Education Risk in CAP Plans

fail gradeCapital Accumulation Plan (CAP) sponsors often note that many employees are not engaged in overseeing their CAP account, or remain in the default fund. They say they really make an effort to communicate and educate CAP members about their role and the basics of retirement savings but it doesn’t appear to have much of an impact.

Most organizations don’t invest significant administrative resources and employee time on education without being certain it is effective. They want to know if it’s working. Key performance indicators (KPIs) are commonly used in this type of situation. A KPI is a measurable value that provides an indication of how effective you are in achieving key objectives. Some sponsors won’t consider CAP education KPIs because they feel it is simply too difficult and costly to measure the effectiveness of an education program.

Educators would disagree arguing that, if you have a specific goal in mind and know the information you want to convey, reasonable measurement indicators are possible.

Why CAP “education” is important

It is important for an organization to recognize that when it provides a pension program it also takes on significant financial and legal risks and hidden costs that have to be managed. Along with concerns about fees and expenses the issue of inadequate education is one of the common areas of DC and 401k litigation in the U.S. Such litigation is also expected to happen in Canada.

Therefore, a key question is how to mitigate the ‘education’ risk.

CAP members are responsible for making investment decisions and using available information and tools. Many of a sponsor’s responsibilities are related to providing information, however sponsors are often in the dark about the nature and appropriate level of education they should provide.

The CAP Guidelines outline general requirements such as information on plan investments, glossaries of terms, and explanations of the different types of plan investments and how they work, plan investments’ expected  risk and returns, and fees and costs. Plan investment performance reports are also required.

The Guidelines also recommend that decision-making tools be provided  including asset allocation models, retirement planning tools, calculation and projection tools (i.e.  for determining contribution levels), risk tolerance and profiling questionnaires, and information about fund investment holdings, financial statements etc.

Major challenges

One of the big challenges sponsors face is the difference in CAP members’ ages, levels of education, language skills, and math and financial comprehension. However, record keepers can provide information on plan demographics, location and type of investments by age bands, “default fund” membership, members approaching retirement, retirees, call centre activity and issues, website usage, responses to surveys and participation in education sessions.

Such information provides an in-depth view of the makeup and activities of plan members. Additional information can also be generated as part of the education sessions in the form of customized surveys. This type of data is useful in improving effectiveness by allowing the sponsor to target communication and education initiatives.

Another key issue is the amount of time employees spend learning how to manage their pension accounts. Is optional attendance at a one-hour annual education session sufficient for something that is complex and important to employees and the organization? For example, attendance at regular safety or environmental training sessions is often mandatory. If concerns about employees’ retirement is important then perhaps mandatory attendance at education sessions should be considered. Yes there is a cost but a sponsor needs to acknowledge that this is a necessary part of offering a CAP program and part of the cost of doing business.

What to include in a KPI report

The demographic and other factors previously outlined should be part of a KPI report. This type of information is useful historical documentation and can be used for education planning purposes. More importantly, the nature of the workforce, age and types of investments available and external factors often change over time. The frequency of KPI reporting should also be tied into major education initiatives because of cost and resource considerations.

In many cases, record keepers are responsible for providing education. These education sessions however tend to be standardized for all clients, often covering a broad range of topics aimed at all age groups as well as new and long-time employees. They are also focused on CAP Guideline requirements and are, in many cases, not customized to address plan demographics or employee concerns. A general survey is often included at the end of each session focusing on the presenter, location, presentation method, etc. While this information is useful these types of surveys are not geared to assessing comprehension of the material presented — i.e. the effectiveness in ‘educating’ the participants.

To improve the feedback loop, plan sponsors should consider including a separate questionnaire which focuses on gauging participants’ understanding of specific topics covered in each education session.

The key in improving overall education effectiveness lies in targeting particular groups of employees. This can be done using the demographic information and the feedback from prior education sessions (i.e. including areas or specific topics of interest to members). For example, employees who will retire in the next ten years will likely be more concerned about issues that are not of interest to new or younger employees. Monitoring attendance and time is also important and measureable and should be included in the KPI report.

Sponsors should consider inviting spouses to education sessions particularly if spousal RRSPs are part of the pension program (sponsors are responsible for educating all plan members). Keep in mind that if a TFSA is offered the objectives and education requirements are different than a DC plan or RRSP. DB plan sponsors are not required to educate DB members. Unfortunately many DB sponsors also offer employees an RRSP or TFSA and the CAP Guidelines apply. Also remember that the pension committee must be well versed in all the areas of education as well.

To improve effectiveness, education sessions logically should target specific groups and include topics of interest or address specific issues raised by participants at previous sessions. Participation in education session, whether or not they are mandatory, should be tracked. In addition, including a survey focused on assessing comprehension of the topics should improve the assessment of the effectiveness of the education sessions.

Underlying this approach is the need for considerable administrator involvement in setting the agenda and topics for each education session rather than leaving it to the discretion of the record keeper. Under the CAP Guidelines the administrator is responsible for overseeing and assessing education initiatives undertaken by the record-keeper. A well thought out KPI report will assist in this task.

Is the underlying problem education?

We know that CAP sponsors often feel employees are not engaged in overseeing their CAP account. But has the underlying real problem been identified? Is education the key? For example teaching someone how to maintain a car before they decide they want to buy it probably won’t be effective. Spending more time and effort marketing the value and features of an organization’s pension programs, when an employee is hired, may be a better way to sell the CAP program than trying to educate employees after the fact. Rather than just handing new employees the pension booklet and telling them to read it, why not take some time to sell the pension program?

It’s important to take a serious approach to education since education requirements are a potential litigation financial risk for sponsors. The KPI methodology is well stablished and can assist in mitigating this risk. A KPI report that summaries education initiatives shows compliance with the CAP Guidelines and demonstrates a sponsor’s commitment to CAP education.