© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the November 2005 edition of BENEFITS CANADA magazine.
Checking in
The Capital Accumulation Plan Guidelines kick in in one month’s time. For those plan sponsors still dragging their feet in the compliance department, the time to act is now.
By Gerry Chiasson

The Dec. 31, 2005 deadline for compliance with the Capital Accumulation Plan(CAP)Guidelines is closing in fast. Are CAP sponsors ready? Since the Guidelines are based on what were already best practices in the industry, compliance shouldn’t be a big stretch for most organizations.

But the reality is that many CAP sponsors are only part way there. The Guidelines were released by the Joint Forum of Financial Market Regulators in May 2004. There, the intent was compliance by the end of 2005, at least in respect of registered pension plans. Regardless of this expectation, the benefits of compliance are numerous, including: clarifying the accountabilities and rights of CAP members, sponsors and service providers; protecting against legal risks; providing a framework for efficient plan administration; and ensuring that CAP members are provided with the information and assistance they need to make investment decisions in a CAP.

While service providers such as fund managers, thirdparty administrators and recordkeepers have been hard at work to ensure compliance from their end, it remains the task of CAP sponsors to review and ensure that the intent of the Guidelines is met by their governance agendas.

The key questions are: will the Guidelines make any difference in how plans are run, or how well members understand their plans? Will they improve CAP members’ ability to finance their retirement?

It’s too early to tell, but based on the current flurry of activity, governance structures are certain to be improved. This in turn will undoubtedly lead to a clarification of roles and responsibilities, as well as more informed plan members—the stated purposes of the CAP Guidelines.

Here’s a list of things that plan sponsors need to do to comply with the Guidelines, along with some “food for thought”—comments from some CAP plan sponsors, and other ideas and concerns to think about.

State the plan’s purpose.
The plan sponsor needs to define the reasons for why the plan exists, and communicate that statement of purpose to the plan members. The reasons for having a plan can be numerous, including but not limited to: attraction and retention of staff; helping employees with retirement; mergers/acquisitions; and more.

In addition to the reasons for establishing the plan, sponsors might want to go one step further by giving answers to the questions: Why this type of plan? Why this set of provisions? It’s great for plan members to get answers to the “why” questions. This kind of transparency can be an effective aid to increasing employee satisfaction and plan appreciation.

This is also a great opportunity to help employees see how the CAP is aligned with business strategy and/or how it fits in with the company’s total compensation package.

This is one area where many plan sponsors need to do some work. In some cases, the plan has been around for so long that existing management isn’t really sure of the answers to the above questions.

Select and monitor service providers and investments.
Many CAP plan sponsors use a third-party service provider to carry out the day-to-day administration of the plan. Again, the ultimate responsibility rests with the administrator which, for a CAP, is often the plan sponsor. Even if you are not using a service provider in this way, you may be hiring consultants to assist you.

In any of these cases, the Guidelines indicate that you need to create a set of criteria on which to base your selections and then monitor the service provided against those criteria on a regular basis(usually annually). If you’re not experienced in this type of selection or monitoring, you may want to hire advisors to help you with those steps. Getting another expert’s opinion on how well a service provider is performing against expectations can be a very effective monitoring tool.

The selection of investment options made available need to be consistent with the purpose of the plan. Specific criteria are to be used in the selection process, and performance must be measured against those criteria. When the range of investment options is to be changed—such as a new option added or subtracted from the mix—this must be effectively communicated to plan members, particularly what actions they need to take or consider.

Most plan sponsors were doing a significant amount of this monitoring before the Guidelines were released, so there may only be a certain amount of “tweaking” needed in this area.

A significant decision is whether to use a default option and, if so, what it should be. One must ask: who is making the investment decision: the employer or the employee? The default option should not be used for anything more than “short-term parking.” To avoid even the perception of the sponsor making the investment decision, some plans do not offer a default option. This encourages members to be more involved, making investment decisions that make sense for them. After all, the CAP Guidelines do promote member responsibility in this area.

Plan sponsors would do well to reconsider and/or reaffirm their default option choice in conjunction with their CAP Guidelines compliance work. Some plans are using the so-called “asset allocation” funds, or “lifestyle” funds, as the default. Even though the member goes through a risk assessment, they are, for the most part, still carved out of the investment choice picture. The person with the most to gain(or lose)is always the best person to make the investment decisions.

Communicate effectively.
Employee education is a key concern of plan sponsors. The CAP Guidelines do not use the word “educate”— they state that information and tools should be provided. One definition of education is: “an instructive or enlightening experience.” If information tools do not produce an enlightened plan member, then they’ve failed to do their job. So there should be no hesitation in using the term “education” in the context of CAP communication needs.

It’s important for plan sponsors to be able to gauge member understanding of the plan and of the investment decisions they need to make(linked to their retirement income needs if that’s part of the plan’s purpose. They need to set out an action plan to improve both, and then regularly monitor the success of that plan.

Here’s a communications checklist:
Have you told plan members about the CAP Guidelines? The mentality, “employees don’t need to know that the Guidelines exist” is not a sound one. A better approach for sponsors is to advise employees of the CAP Guidelines and where the company sits on the compliance spectrum.

Communicate the statement of purpose—as discussed above.

The Guidelines state that “CAP members are responsible for making investment decisions within the plan and for using the information and decision-making tools made available to assist them in making those decisions.” It’s very important to regularly reinforce this message; members have a big job too, and need to step up to the plate.

Provide investment information and decision-making tools to help facilitate:

  • a retirement income needs assessment;
  • an assessment of the savings rate required to provide that income;
  • a risk tolerance assessment;
  • an assessment of the asset mix best suited to the members’ income needs and risk tolerance;
  • a way to fit all of the above together in the context of the CAP contribution formula and investment options provided.

If your plan administrator also sells investment products, then they cannot present themselves as providing unbiased information and tools. For a seller of investment products, it’s hard to escape the inherent conflict—and most will admit that. So consider providing independent tools(on the Web, in seminars and workshops, in written communications)in addition to the administrator/investment provider’s offerings, to ensure that your plan members have access to independent material.

Provide additional information, including the following:

  • how to move assets amongst the options;
  • details of all fees, expenses and penalties—you might want to provide tools for this to ensure the member understands how the fees are built into the unit values;
  • retirement information, including details about annuity purchases and RRIF products(locked-in where required);
  • a referral to a service provider who can advise members about their investment decisions(note that this is only suggested in the Guidelines; it is not a requirement).

This significant communications mandate calls for a well-developed, comprehensive ongoing communications strategy that is monitored regularly for its effectiveness.

Document everything.
As part of a good governance structure, anything important must be documented. This includes the relationship with service providers—a contract with each of them is essential. The investment selection process and periodic reviews also need to be documented.

The Guidelines recommend a document retention policy be prepared and maintained. While several plan sponsors have mentioned that there is a significant amount of work to be done here, a well-documented process is an excellent risk management tool. And make sure privacy legislation is built in to your document retention policy.

It’s very important to get across to members that they share in the responsibilities outlined in the CAP Guidelines. They need to do their job, and the plan sponsor does too.

One final checklist: undertake your own, independent review of CAP Guideline, compliance and your governance structure to determine if there are any gaps; ask your service providers for an analysis of their own compliance with the Guidelines (but don’t accept this in lieu of your own work in); establish an action plan to address any gaps, and review this compliance action plan annually. Congratulations— you’re compliant.

Gerry Chiasson is communications practice leader with ACS HR Solutions, in Toronto. gerry.chiasson@ acs-hro.com