan members.
"What you try to do is have a person make an investment choice based on philosophy and concept," says
Johnson. "The best seminar you can have is one where you don't put up the investment performance of funds.
You talk about a balanced fund, you talk about an equity fund, GICs, bond funds and if you've done a good
job explaining the concept, people will make a decision based on the concept rather than the investment
performance."
While plan sponsors should just accept the fact they won't reach everyone with their communications,
Johnson believes all plan members are reached in some way or another. "I believe everybody is reached. The
people who show up at investment seminars and retirement planning sessions are the key people in the
organization. They circle back within their own organization and assist other members, rightly or wrongly,
in making investment decisions," he says.
CUSTOM COMMUNICATIONS
One method of helping plan members grasp the basics about their DC plan is through customized
communications. Some employees learn best with printed materials, others respond to electronic
communications while still others might prefer regular investment seminars. Customizing communications
sends a clear message to plan members that their employer cares about how they best absorb information.
While customization may ring alarm bells in the minds of plan sponsors who fear the cost, it doesn't have
to be prohibitive.
"Creating customized employee material doesn't have to cost a fortune," says Randy Colwell, vice-president,
pension sales and marketing at Clarica (Colwell has since joined Sun Life of Canada). Colwell cited four
case studies where costs for customization ranged from $5,000 to $100,000.
One thing employers do need to be clear about before embarking on a customization program is the objective
of the communications. Some plan sponsors may want to increase plan participation, others may want to
increase contribution levels or simply provide extra information.
Consider the example of The Gap. The clothing retailer had specific objectives when it changed
recordkeepers. It wanted existing employees (approximately 800 across the country) to sign up within two
weeks of receiving the information package. It also wanted to increase employees' comfort level with the
savings plan. The company needed a smooth transition to the new recordkeeper. To achieve its objectives,
the company chose self-access print materials that were customized to reflect the Gap environment and
brand.
The results? More than 95% of the forms were returned within the two-week time period. Follow-up surveys
found that employees felt the communications were the most comprehensive, easy-to-understand information
they had ever received on their savings plan.
"The success of any employee education program depends on the employer's capacity to satisfy the needs of
employees on an ongoing basis," says Colwell.
--Andrea Davis
Crossing the line to advice
When plan participants demand more than basic information about investment options, sponsors are confronted
with the question of whether they want to cross the line from communication to advice. "Many employers in
Canada have already gone quite far in providing advice to their plan participants," says Colin Carlton,
chief investment officer with Canada Trust Investment Management Group. "Advice empowers employees to make
decisions, it enhances the total benefits package, increases participation levels, enhances the adequacy of
retirement income and addresses fiduciary risks."
How do you know if communication has moved beyond information to advice? According to Carlton, as soon as
you make a statement or write down a specific way an individual should construct their portfolio, you've
crossed the line. "If you simply provide generic information about markets and risks, that's considered
communication. But as soon as you say to participants: 'answer these particular questions and then make
your investments based on the answers,' that's advice."
When considering whether and how to provide advice, plan sponsors face several issues--the level of
investment advice they want to provide, the choice of advice supplier, the costs involved, the investment
knowledge of participants, what type of media should be used to provide advice, best practices benchmarking
and potential liability.
There is no legal definition of "advice" in the Canadian DC market, but that doesn't mean there is no legal
risk. "As the level of advice goes up, so does liability," Carlton says. "The best defence is to practice
due diligence and a disciplined process. If advice isn't considered outside the normal stream and the
advice is 'reasonable,' then plan sponsors don't have to worry. Advice doesn't have to be perfect, just
reasonable."
THIRD-PARTY LIABILITY
When plan sponsors provide investment advice to participants, they face the risk that if the investment
goes wrong, an individual could take action against the provider of the advice. If a sponsor has employed a
third-party specialist as the adviser, the responsibility still falls back on the plan sponsor. "The
individual could say that they assumed the employer knew what they were doing in hiring the adviser," says
Carlton.
In the U.S., mPower, a third-party investment adviser, has taken the risk away from employers by accepting
liability for advice they supply to plan participants. In Canada, however, there's no clear view
surrounding third-party liability.
"We need to make sponsors feel comfortable so they can provide advice without fear," says Martin Lion,
director of business development at mPower in San Francisco, Calif. "We keep records of all interactions
with customers when providing advice and participants still have the ability to decide whether or not to
follow the advice."
To date, mPower has no pending litigation based on the past three years of providing investment advice to
plan participants. --Sonya Felix
The Unreachables
No matter how good or frequent employee communications are, there will always be some plan members who just
don't get it. How far do you go to reach these unreachables? Here's an excerpt of a discussion at the
conference.
Stephen Steele, director, financial services, Ford Motor Company of Canada, Limited: What we worry about
are the 20% to 30% of people we can't get at--the ones who don't call in, the ones who are clearly not
using our plan effectively.
Stephen Johnson, managing partner, Integra: You have to use every approach to get out there and continue to
hammer away and try and find out why that 20% to 30% isn't using the program.
John Denham, manager, pension funds, IBM Canada Ltd.: You have to come to a resolution in your mind about
what your policy is regarding those members. As long as you're comfortable with whatever that number is,
and you exercise due process and due diligence and you talk about it with the committee, then I think you
let it happen. If that number isn't something people are happy with then you have to do something about it.
Garth Lockwood, manager, employee benefits, Petro-Canada: Why would you worry about it?
John Denham: It goes back to the question of ultimate goals in terms of the retirement income that a person
would generate from their investment decisions along the way.
Let's take the example of the default option. If your default is a money market fund, for example, and you
have some folks who've stayed in money market for the past five years. Is that a prudent investment
decision? Absolutely not. If you knew this person had kept their money in a money market fund for that
long, do you have an obligation to do a little more than just send a reminder?
Garth Lockwood: If you've gone through and done the things you believe are appropriate and you're worried
about the individuals that aren't capable of making what you consider to be the appropriate choice, then
perhaps your retirement program needs to be redesigned so that you put a core in place to protect those
individuals. Otherwise, you just have to say "we will provide a defined contribution plan and provide
appropriate investment options, we will provide education, information and then you, as an individual, have
to decide what it is you wish to do."
*** ***
INVESTMENTS
When more is less
A significant challenge for DC plan sponsors is deciding how many and which investment choices to offer.
The University of Western Ontario, in London, Ont., decided in 1994 that it wanted to increase the number
of investment options in the DC plan from the four it offered at the time. The desire for more choice was
mainly driven by the members themselves.
"Our members had always wanted more investment options but we were restricted by our third-party
administrator and whether they could actually accommodate that," says Louise Koza, manager, pension
investments and plan policy.
Over the next four years, the plan introduced several new funds and members can now choose from 13
investments. As part of the transition, the university brought the recordkeeping function in-house, which
afforded the plan much more flexibility, says Koza. Having the recordkeeping in-house allowed the
university to offer more choice while keeping costs under control. The plan used a modular approach to
increase the number of fund options while actually simplifying investment choices for members.
"What the modular approach does is say, 'OK, we've got this diversified equity fund that has a Canadian,
U.S. and non-North American component. Let's take each of those components and make them into an investment
option on their own,' " says Koza.
Each "module" then has the same investment manager and mandate as the fund from which it's derived.
"You're giving your members more choice because they can decide among different regions now," says Koza.
"But when they allocate money to a Canadian equity fund, that's essentially the same as taking a slice of
their allocation from the diversified equity fund and putting it in the Canadian component."
GOVERNANCE
Koza says the best thing the pension committee did before implementing any changes was setting out a strong
governance structure.
"Before we could really decide whether these changes were good, bad or indifferent, we had to have a
structure that allowed us to measure those policies, to identify who was doing what research and who was
making what recommendations," she says. "Governance needed to be documented, it needed to be agreed upon."
Governance protects plan sponsors so that if members ever question why a particular fund was added, the
sponsor can produce documentation on how a particular decision was reached.
"If you just have a CFO deciding that adding a new fund might be a good thing and he just brings it to your
board, it might be truly a good thing. But if you want it to be consistent, and you want everyone to
buy into it then you want documentation," says Koza. "If someone looks back and says 'why on earth did you
introduce this fund?' Then you have the documentation to say 'based on this governance document that was
bought into by everyone at the time--these were principles the decision was based on,' not that the CFO
listened to a good sales pitch and decided to do it."
--Andrea Davis
Diversification in DC plans
When designing a DC plan, sponsors need to deliver enough variety to satisfy the different risk tolerances
and investment horizons of the membership and provide members with tools to understand differences and make
informed choices. But how do you go about choosing what goes into a DC plan?
"One role you don't want to take on is predicting performance," says Ken Richards assistant vice-president,
marketing at Canada Life. "Returns come from many places and we know that asset allocation has tremendous
impact."
Other factors to look at besides performance include asset class, investment style, sector, capitalization,
stock holdings and geographic location for foreign content.
"Investment criteria should be based on solid performance, experienced management, variety of styles,
valuation frequency, service agreements and the funds offered," he says. "It's also important that
investment monitoring be done regularly. Look at changes in style, philosophy, key personnel or ownership.
Perform a quarterly performance review and a formal annual review. And, have a red flag procedure."
--Sonya Felix
Top 10 tips for managing DC plans
10. Convert to an NHL team to claim government support.
9. Convince your employees that GIC stands for Guaranteed Inferior Compounding.
8. Avoid a menu list that looks like the Report On Business mutual fund listings.
7. Manage your DC plan like a DB sponsor.
6. Don't place fund performance charts by the water cooler.
5. Buy low, sell high.
4. Forecasting, especially about the future, is dangerous.
3. Offer at least two investment choices: Nortel and BCE.
2. Allow employees to e-trade . . . in their own accounts.
1. Promise a colour Gameboy for every employee that actually attends your investment education sessions.
Source: Harry S. Marmer, director of investment funds, Frank Russell Canada
The question of choice
In the U.S., DC plans must have a minimum of three investment choices to comply with legislation, but in
Canada, there are no restraints or requirements to provide any choice for members of DC plans.
But that doesn't mean Canadian sponsors don't worry about whether they're offering their members enough
investment options. "How many is enough and how many are too many?" asks Dan Stone, director, human
resources at Saint Mary's University in Halifax.
There were no clear cut answers at the DC Plan Summit. "It comes to understanding your plan membership,"
says Canada Life's Ken Richards.
"You must understand the aims and needs of the different risk profiles. Use surveys and focus groups to
figure it out. For instance, an older conservative group doesn't need so many options, while a younger
group needs equities with foreign content. If the group is all over the map then you need more choices. You
may also need to have a financial adviser as part of the plan. Members need to have education and choice so
they can diversify their assets." --Sonya Felix
*** ***
FIDUCIARY RESPONSIBILITY
The road to good governance
ith the absence of regulation governing DC plans, sponsors struggle with fiduciary responsibilities. In the
U.S., DC plans are governed by federal legislation. In Canada, however, no such legislation exists, leaving
plan sponsors unclear on how best to fulfill their fiduciary duty to members.
To mitigate fiduciary risk, plan sponsors should develop governance models for their plans. By addressing
these risks in a consistent manner, sponsors will be able to demonstrate that processes were in place to
assist participants with their choices.
While there's no right or wrong answers in terms of specifics--one plan sponsor may decide five investment
options is enough, another may decide only 55 will do--getting it down in writing is important.
"The fact that you thought about it in the first place is going to make the difference," says Cathy Honor,
vice-president, group retirement services, Sun Life of Canada.
A good governance model should document the plan objectives, investment policy and education and
communication strategy. Plan sponsors can use the following checklist as a guide. It is adapted from The
New Imperative: The Pension Plan Sponsor's Guide to Successful Employee Communication and Education by
Mary DiSpalatro (Rogers Media).
PLAN OBJECTIVES
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Develop a social contract to manage expectations and define roles and accountabilities.
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State corporate objectives and rationale for plan design.
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Set clear governance and decision-making structure.
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Communicate objectives.
INVESTMENT POLICY
A plan's investment policy governs the selection, monitoring and replacement of investment managers and
options within the plan. It should:
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Include a statement of purpose, including objectives for risk/ return requirements.
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State the type and number of investments offered.
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Outline the investment selection process.
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Outline how the plan sponsor will conduct performance monitoring.
COMMUNICATIONS STRATEGY
An effective communications strategy is an important component of a plan's governance structure. In
developing education and communications strategies, plan sponsors should:
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Research members' needs, including their investment knowledge.
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Consider different learning styles.
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Involve employees in the process.
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Consider plan members' comfort with different types of communication.
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Measure the effectiveness of communications through employee surveys.
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Repeat communications often.
Legal challenges
hile case law in Canada has not yet evolved, the potential for litigation by plan members is real. Jeff
Graham practices law with the Toronto law firm Borden & Elliot. He is also the president of the
Association of Canadian Pension Management (ACPM). Here's an excerpt from his presentation:
One of the reasons that DC plans have become so popular is this perceived superior protection they provide
plan sponsors against liability for adverse investment experience.
While the structure of DC plans was designed to pass the investment risk to the plan participants, it does
not automatically follow that the participants assume all risk associated with the plan's investments. If
the plan's investment performance is poor, there may be circumstances in which the participants could sue
the sponsor successfully for failing to maintain a better rate of return.
Pension statutes generally provide that the plan's administrator has overall responsibility for the pension
plan. The administrator is in a fiduciary relationship with the plan's members. In the case of the federal
statute, this duty is set out in section 8 (1) of the Pension Benefit Standards Act (Canada): "In the
administration of the pension plan and pension fund, the administrator shall exercise the degree of care
that a person of ordinary prudence would exercise in dealing with the property of another person."
In DC plans, participants remain entitled to have assets invested by the administrator in accordance with
the principles of fiduciary duty and prudence. To the extent that the administrator invests imprudently,
where the sponsor controls the investments, or allows participants to invest imprudently in the case where
participants direct their investments, the participant retains the right to sue the administrator for any
losses.
With respect to claims related to identifiable investments, there is the case of Fales vs. Canada Permanent
Trust Company, where the defendant trustee was found to have failed to implement a process for monitoring
the continued appropriateness of a trust's investments. Consider also the failure of Confederation Life
where certain plan sponsors agreed to compensate participants for losses suffered where the plan held
Confederation Life guaranteed investment certificate-like products. Also, in Tonks vs. Aetna Life, an
investment manager was held liable for failure to follow a number of guidelines that had been established
in its retainer by a pension fund.
South of the border, the leading case is a series of 12 class action lawsuits arising out of the failure of
a California state chartered insurance company called Executive Life of California. In this case, under
corporate sponsorship of a DC plan, employees could choose to invest their retirement savings in one of six
funds, one of which was invested in insurance guaranteed investments.
From time to time, insurance companies were asked to bid for the opportunity to offer guaranteed investment
certificates (GICs). At a certain point in time, a substantial number of GICs were purchased by Executive
Life. At the time of the purchase, the corporation knew that Executive Life had a substantial junk bond
portfolio as part of the underlying asset. When rumours of financial difficulty surfaced a couple of years
later, it was alleged that the corporation made a series of arguably questionable judgments.
Among other things, it was alleged that the corporation replaced an Executive Life certificate of annuity
with an annuity from another company, provided employee communications that warned members that repayment
of GICs depends on the ability of the insurer to pay, directed calls to the human resources department
personnel who told people not to worry and entered into the agreement with Executive Life under which it
agreed not to disclose anything about the financial condition of Executive Life to participants.
At the end of the day, it was ultimately decided that Executive Life, corporation officials and consultants
had considerable experience in assessing GIC programs of insurance companies. When problems became
apparent, the corporation did change the disclosure and it did share that disclosure with participants. The
testimony before the courts was that while the participants received the information, virtually nobody had
relied upon the information.
The corporate sponsor was found to have acted prudently and reasonably and the participants could not show
that any of the losses they suffered were a direct result of the lack of action on the part of the sponsor.
So where does that leave us? Things are happening. The Office of the Superintendent of Financial
Institutions has published guidelines, giving useful guidance to plan sponsors. The Canadian Association of
Pension Supervisory Authorities is looking at the issue of national investment disclosure standards. ACPM
has also recently published a paper on the governance of funds. Without question, one of the drivers of
change is the desire to clarify requirements for plan sponsors.
What is ERISA?
The Employee Retirement and Income Security Act (ERISA) of 1974 was landmark legislation in the U.S. that
called for all employer-sponsored benefits plans to be properly funded, reported and disclosed. The
legislation sets out plan sponsor accountability, plan funding and outlines clear employee rights as well.
Section 404 (c) of ERISA provides "safe harbours" designed to protect DC plan sponsors from liability. The
legislation says that if a participant in a DC plan exercises control over the assets in his or her
account, then no person who was otherwise in a fiduciary relationship with that participant is liable for
any investment losses which result from the participant's exercise of that control.
Under ERISA, participants in DC plans must have the opportunity to give instructions to the fiduciary and
be provided sufficient information to make informed decisions. A plan must offer a range of investment
alternatives sufficient to:
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materially affect potential returns;
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provide at least three investment alternatives;
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diversify the investment so as to minimize the risk of large losses.
--Andrea Davis
*** ***
REGULATION
CAPSA considers regulation of DC plans
Legislation of DC plans is a murky area at best. Under current regulations that apply to DC plans, there
are many questions to address. Are the general fiduciary duties of plan sponsors sufficient to protect
members? Are current securities rules appropriate for DC plans? Should investment disclosure obligations be
spelled out specifically in legislation? Would specific rules water down fiduciary duties and would this
mean plan sponsors would adhere to the lowest standards? Should plan sponsors be provided some protection
against liability for members' investment decisions?
The Canadian Association of Pension Supervisory Authorities (CAPSA) is setting up a Model Law committee
that will look at regulatory issues surrounding DC plans.
"CAPSA's work is still in early stages. It's an enormous task, but with a Model Law, CAPSA could say we
endorse certain rules on vesting, portability, locking-in, etc. Of course, all we can do is make
recommendations. It's up to politicians to make legislative changes," says Sherallyn Miller, chair of CAPSA
and the superintendent of pensions for British Columbia.
One issue that concerns plan sponsors is harmonization of regulations across the country.
"I commend CAPSA for trying to come up with a solution," says Pat Suzuki, director of pensions at Suncor in
Calgary, Alta. "But please have kindness for plan sponsors where there are multi-province members."
Miller agreed that everyone says they'd like harmonization, but it's difficult when every jurisdiction has
its own priorities, local political pressures and environments to deal with.
"There's no vanilla flavour in a federation," she says. "Harmoniz-ation isn't always possible when you've
got 10 statutes and one is different than the other nine. An example I like to use is spousal benefits.
Each province proscribes to a minimum amount going to the surviving spouse. All of the provinces have set
it at 60% of the members' pension--except Manitoba which has 66.6%. We could say, 'Hey, let's all beat up
on Manitoba,' but then their benefits would be reduced. We need some sort of compromise."
To further efforts towards harmonization and to manage over-regulation of the pension industry, CAPSA has
partnered with the Canadian Securities Administrators and the Canadian Council of Insurance Regulators to
create the Joint Forum of Financial Market Regulators.
"Together, we're working to see that there is no regulatory overlap between the three areas," says Miller,
who is also chair of the Joint Forum. "For instance, a lot of pension plans are administered by life
insurance companies. Are we regulating the pension plans or the insurance companies? The Joint Forum is
still working out the operation of agreements between us to reduce over-regulation."
In the meantime, the Joint Forum is putting together a paper on DC plans. "It will be some time before it's
ready for public consumption," says Miller. "We will have a consultative process which has yet to be put in
place, but we don't mind hearing opinions before we get to the consulting phase. Once the paper is ready,
everyone in the pension industry will receive a copy."
--Sonya Felix
Should securities law apply to DC plans?
s the pension industry grapples with the complexities of regulation, one of the key questions is whether
rules governing the securities industry should apply to DC plans. Jack Geller, vice-chair of the Ontario
Securities Commis-sion, isn't convinced that the securities model should be applied to DC plans. "Really,
what we're interested in is making sure employees who are investing through DC funds get the information
they need to make intelligent investment decisions," he said.
Here is an excerpt from Geller's presentation, in which he addressed the need for regulatory changes in the
financial services industry:
"In recent years, mutual funds, pension funds, group RRSPs and other collective investment arrangements
have become important providers of financial services to Canadians.
Increasingly, we are seeing products of a very similar 'look and feel' in the banking, insurance, pension,
group RRSP and securities fields--particularly, but not exclusively, with respect to collective investment
products. Some of these products are being distributed by individuals and organizations licensed by both
the securities and insurance regulators. From the consumer's perspective, the distinctions between these
products may be very difficult to see. However, there can be substantive and substantial differences in the
regulatory regimes that govern both the products and the distributors.
Securities regulators believe it's time to rethink this regulatory structure. We think that neither
institutional regulation, nor the regulation of banks exclusively by federal authorities and the regulation
of their wholly-owned securities subsidiaries exclusively by the provinces and territories, produce the
best, or the fairest, regulatory results.
We have proposed a 'functional' model of regulation, rather than an 'institutional' model. Functional
regulation considers the economic functions served by financial markets and products, and looks for the
best regulatory regime to facilitate the performance of those functions. It focuses on activities rather
than particular products or the label on the institutions which carry on those activities.
As a result, functionally equivalent or similar products and services would be given similar regulatory
treatment, even where they are being provided by very different entities.
Ideally, it would be nice to end up with one national prudential regulator and one market regulator.
However, Canadian political realities dictate that we set our sights on a different goal.
Just a few years ago, the federal government and the provinces and territories made the latest in a series
of efforts to obtain agreement on the creation of a federal securities commission. It turned out to be a
forlorn hope for a number of reasons, not the least of which was a concern by some provinces that a
centralized regulator would ignore regional concerns.
It seems clear that, at least in the foreseeable future, the Canadian reality is that each province and
territory will continue to have its own securities regulator.
The reality is also that the federal government has little experience in the market regulation of financial
services and products, and no existing structure to provide such regulation. The provinces, on the other
hand, have a long history of providing this sort of regulation, and there are structures in existence to do
so.
To the securities regulators it seems clear that, if the problems inherent in the existing structure are to
be dealt with, it makes very good sense for the provinces and territories to be given the responsibility
for the market regulation of all financial products and services, and the marketing activities of the
providers of those products and services.
Provincial and territorial regulators would be responsible for oversight of market conduct, integrity of
markets and consumer protection provisions, such as disclosure and licensing rules.
Under this model, the provincial and territorial regulators would assume responsibility for the market
practices of all financial service providers, including banks, securities firms, trust companies, insurance
companies, credit unions, pension plans and group RRSP providers.
Provincial and territorial regulators bring together the necessary combination of resources, expertise,
experience and regulatory culture to successfully perform the market regulation function."
*** ***
RETIREMENT
Your plan members are nearing
retirement . . . now what?
Plan sponsors have a fiduciary duty to educate and communicate to plan members about their retirement
savings and investments in DC plans. According to Peter Gorham, a partner with Morneau Sobeco, some of the
topics a sponsor should discuss with a retiring member include: the advantages and disadvantages of Life
Income Funds (LIF), Locked-In Registered Retirement Income Funds (LRIF) and annuities; the impact of
selecting LIF and LRIF withdrawal amounts from the minimum to the maximum; when it is appropriate to choose
an annuity; income replacement levels; how to avoid being fleeced by a financial adviser; spousal
protection; and the difference between investing assets at retirement and following retirement compared to
before retirement.
"In my view, fiduciary responsibility doesn't stop until the employee has retired and transferred
retirement assets out of the plan," says Gorham. "Just as we have a duty to give employees the information
they need to make appropriate investment decisions for themselves, we must also provide them with the
information to make appropriate retirement decisions.
"Up to about 10 years before retirement, employees are generally interested in accumulating assets," says
Gorham. "They need advice on target asset levels, investment choices and maximizing tax effectiveness. As
retirement approaches, the needs turn towards retirement affordability and gradually to lifestyle issues."
Gorham offered the following tips for communicating information to retiring plan members:
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Retirement calculations:"With the advances in computer technology, we can now provide employees
with various retirement calculators to help in determining post-retirement expenses, income needs,
target asset level required to support that and the savings level and investment return targets to get
there. In providing this advice, employers should be very careful to avoid making any recommendations.
You should counsel and advise, but it is the employee's decision."
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Liability concerns: "The big fear among employers is liability. I believe there is liability for
doing nothing. There is likely liability for doing things poorly or appearing to recommend. To the
extent that you give advice in writing or through software tools, you have documentation and control
over the advice. Where an individual session takes place, I would document the discussion."
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Financial advisers: "Among DC sponsors and members, the perennial question has to do with
financial advisers. We all know there are some advisers to be avoided. We just do not know how to
identify them. If a sponsor recommends an adviser and it turns out the advice given was bad, does the
sponsor get hit with some liability? There's a good chance the sponsor would be named in a lawsuit."
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Disclaimers and feedback: "There will still be a need for one-on-one sessions. A sponsor could
give out a summary of questions to ask and things to consider when selecting an adviser. Or it may be
time to ignore the lawyers saying 'don't recommend anything,' and do what is right by your members.
Yes, you may be accepting some liability, but done well, it should prove better overall. Offer a list
of pre-screened advisers--with a disclaimer. Update it as soon as you get feedback from members. Get a
contract with the listed advisers setting out what their service levels will be, and what disclosure of
fees they will provide to all members."
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Help with education: "In developing education and advice for upcoming retirees, a sponsor will
likely need to turn to outside advice. Consultants and advisers can assist in putting together
information--written, software and seminars. This gives the sponsor the ability to review material and
assess its appropriateness."
--Sonya Felix
A plan sponsor's view
Sobeys Inc., a grocery store chain based in Stellarton, N.S., has had a DC plan since 1952. The company has
approximately 7,000 active plan members and between 1,600 and 1,700 retired members.
To help plan members make the transition to retirement, Sobeys sends a handbook dealing with issues such as
health, the emotional side of retirement, financial planning and estate planning to all members over 50.
The booklet gets mailed to plan members' homes.
At the local level, the company hosts retirement seminars in the various communities where employees live.
Local professionals--lawyers, financial planners, Canada Pension Plan representatives--are invited to make
presentations and plan members can attend with their spouse.
As plan members near retirement, Sobeys sends a more detailed package that provides specific information
about what their pension benefits will likely be, what their choices are for the money, as well as what
their group insurance coverage will be. Plan members are invited to come in for an individual information
session with their spouse.
"We discuss the three or four major issues they need to think about in terms of the choice, which is
understanding the difference between no risk and some risk, meaning that an annuity is risk-free but you
forgo the pool of capital. A LIF has some upside potential for capital preservation and income, but there's
some risk in that you have to manage the money," says Brian Morrissey, corporate director, compensation and
benefits at Sobeys.--Andrea Davis
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