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© Copyright 2000 Rogers Media. The following article first appeared in the June 2001 edition of
BENEFITS CANADA magazine.
DC plan regulation
The Joint Forum of Financial Market Regulators' report on DC plans has its strengths. But its
weaknesses are worrisome.
By Hugh O'Reilly
the joint forum of financial market regulators' report on defined contribution (DC) plans is an important
step in the development of an effective regulatory framework that helps members meet their own needs while
creating certainty for plan sponsors.
Unfortunately, the report, Proposed Regulatory Principles for Capital Accumulation Plans, is flawed. At
best, its flaws inhibit a productive discussion on an appropriate regulatory environment; at worst, they
could result in a regime that will make it difficult for plan sponsors to carry out their legal
responsibilities.
FINDING FLAWS
The report certainly has its strengths. But its review of the existing regulations governing the DC market
is inadequate.
The discussion of statements of investment policies and procedures (SIPP) is particularly revealing. In the
context of member-directed DC plans--which invest in mutual, pooled or segregated funds--a SIPP is surely
form over substance. The fund managers, not the plan sponsor, determine the investments. In a DC context, a
SIPP might be better focused on the criteria that apply to the selection of investment choices and
investment advisers.
There are other problems with the pension investment rules and their applicability to DC plans. In making
the point about SIPPs, the regulators' view is that the current rules require only a few additions to make
them work for DC plans, when in fact they need to be completely revamped.
The key principles spelled out in the paper are also of concern. In particular, the paper rejects safe
harbours (the requirement to offer a minimum of three core investment choices with different risk and
return characteristics as outlined in the U.S. Employee Retirement Income Security Act) and proposes that a
fiduciary obligation be imposed on plan sponsors to select a reasonable range of investments.
In a world of seemingly unlimited investment choices, the absence of specific guidance means that employers
may find this an impossible standard to meet. Liability for plan sponsors can result from the number of
investment options available. Having a minimum number of options set out in legislation would provide
guidance to sponsors and help them to do a better job for members.
LACK OF GUIDANCE
Requiring sponsors to provide members with a reasonable opportunity to switch investments is also flawed.
This issue creates a Goldilocks paradox for sponsors because liability can result from both too little and
too much opportunity. A better approach is to require plan sponsors to give members a minimum number of
opportunities to switch their investments, such as once a quarter.
The recognition of investment advice is an important feature of the report. However, the manner in which it
is addressed is confusing and incomplete. For example, the notion that employers could provide advice is
troubling. Another issue to consider is who pays for the advice and, in particular, is it permissible for
commissioned sales staff to provide it?
The paper rejects the notion of holding administrators harmless--even when its proposed rules are followed.
If this is the case, the rules should be as specific as possible because in making a determination on
liability a court will almost certainly focus on whether a sponsor followed regulations. Vague rules that
create uncertainty leave plan sponsors exposed.
While the Joint Forum's proposals are important in creating a more appropriate regulatory regime for DC
plans, they clearly have a ways to go. It will be interesting indeed to watch the regulatory reaction to
the industry debate that this report is certain to generate in the coming months.
Hugh O'Reilly is a partner with Torys in Toronto.
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