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© Copyright 2000 Rogers Media. The following article first appeared in the April 2001 edition of
BENEFITS CANADA magazine.
A legal view on advice
DC plan sponsors should stay away from providing investment advice.
By Kathryn Bush
Given the increased popularity of defined contribution (DC) plans, questions are being raised about the
potential liability of plan sponsors under these plans. To date there has been very little litigation
surrounding DC plans. One would expect these happy circumstances not to continue.
An area which particularly concerns plan sponsors is the provision of advice relating to the investment
options available under the DC plan. Providing true investment advice, particularly to less sophisticated
investors, is perilous and must be handled in a manner that makes absolutely clear the risks inherent in
any investment.
Plan sponsors have avoided this risky area. For example, while pension plans in Ontario are provided
voluntarily, the question arises as to what extent a plan sponsor must provide investment advice. The
current pension legislation in Ontario, the Pension Benefits Act (PBA), contains limited express
requirements to provide "advice" to pension plan members. Under the legislation, plan sponsors are required
to provide, for example, annual pension statements, termination statements, benefit options and notices of
amendment.
Consideration must also be given as to what fiduciary responsibility the plan sponsor has in this area.
Section 22 of the PBA imposes a fiduciary standard on all plan sponsors when it states: "the administrator
of a pension plan shall exercise the care, diligence and skill in the administration and investment of the
pension fund that a person of ordinary prudence would exercise in dealing with the property of another
person."
In considering the issue of providing advice regarding investment options some guidance may be possible. If
the sponsor of a DC plan provides discretionary investment advice to a member--formally or informally--the
member may rely on the information. If the member relies on the information to his or her detriment, a
claim for damages incurred as a result of the reliance (i.e., the breach of fiduciary duty) may ensue.
Clearly, a sponsor must be careful and not hold itself out as an investment adviser.
To reduce the risk of liability, a plan sponsor cannot simply refuse to provide any investment information.
Liability may also attach if relevant information is not provided to members. A plan sponsor should
therefore strive to educate rather than advise, to provide sufficient material for a member to fully
consider the investment options.
Where a plan sponsor offers a number of investment options but does not provide any information with
respect to the risk and return characteristics of each option, plan members may believe all investments are
equally good. The member may, in turn, rely to his or her detriment on the sponsor to make good investment
selections. Consequently, the plan sponsor may be held liable for breach of fiduciary duty or negligent
misrepresentation if information has not been brought to the attention of plan members. Accordingly,
providing sufficient information for members to appreciate the level and type of risks relating to each
investment should be clearly provided.
Until there is litigation in Canada, caution would be advisable in walking the narrow line of providing
sufficient information to permit plan members to make educated choices without crossing over into the more
nebulous arena of providing investment advice.
Kathryn Bush is a pension and executive compensation lawyer with Blake, Cassels & Graydon LLP in
Toronto.
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