© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the January 2006 edition of BENEFITS CANADA magazine.
The Law: United they stand
Though ERISA and the CAP Guidelines are different when it comes to enforcement, they create a united front in terms of plan governance.
By Hugh Kerr

IT IS AN INCREASINGLY COMMON OCCURRENCE FOR group benefits decision-makers to be made up of employees from both Canada and the United States. Those employees may bring different perspectives to decision-making depending on their experience with the Canadian Joint Forum of Financial Market Regulators’ Guidelines for Capital Accumulation Plans(CAPS)or the 1974 U.S. Employee Retirement Income Security Act(ERISA). A comparison of these two sets of rules may help clarify these different perspectives.

ERISA is a very comprehensive federal statute covering both defined benefit and defined contribution(DC)pension plans and other tax qualified retirement plans. In contrast, the CAP Guidelines are new to plan sponsors, having only been released by the Joint Forum in May 2004 with a Dec. 31, 2005 effective date. Like ERISA, the Guidelines have national application and cover DC and other retirement plans; however, they also cover tax deferred group savings arrangements in all cases as long as the plan has multiple investment options.

Perhaps the most significant difference is the safe harbour for plan fiduciaries found in section 404(c)of ERISA. That section states that should a member- directed plan be structured in a fashion which empowers members and provides them with sufficient diversified investment options, then fiduciaries can be exempted from investment losses suffered by those plan members.

The CAP Guidelines cannot prescribe a safe harbour for the very reason that they are guidelines put forth by regulators.

True to its trust legislation roots, ERISA relies heavily on the concept of a fiduciary and applies it to plan stakeholders who exercise discretionary authority over the assets of the plan members. Such fiduciaries are held to the high standard of a prudent expert. In contrast, the concept of a fiduciary was removed from the CAP Guidelines due to plan sponsor unease with this somewhat nebulous concept.

Both ERISA and the CAP Guidelines focus on the merits of plan governance. Fiduciaries and plan sponsors are encouraged to make use of appropriate expertise in their decision-making or delegate such functions to qualified third parties. In doing so, the governance concepts of screening and monitoring the actions of delegates are emphasized. Sponsors are also encouraged to document all decisions and significant policies.

While the absence of a prescribed safe harbour is a significant difference, there is remarkable similarity between the types of information and plan structures required under ERISA in order to obtain the safe harbour with the recommendations in the CAP Guidelines.

In each regime, members are to be given a reasonable opportunity to communicate with service providers in order to exercise control of their investments. In addition, ERISA requires—and the Guidelines recommend—that members receive information about their rights and responsibilities, the funds offered, fees and expenses, and more.

Neither ERISA nor the CAP Guidelines suggest that investment advice be part of the plan service offerings. In contrast, each emphasizes the need to provide investment information and decision-making tools such as asset allocation models.

Jointly, ERISA and the CAP Guidelines share a governance stance. In addition, the similarity in the requirements/recommendations around plan structure and information provision to members can lead to a strong inference that what is a prescribed safe harbour under ERISA is a de facto safe harbour under the CAP Guidelines. These similarities should lead plan sponsors offering retirement plans on both sides of the border to believe that they can take a largely uniform approach to decision-making.

Hugh Kerr is assistant vice-president and senior counsel at Sun Life Financial in Toronto. Hugh.Kerr@sunlife.com