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© Copyright 2000 Rogers Media. The following article first appeared in the March 2000 edition of
BENEFITS CANADA magazine.
The Law: Decisions, decisions
Defined contribution pensions were supposed to answer all of the problems presented by defined
benefit plans. If only life were that simple.
By Hugh O'Reilly
Defined Contribution (DC) pension plans are often seen as a cure-all for the ills associated with defined
benefit (DB) pension plans. From a sponsor's perspective, the regulatory burden is lighter with DC plans
and the liability is seemingly limited to making the required contribution. From an employee's perspective,
portability is improved and the plan is more easily understood.
However, a thorough examination leads to a more worrisome conclusion. DC plans involve a fundamental shift
in responsibility. Plan members--and not plan sponsors--have the responsibility of ensuring that their
retirement savings will provide them with a sufficient retirement income. In essence, plan members become
their own investment managers. To the extent that they make bad decisions they will shoulder the burden of
a lower retirement income.
In the absence of clear legislative or regulatory guidance, the problem for plan sponsors is that a court
may hold them responsible for the poor investment decisions of plan members. This could occur, for example,
if a plan sponsor unduly limits the investment choices. Courts may also hold plan sponsors responsible if
plan members lack the information or expertise to make the right investment decision.
EDUCATING MEMBERS
Many feel that plan sponsors can adequately discharge their responsibility by educating plan members and by
providing them with appropriate investment choices. Mutual or segregated fund providers are often required
by plan sponsors to produce understandable material and to provide seminars for plan members on their
investment choices. If these steps are followed, plan sponsors can argue that they have discharged their
responsibility by providing plan members with the information they need to make the decisions that will
allow them to get the best results.
While the education approach is helpful, one wonders if it is enough. Marshall Capital Corporation in
Toronto is a third party provider that offers investment advice to DC plan members. Mark Slipp, managing
director of Marshall Capital, believes that members need more than education. They need advice.
"Just because someone makes an investment through the mechanism of a defined contribution pension plan,
doesn't mean that the decision is any different than any other investment decision they make. Members
should be provided with investment advice from an independent service provider who complies with all
applicable securities legislation, including the 'know your client' rules. In this way, each member will be
able to make the best decision and, one hopes, maximize their retirement income," says Slipp.
UNDER EXAMINATION
Regulators are aware of the challenges associated with DC pension plans. Recently, the Joint Forum
(comprised of the Canadian Association of Pension Supervisory Authorities, the Canadian Securities
Administrators and the Canadian Council of Insurance Regulators) announced that it was going to examine
investment issues as they relate to DC plans. This project has just begun, so it is too early to tell if it
will lead to regulatory or legislative changes.
In the meantime, plan sponsors should take practical steps to ensure that they are discharging their
responsibilities. At a minimum, plan sponsors should ensure that plan members have a variety of investment
choices and that they are receiving appropriate educational information about these choices.
Ultimately, education plus investment advice may be the best long-term solution to the problem faced by
sponsors and members of DC plans. If members are to shoulder more responsibility then they must be given
tools to do the job. A plan sponsor organization that gives its members the right tools is much better
positioned to provide its plan members with the best possible benefit from their pension plan. In addition,
a sponsor may also gain the ability to persuade a court that it discharged its obligations to plan members.
Hugh O'Reilly is a lawyer with Torys in Toronto.
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