These days, capital accumulation plan (CAP) sponsors have a big job. Many plan members look to them for advice on their retirement plans. But sponsors don’t want to be accountable for providing it. So how do they deliver on the need for advice, given the risks associated with offering it?
Education and information will always be important and helpful to members, but most want someone to tell them what to do. They want personal investment advice—and with good reason. A 2010 U.S. report sponsored by Hewitt Associates and Financial Engines of more than 400,000 plan members indicates that investment returns improve by almost 2% with advice, significantly adding to a member’s retirement savings.
According to the CAP Guidelines, the onus is on the plan sponsor to regularly review the quality of advice offered by its service provider. Because of the risk associated with this responsibility, many plan sponsors are hesitant to offer members that kind of service. And the larger the company, the less likely it is to offer advice because it’s a challenge to provide consistent advice across the company. Advice should be offered only to members who are engaged in their retirement plan. It cannot work as a magic bullet for unengaged members. Plan sponsors still need to offer an effective default investment fund.
Offering advice isn’t without risks, though. But there are ways to help protect plan sponsors and members.
Before offering members advice, plan sponsors should assess their company’s needs. Knowing the organization will help sponsors decide whether to offer advice and to whom, and how best to communicate with members.
Mass Advice: If the plan sponsor’s company has many sites across the country, providing telephone-supported advice may be a great option. Sponsors can ensure advice is consistent because members—whether in Whitehorse or Halifax—are calling one location that has a single, repeatable process.
Targeted Advice: Usually delivered face to face, targeted advice generally involves much broader financial guidance. Advisors can make recommendations by taking into consideration members’ personal circumstances and their savings outside of the group plan. Plan sponsors can reduce costs by offering the service to certain groups, such as individuals getting close to retirement or executives.
Sponsors should choose a provider that’s accountable for the quality of advice it provides. Ask the provider to demonstrate how it takes members through the advice-giving process. Is the process repeatable? How is the service monitored?
Finally, plan sponsors should monitor the provider’s performance to help them make adjustments to the strategy.
Plan sponsors select their employees carefully to make sure they’re the right fit for the organization; they should do the same with advice providers. By doing their homework, plan sponsors can deliver on the need for advice while minimizing the risks associated with providing it.
Michael Campbell is vice-president, market development, wealth management, with Great-West Life.