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© Copyright 2000 Rogers Media. The following article first appeared in the September 2000 edition of
BENEFITS CANADA magazine.
The Advice Debate
Giving financial advice to DC plan members is a two-sided issue. While most plan sponsors regard
advice as a fiduciary gamble, a minority says it's an investment in employees that actually alleviates
liability concerns.
By Kathryn Dorrell
Glazed faces, obvious concern, endless questions. This is a troubling scenario for defined contribution
(DC) pension plan sponsors trying to give their members the financial education they need to make prudent
investment decisions. Organizations often struggle with the education issue. They worry whether the
information is too simple or, on the other hand, overwhelming workers with complicated details. The big
question for many plan sponsors is: are we giving employees enough?
Shell Canada Ltd.'s solution to this dilemma was to cross the line from education into the realm of
financial planning--specifically advice. Several years ago, the Calgary-based company was troubled by the
results of a survey that gauged employees' financial knowledge. While the company had launched an extensive
education campaign to prepare its workforce for the responsibilities of their new hybrid pension plan,
which includes a significant DC component, the study revealed investment acumen among the 3,600-strong
workforce was lacking--at least by Shell's standards.
"The scores were average in terms of [industry] benchmarks but [we didn't] feel employees had sufficient
understanding to make [investment] decisions," says Chris Ferrill, Shell's manager of compensation and
benefits. Ferrill says Shell felt confident that the education program fulfilled it's fiduciary
responsibilities. But it was concerned that because employees didn't have a solid understanding of
investment principles, they wouldn't achieve their personal retirement goals. As a result, it hired a
financial consulting firm to give advice to workers approaching retirement.
The move is a bold step into a new territory that a small number of Canadian DC plan sponsors are
exploring. Like Shell, they are concerned about the repercussions of simply offering education and find
themselves unable to help employees who are asking for their advice. Indeed, Elaine Leufkens, senior
consultant, benefits and pensions, at Sony of Canada Ltd. says the company's DC plan members are far more
interested in receiving advice than education, which is why the Toronto-based company now offers the
benefit.
"The feedback has been very, very positive," says Ferrill of Shell's initiative. "Sometimes [employees get]
not so pleasant surprises [about their finances], but they say, 'at least I've got someone to show me what
I can do.' We have people asking, 'when am I going to be eligible to participate?'" he adds, noting that
Shell now offers the service to younger employees.
In essence, DC plans and plan members, who are demanding the tools to properly manage their retirement
savings, are forcing the pension industry to reconsider the boundaries of its fiduciary responsibilities
and traditional mandate of simply educating employees. Many organizations are acknowledging the need to
move beyond the role of information provider to that of advice facilitator, says Mary DePaoli, assistant
vice-president, national marketing and sales at Sun Life Group Retirement Services in Toronto. DePaoli
believes that "the time has come for this benefit." She adds that providing advice through a third party
could become a powerful attraction and retention tool.
More at issue is the fact that advice may prove to be a lifesaver of sorts for plan sponsors. "In 20 years,
there could be a disastrous result [in an employee's retirement investments] and someone will conclude that
plan sponsors should have [offered advice]," says Hugh O'Reilly, a partner at Torys in Toronto. While most
organizations still regard advice as a fiduciary gamble, Shell's Ferrill says one of the biggest advantages
of this benefit is that the company actually worries less about liability because it's confident employees
can make shrewd investment decisions.
Plan sponsors are using third-party providers to deliver advice for two reasons: these firms have the
expertise needed to assist members, and the relationship distances the organization from the advice (see
"Taking the plunge," page 55). Sony offers advice through the telephone and online services of Integra
Financial Corp., the financial planning arm of its principal fund manager, Integra Capital Management.
Shell, meanwhile, has contracted the services of Toronto-based T.E. Financial Consultants Ltd.--which has a
Calgary office and works with the plan sponsor on its education programs. Employees eligible for the
benefit must complete a detailed financial profile. This helps T.E. Financial assess members' financial
position, risk tolerance and goals and then work with them to draft a plan, which includes advice.
Employees' spouses and partners are encouraged to participate in the process and attend the two- to
three-hour financial planning sessions. These sessions do not exclusively address the Shell pension plan
but the overall financial portrait that an employee's assets, debts, income and investments comprise.
The cost of offering advice varies, based on the plan sponsors' needs and the provider. Shell has invested
an amount equal to its annual long-term disability costs to launch financial planning for employees.
However, this figure includes education and communication efforts to promote the benefit.
Toronto-based Integra Financial Corp. charges $150 per hour for financial planning services while Marshall
Capital Corp., also of Toronto, charges less than 2% of the plan sponsors' assets under management.
However, some plan sponsors, that represent large and valuable accounts to their money managers, have been
able to negotiate this benefit at no extra charge.
SEEKING ADVICE
Mark Slipp, managing director of Marshall Capital Corp., a Toronto-based firm that provides education and
advice, believes advice is crucial because most education programs don't meet DC plan members' needs. "We
would do [education] presentations to plan members and really [simplify the information]. Still, you would
watch members' faces glaze over. They had no idea what we were talking about. [It's like] taking a six-year
old into a university physics class."
However, Jury Kopach, vice-president, retirement services at T.E. Financial, says plan sponsors shouldn't
offer advice without delivering a thorough education program that ensures employees do understand an
adviser's recommendations. "Proper education allows the employee to utilize the tool that the company
offers them whether that be mutual funds or pension plans. Those employees do very well in seeking out
their own advice," says Kopach, adding, "part of the educational plan should [address] how you go out and
seek financial advice."
Some DC plan sponsors are telling their members to do just that. "[Employees] are capable of going and
getting their own adviser. In fact, we recommend that they do so," says Genie Gilchrist, consultant,
pension and benefits at Enbridge Consumers Gas in Toronto. She adds that T.E. Financial provides Enbridge
employees with a list of licensed advisers after conducting education sessions.
Organizations such as Enbridge are not dismissing the need for advice, says Kopach, but simply drawing the
line as to what they are willing to do for employees. "That's fair," he adds. But the issue isn't that cut
and dry. Ferrill says acting as facilitator and payer of this benefit is an acknowledgement on Shell's part
that, left to their own devices, the majority of employees would not go out and hire a financial adviser.
The reality is most companies would like to assist employees with their financial decisions--many are faced
with a barrage of questions on a regular basis and it's their instinct to try and resolve these issues. But
they don't, simply because of the fear of lawsuits.
"I am cautious about crossing the line," says Wayne Hoffman, an investment adviser for the DC plan at
Grimsby, Ont.-based Jonn Deere Ltd. "There will be ramifications if things don't work out." Gilchrist
concurs. "Giving advice is risky. [Employees could come back] and say: 'you told us to use this company and
they didn't do a good job.'"
Kopach says these concerns are unfounded. He emphasizes that advisers assume liability for the information
they provide. "When we offer advice, we offer options and alternatives. We don't tell people what to do,
they ultimately make their own decisions. In the context of liability, where you have prudently discharged
your responsibility, essentially you've done your job in terms of offering solutions to problems."
On the legal front, O'Reilly says existing pension laws do not adequately cover DC plans, therefore they
reside in the territory of common law, leaving organizations to manoeuvre in what is essentially a
regulatory vacuum. It's also unlikely that any national standards covering advice will be established
considering pension plans are currently subject to varying provincial regulations.
Kathryn Bush, a pension and executive compensation lawyer with Blake, Cassels & Graydon LLP in Toronto,
who is also the vice-chair of the Ontario Financial Services Commission and its tribunal, takes a different
stance from O'Reilly. He thinks the liability issues are greater when a plan sponsor doesn't provide access
to an adviser. Bush bristles at the notion that DC plan sponsors have to offer such a benefit. "If [an
organization] didn't have a plan at all would we say it had to [provide financial advice]?
"I don't think the cases are anywhere near requiring the employer to provide advice through third-party
individuals," says Bush. She adds cases in Canada to date regarding DC plans have been limited, and consist
of failure to inform (such as the signing of a spousal waiver) or incorrect or misleading information
issues that stem directly from relations between the plan sponsor, its recordkeeper and the employee.
"I think it's going to be tough. Yes, the courts will feel sorry for the hard luck story when it comes up,
but they don't want to put employers in a situation where it's better not to have a pension plan than to
have one," says Bush. "I don't think there will be a lot of successful lawsuits."
Hoffman believes it may take a "magic bullet to shield [plan sponsors] from liability" for advice-giving to
develop further in the plan sponsor community. Ferrill's wish list is more modest. He says even a Canadian
best practices model would be helpful.
Financial planning as an employee benefit is taking off in the U.S. San Francisco-based mPower, an online
provider of advice services for 401(k) plans (the DC equivalent), has 50 U.S. clients. "At this point it's
just a matter of how fast we can sign people up," says Lisa Massena, senior vice-president of marketing at
mPower. While mPower is currently licensed only to deal with U.S. plan sponsors, it has received queries
from other organizations, including Canadian firms.
At home, financial advisers regard group clients, particularly smaller organizations, as a growth market,
says Caroline Nolan, editor of Advisor's Edge, a Rogers Media publication for the financial planning
industry. She adds that several mutual fund companies have set up service bureaus to help their advisers
manage group accounts.
Other market forces will also advance this benefit. For one, the present bull market euphoria is not
conducive to an evolution in fiduciary responsibilities as few plan sponsors or members are worried about
investment returns. A change in the markets, however, could provoke anxiety and action.
"DC plans are in their infancy, we've had a decade of good markets in which no one really needed advice,"
says T.E. Financial's Kopach. "What you are going to [see] is employees realizing they've put in so much
money and now it's worth less, or they took all this risk without fully understanding. They are going to go
to their company and say, 'listen, we really need some advice.' Ultimately, the plan member will dictate
what the market needs."
Kathryn Dorrell is associate editor with BENEFITS CANADA. kdorrell@rmpublishing.com.
*** ***
Taking the plunge
Once plan sponsors decide to dive into the world of advice, they should spare no effort in picking the
right provider.
Industry experts agree that third-party providers with expertise in financial planning are best suited to
take on the role of adviser.
"Plan sponsors must do all the due diligence possible to make sure their adviser gives objective advice, is
acting in the best interest of the member, and has the highest qualifications with no pending lawsuits,"
says Mary DePaoli, assistant vice-president, national marketing and sales, at Toronto-based Sun Life Group
Retirement Services.
Chris Ferrill, manager of compensation and benefits at Shell Canada Ltd. in Calgary, recommends hiring an
independent provider. "We didn't want to go to a company that was directly associated with the buying and
selling of mutual funds."
Providers should comply with the Securities Act, says Hugh O'Reilly, a partner with Torys in Toronto. "At
minimum, a plan member will have to acknowledge it was their [decision] to take the advice," he adds.
The provider must also take full responsibility for its advice. "We indemnify plan sponsors," says Lisa
Massena, senior vice-president of marketing at mPower, a San Francisco-based online advice provider. "When
people come on our site they have to sign a disclosure that states the advice comes from [us]."
It's also important to monitor the provider on a regular basis. "You have to be a watchdog [and see if] the
returns are doing well and people are satisfied," says Wilf MacIntyre, national vice-president of the
Industrial Wood and Allied Workers Union.
Lastly, national companies should ensure their adviser can service all of their locations.
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