Many plan sponsors aren’t aware of the level of oversight required for their defined contribution pension plans and the legal risks that comes along with them, according to Jana Steele, partner, pensions and benefits at Osler, Hoskin and Harcourt LLP, speaking during a session at Benefits Canada‘s Benefits and Pension Summit on April 1.
“Arguably, the administrator should be applying the same level of diligence in their DC investments as they would in their [defined benefit] investments,” she said. “They have to provide the appropriate [investment] options for their demographic and their plan members, taking action to replace underperforming options.”
The level of diligence includes overseeing decisions about what funds are in the plan and why they have been selected, tracking their performance through frequent communication with service providers and monitoring fees. If fees are excessive or inadequately disclosed to members, the administrator could be at risk of litigation.
Speaking at the same session, Mitch Frazer, partner and chair of the pensions and employment practice at Torys LLP, said 2008 was the year that market this shift in the pension world.
It used to be that with defined benefit, “the employer bears the risk, with DC, it was employees,” said Frazer. “Now we know that with DB, employers [bear the risk] until a company goes insolvent and then employees bear some risk, and with DC it’s not as simple as it used to be. Now the risk is more divided up among the parties.”
So, what risks do defined contribution plan sponsors face? There are many legal obligations spelled out under the Pension Benefits Act, the Income Tax Act, common law and the Canadian Association of Pension Supervisory Authorities (CAPSA) Guidelines, according to Frazer and Steele.
Steele also said sponsors can’t forget that they must play an active role in the management of their plan. “What often happens with DC is that administrators take a very standoff approach and rely on service providers,” she says. “But the administrator is still a fiduciary.”
Communication risk is another concern for sponsors. Fiduciaries have an obligation to communicate with plan members in a timely manner about pension matters.
The Capital Accumulation Plan Guidelines are a case in point. Under those guidelines, employers have to provide members with sufficient information to allow them to make informed decisions about their investment options.
“Unfortunately, communication is what employers struggle with,” says Steele. She says pension cases in Canada centre around misrepresentation, in which plan sponsors misled members about their retirement plan, causing the member to lose money or exit the plan erroneously.
Frazer says communication materials need to be comprehensive and clear to prevent any misrepresentation. “Who reads the pension plans cover to cover? Retirees do.”