Year 2008 certainly has been a challenging one financially, and those capital accumulation plan (CAP) members who had not realized what it meant to them yet are doing so now, as they are receiving their year-end statements. These turbulent times represent a unique opportunity to communicate with CAP members, as rarely will they be open to information and education more than now.

However, as a plan sponsor, you should know that you may ultimately be held responsible for all communications going to your members. So you need to keep a keen eye on everything going out or being presented to them—whether prepared by you or by your CAP provider.

Simple enough? Not so. Let’s take a look at a few not-so-obvious missteps you should avoid repeating.

Staying the course
To say there is general agreement in the financial community around the fact that you should remain invested and keep a long-term view on equities would be a gross understatement. This consensus comes largely from past experience and generally accepted risk/return theory. But it remains just that: a widely shared expectation of what should happen in the future (i.e., that the markets will come back up). There is no guarantee that this will happen, and certainly no one could say when it will for sure.

Nevertheless, we still came across communications saying things like “equities always outperform fixed income investments over long time periods” or “you need not to worry and should remain invested with a long-term focus.” Be mindful of potentially misleading messages and ensure to adequately manage member expectations, limiting fiduciary risks and avoiding even the impression of providing investment advice. And offering a quote, say from Warren Buffet—a popular source recently—is fairly equivalent to advising that message is the right one.

Provider financial stability
With all the bad news regarding some financial institutions in the United States, some Canadian companies have felt it important—understandably so—to reassure their clients and manage their concerns about their financial stability. With that in mind, some have decided to write directly to all their clients, including CAP members.

The potential issue is in the way these communications may be worded. In one instance, a provider had drafted a letter to inform CAP members that they did not need to be concerned with their ABC Life investments, as ABC Life had strong credit ratings from various agencies. The underlying message was that ABC Life remained sound and that their guaranteed products continued to be secure. What it did not say, however, was that the financial stability of the company had no effect on non-guaranteed investments such as the segregated funds the vast majority of CAP members are invested in—these are simply subject to general market fluctuations. Without this clarification, such communication could have been interpreted as guaranteeing the value of the investment funds.

Fortunately, the company revised its position and did not send this communication, which could have represented potentially significant fiduciary risks to CAP clients. The smart sponsor has each communication sent to its plan members reviewed ahead of time to ensure it is comfortable with its content.

Investor risk profile review
The most frequent recommendation we come across is that plan members should review their investor profile by redoing their investor risk tolerance assessment questionnaire. Again, this is a seemingly great idea, but looking at it through the lens of investor behaviour theory makes it much less clear.

Under normal circumstances, risk profile questionnaires do an acceptable job—there is only so much you can expect from a 10-question drill—of herding the typical plan member into a fairly adequate asset mix. However, put plan members under stress (the case for most members looking for guidance in turbulent markets) and it is likely that they will find themselves scoring as a lot more risk averse than only a few months ago. This in turn will mean that the suggested asset mix will be more conservative than the member’s current one.

So for many members, simply suggesting they redo the questionnaire will result in having them invest more conservatively. A better idea may be to suggest that plan members redo the questionnaire only if they feel there has been a significant change in their personal situation—other than a decrease in investment value—thereby avoiding unwanted side effects.

Communicating effectively is not always as straightforward as one might expect. As a plan sponsor, be sure you are there for you CAP members, but be aware of what is sent to them and never be afraid to question the seemingly obvious.