One of the fundamental questions about the structure of defined contribution pension plans is one that rarely comes up but that has an impact on almost every other aspect of the program: whether to use a trusteed or an insurance platform to structure the plan.

Most Canadian defined contribution pension plans use an insurance platform. They are, therefore, insurance products but without the security insurance usually offers.

The appeal is their off-the-shelf availability and easy access to an extensive menu of investments managed either by the insurer or other managers with whom it has negotiated bulk fees.

Some plans, particularly those whose assets have accumulated to a meaningful size or that have developed relationships with investment managers for their defined benefit pension arrangements, have chosen to use a trusteed platform, rather than an insurance one. A shift to trusteed platforms has been underway in the U.S. market for several years.

Similar to traditional defined benefit pension plans, a trusteed model involves three distinct and transparent components:

1) Monies are held in trust under a trust agreement.

2) The assets are invested in pooled funds or other investments of money managers.

3) A pension administrator, which maintains the member records and co-ordinates between the trustee, money managers and the sponsor, administers the plan.

But for plan sponsors to consider whether a trusteed model may work for them, they must first look at some of the common assumptions and misconceptions about them. A big misconception is the notion that the trusteed model is only for very large plans. Historically, it was the largest plans that opted for trusteed structures. But as assets in defined contribution plans have grown to meaningful balances, economies of scale make them a more realistic option. At the same time, technology and other efficiencies mean it’s now possible for plans with as few as 500 members to also benefit from a trusteed structure.

A second misconception is the notion that trust-based plans must invest in retail mutual funds.

Trust arrangements are flexible and don’t lock the plan into any specific type of investment. Most trusteed defined contribution pension plans invest in institutional pooled funds, but mutual funds, direct-held stock, exchange-traded funds and insurance-segregated funds are also options. Trusteed plans can also create their own investment portfolios, just like some larger defined benefit plans do.

There’s also often a belief that trustbased plans must issue prospectuses and follow onerous know-your-client securities rules. But plans administered by trustbased record keepers are often exempt from using a prospectus, as well as knowyour-client and related securities rules.

As for the suggestion that trust-based plans suffer from more out-of-market exposure than insurance-based arrangements, they only hold money out of market for short periods during a critical part of a transaction.

One of the key features of trust-based plans is the potential for greater flexibility and customization. The amount of any additional cost for that, however, depends on the degree of customization the plan sponsor wants.

Idan Shlesinger is managing partner of defined contribution pensions and savings plans at Morneau Shepell Ltd.

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Copyright © 2018 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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