Managing Risk in Volatile Times

Compliance services are not on this list because no one can relieve plan sponsors of these responsibilities. However, plan sponsors should look at governance not as a hindrance but as a guide to ensure successful outcomes for themselves and their members.

Action Items for Plan Sponsors
We have all become familiar with the CAP Guidelines, which provide a high-level road map and offer some good common sense ideas to help plan sponsors. Looking at the selection of an investment platform, we can see how valid these guidelines are. Here are a few actions that plan sponsors can take to ensure that their plan governance is up to par.

Document the process of selecting investments and decide who will make decisions. Will decisions be made internally, with the support of an outside consultant, by the service provider or through some combination of these options?

Documentation allows everyone to understand their roles and responsibilities—and their liabilities—in the event of potential discrepancies.

Make sound decisions based on established criteria. Performance should be evaluated against specific benchmarks chosen in advance, and additional criteria (not always quantitative) should be in place to measure the quality of the investments.

Communicate to all stakeholders, particularly members, so that they understand the decisions that have been made and how they might affect them. Ensure that any communications are targeted, relevant and timely, and geared to the member’s level of expertise and comprehension.

Clearly delineate who is responsible for each aspect of the plan and confirm any delegations of duties and responsibilities.

Review your decisions. In particular, follow up on any delegations at least annually using the same process.

In the U.S., plan sponsors can turn to ERISA and the safe harbor provision to mitigate their liability in choosing an investment platform. In Canada, no such legislation exists.

Making sure that you get it right is important to protect your company and help members to achieve their goals based on the stated purpose of the plan. It’s hard to find comfort in a down market, but building an investment platform based on quality and choice can help.

Make sure that you offer an adequate choice of asset classes and have controls in place to prevent poor decisions. For example, can a member be 100% invested in an emerging market or money market fund? Too much choice can also be crippling.

Ensure that the investment program has clearly defined qualitative screens. Quality always endures, and choosing an investment roster based on short-term quantitative results could prove disastrous under the current financial conditions. Finding managers who stick to their knitting even in hard times can help prevent flavour-of-the-month investment decisions.

Choice is about more than the sheer number of options; it’s also about diversification and correlation. The higher the correlation, the more two investment funds will move together under the same circumstances.

These days, understanding the relationship between correlation and performance, and integrating this into your investment platform, is more important than ever.

Wrap it all up in a codified governance structure, including the above elements, and you are well on your way to mitigating your risk exposure and helping members to achieve positive financial outcomes, even in down markets.

After all, performance is relative and needs to be judged against peer funds or benchmarks, not against absolutes.

Claude Leblanc is senior vice-president, group savings and retirement at The Standard Life Assurance Company of Canada.

> click here for a PDF version of this article and all of the other 2009 DC Summit articles.

© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.