| This year’s Defined Contribution
Plan Summit featured a breakout discussion on plan regulation.
Sherallyn Miller, chair of the Joint Forum of Financial Market
Regulators, posed these 11 questions to our delegates. Their
responses—in point form, as submitted—run below each
question |
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1.
If the Joint Forum is not amenable to a U.S. ERISA-style "safe
harbour" for employers from liability for employees'
investment losses, what alternatives could be included in
the proposals to provide adequate comfort for employers?
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>
Define employer/member responsibilities.
> Due diligence.
> Plan governance.
> Test: reasonableness
in circumstances.
> Establish guidelines—best
practices.
> Depends on the capacity
of the plan sponsor. Is the sponsor the administrator or not?
> What role(s) is/are
employers playing?
> What is the duty? Statutory
vs. fiduciary.
> If duty, what is the
standard?
> Was the standard breached?
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>
Provision by the regulators of a list of best practices (and/or
minimum standards) that, if followed, will keep us onside with
the regulators.
> Member Charter of Rights—i.e.
“as a member, I understand the risks associated with a
DC plan.”
> In exchange for accepting
these risks, my expectation of my sponsor and administrator
are:
> Appropriate level of
investment options
> Education
> Sound strategy for
reviewing fund manager performance
> Key question—would
we actually get members to sign off on this?
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>
Alternatives to ERISA-like safe harbour protection for employers
against investment losses.
> In addition to ERISA
standards, we would like to see minimum standards for a defined
process based on best practices for, for example: enrollment,
risk profiling, positive investment election or waiver.
> Annual compliance reporting?
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| 2.
The proposals require that the roles and responsibilities of
the employer and employees regarding the plan be defined in
the plan documents. How would you define these roles in your
plans? |
>
May depend on mandatory vs. optional employee participation.
> Define responsibility
of administrator.
> Choose number of funds,
define funds and define default.
> Employee responsibility
to select, rebalance (provide with tools).
> Educate themselves
to make investment decisions.
> Employee is responsible
for results of investment decisions, for investment losses.
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Employer:
> Education program
> Update plan rules
> Annual report for
plan
> Timely remittance
of contributions
> Select and monitor
fund managers
Employee:
> Investment returns
and risks
> Be informed
> Member Bill of Rights
> Self-education
> Incorporate these
into the plan document with an annual renewal.
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Employer:
> Plan design
> Fund manager and
fund selection
> Contribution limits,
amounts, frequency, etc.
> Provide access to
appropriate education, information regarding plan design,
options, administration, fees, etc.
> Monitor fund manager
performance—alignment with style, objectives, etc.
> Hire recordkeeper
Employee:
> Make fund selections
> Responsible for participating
in education sessions and understanding their plan and options
> Sign a waiver of
liability
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| |
| 3.
The proposals include investment rules for each fund offered,
including adequate diversification, an acceptable level of risk
in each fund and avoidance of conflicts of interest (similar
to mutual fund rules). What do you think are appropriate investment
rules for plans that provide investment choices? |
>
Must invest prudently.
> Reasonable level of
diversification.
> Process—monitoring.
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Diversification by asset class and style for all risk profiles. |
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| 4.
Do you think that stock in the sponsoring company is appropriate
for a retirement savings plan? If so, should there be a limit
on the percentage of the assets in the plan invested in company
stock? |
>
Voluntary.
> Redemption.
> Not the only option.
> Minimum disclosure
rules, but no limit if it is a voluntary election plan. |
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| >
If yes, some limitations within registered plan. |
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| 5.
The proposals would require disclosure regarding fees. Materials
currently provided are not always clear about fees, and how
they might effect the stated rates of return. How would you
disclose all fees related to the funds? |
| >
Sufficient to disclose up front, and upon request. |
|
>
Disclose how they are calculated.
> Fund manager to provide
information on their fees.
> Need approval from
sponsor if we decide to disclose direct fees.
> Need to split fees
hidden in unit value by type and specific percentage impact—varies
by employee plan.
> Need all investment
providers to provide same level of detailed information about
fees to ensure a level playing field.
> Disclose by fund.
> Keep it high level—advise
of group benefit.
> How? For each member
provide disclosure of process in member kit. Web/call centre
with specific sponsor plan information. |
| |
| 6.
The proposals require a default option to be provided in cases
where an employee fails to make any investment choices. What
do you think of this proposal? And what kind of fund do you,
or would you, provide as a default option? |
>
Default option—is it necessary? No, not legislated.
> Money market is common—preservation
of capital and flexibility.
> The question/answer
would depend on whether or not the employer or employee is directing
the investment.
> If employer funded—he
may have the ability to select default.
> If employee funded—discretion
is given.
> Cannot have accidental
investors—choosing a default on behalf of the employee
is in fact choosing. |
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>
Default fund—believe in it. Protects firm (fiduciary obligation).
> Sponsor’s discretion—limited
funds to choose from. Balanced, life cycle, money market.
> Explain why selective
funds are available.
> Ensure member has selected
an option before the plan becomes operative. |
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| 7.
Do you do any surveying or data testing to determine whether
members in general understand your investment information and
education materials, and are generally making prudent decisions?
If so, do you find that employees generally have an adequate
level of investment knowledge, and choose their investments
within a prudent range of risk and reward? |
>
For each new employee, a meeting is held one month after orientation
and choices are explained. Employee gets back after a few weeks
about investment choices in the DC plan. New employees are easy.
> Ongoing, each year,
overall funds are reviewed on investment split by union or employee
group (but not individually).
> Over all, no direct
employee survey but retrospective review of elections/investments.
We can modify information/materials using our observations.
Good way to identify potential problems. |
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>
Generally, we remind employees to do risk profiles annually.
>Do not measure results
or test back investor knowledge.
> Some suppliers do Know-Your-Client
(mutual funds). |
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>
No. Employees generally do not have the knowledge necessary.
> Are people applying
the knowledge? |
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| 8.
Can you provide examples from the proposals that would significantly
increase the costs of the provider and/or the employer? If so,
can you quantify or estimate those costs? |
>
Advice potentially adds cost, especially on individual counseling
sessions.
> Could be $100 to $200
per person, plus cost of doing while on company time.
> What is advice? Investment
fund disclosure? Investment 101 education?
> Recognize that performance
evaluation of fund managers is expensive but almost (prudently)
required. |
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>
Advice on investments.
> Surveys—if they
could be done electronically, the cost would be reduced.
> Identify all securities/assets
held in the fund. |
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| 9.
The proposals would require plan administrators to provide financial
statements and lists of assets for each fund offered, similar
to mutual fund requirements. Do you currently provide this information?
If not, why not? |
>
Information received quarterly shared with pension committee.
Information is not restricted from employees, but only given
out if asked.
> Prospectus is expensive
to put together. And how does a list of assets teach employees?
Better off with the assessment of manager performance.
> Asset information could
be confusing rather than educational. Members could make wrong
decisions.
> Better information
is “decision-making” information.
> Other important information
to share would be fee levels—to show employees that group
rate is lower than available retail rates.
> Specific information
in question is not available without asking, paying for it and
having to interpret it. |
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>
Suppliers do not do this now.
> No significant demand
for detail.
> No value added.
> Same vein as too many
choices—too much information (except when asked). |
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No. Costly and of questionable value. |
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| 10.
Do you currently arrange for your employees to receive investment
advice from a registered adviser, or recommend that they seek
professional advice on their own? |
>
Where possible, yes, in conjunction with supplier tools.
> Facilitate access. |
|
>
Education—yes.
> Suggest they retain
their own adviser if advice is needed. |
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| 11.
The Joint Forum paper sets out some options for implementation
of the regulatory proposals, which include: |
a) Harmonized industry
guidelines developed with the Joint Forum, then adopted by the
applicable regulatory authorities,
b) Best practices guidelines issued by the Joint Forum
through its member regulators, or
c) Legislation or regulation developed by the Joint Forum
and adopted by the various regulators. |
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| How would you like to see
the proposals implemented? |
>
We’d like to see minimum harmonized regulations (that the
best plan sponsors are already satisfying).
> We’d like to see
harmonized best practices/guidelines as published by industry
associations. |
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We like option B. Minimum standards, documented procedures,
helping employers select best options for employees. |
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Harmonized best practices that are not legislated. |
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