Full Disclosure

As defined contribution (DC) pension plans gain international traction in today’s weakened economy, the issue of meaningful fee disclosure has garnered significant attention. Unlike the fees in defined benefit (DB) pension plans, fees in DC plans directly impact the benefits available to plan members. Even slight differences in fees can yield a large difference in a pensioner’s account balance.

While the Ontario legislature has lagged behind in providing clear regulatory directives around this issue, federal pension regulators in Canada and the U.S. Department of Labor are moving toward a more regimented system of fee disclosure, solidifying both the nature and extent of disclosure. Reform may be in its infancy, but as interest in plan fees grows, plan sponsors should pre-emptively limit potential liability by adopting best practices for fee disclosure.

The Regulation of Fees
Pension legislation regulates an administrator’s duty of care in administering a pension plan, including monitoring plan fees and expenses. For example, Section 22(1) of the Ontario Pension Benefits Act (PBA) states that the administrator of a pension plan must exercise the care, diligence and skill in the administration and investment of a pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.

An important aspect of this fiduciary duty is to ensure that the costs and expenses of operating the plan are “reasonable.” While Section 10(1)(9) of the PBA mandates that the documents creating and supporting the plan set out the “mechanism for the payment of the cost of administration of the pension plan and pension fund,” the statute does not specifically state the method by which the reasonableness of fees should be assessed or the extent to which they must be disclosed to plan participants and beneficiaries.

The CAP Guidelines provide plan sponsors with regulatory guidance on fee disclosure. While the PBA provides an outline of fiduciary duty, a subset of which is disclosure, the CAP Guidelines seek to fill in the specific disclosure requirements within these broad obligations.

Specifically, Section 4.4 of the guidelines states that all plan sponsors must provide members with the description and amount of all fees, expenses and penalties relating to the plan that are borne by the members, including the following:

• costs of buying and selling funds;
• costs associated with accessing and using any of the investment information, decision-making tools or investment advice provided;
• investment fund management fees;
• investment fund operating expenses;
• recordkeeping fees;
• any costs of transferring among investment options (including penalties, book and market value adjustments, and tax consequences);
• account fees; and
• fees paid to service providers.

The best practices created by the CAP Guidelines are national in scope, providing uniform guidance to DC plans across Canada. While the CAP Guidelines are voluntary and do not carry the force of law, they are considered persuasive and represent the pension regulators’ views on required fee disclosure in Canada. They therefore form the benchmark against which the nature and scope of the plan administrator’s fee disclosure is measured.

In addition to the CAP Guidelines, there has been a movement on the federal pension front toward greater disclosure for all provincially regulated DC pension plans. In September 2009, the Office of the Superintendent of Financial Institutions (OSFI) issued a draft of the Disclosure Guideline for Defined Contribution Pension Plans (OSFI Guideline). The OSFI Guideline sets out specific disclosure obligations for DC pension plans to ensure that members and retirees receive adequate and appropriate information concerning their plan contributions and investments.

According to OSFI, its guideline seeks to inform the pension industry “of the general principles as well as more detailed requirements” that OSFI expects to be disclosed to plan members, eligible employees and spouses. The general principles set out in the OSFI Guideline call for plan administrators to ensure that disclosure is timely, understandable, accurate, complete, useful and carried out in accordance with fiduciary responsibilities and duties of care.

Section 1 of the OSFI Guideline itemizes specific information that must be included in a DC pension plan member booklet. Among other things, where a member is required to make investment decisions, the booklet must include a statement that explains that account balances will reflect the actual investment performance of the funds selected, minus fees. The member booklet must also contain an overview of any fees charged to the member’s account and information on how to obtain further detailed information concerning specific fees charged in respect of the investment options available under the plan. An explanation of the plan provisions that govern which expenses may be charged to the pension fund must likewise be disclosed. Information on investment fund management fees, account fees and fees for service providers must also be included.

The OSFI Guideline applies only to federally regulated pension plans registered with OSFI. However, given the sparse provincial statutory authority, administrators of provincially regulated DC plans should also consider following the OSFI Guideline. Issued by a significant pension regulator, the OSFI Guideline represents best practices for the disclosure of information in DC plans. By incorporating the CAP Guidelines disclosure requirements, the OSFI Guideline more clearly defines the plan administrator’s fee disclosure responsibilities and does not represent a significant departure from best practices.

U.S. Reform
As with the federal pension landscape in Canada, the U.S. is also moving toward a more comprehensive system of fee disclosure in DC pension plans.

Under the Employee Retirement Income Security Act (ERISA), plan sponsors have a fiduciary responsibility to participants to prudently discharge their duties in the sole interest of plan participants and beneficiaries. A function of this responsibility is the duty to defray reasonable expenses of administering the plan. As with the Ontario PBA, despite this overarching fiduciary duty, ERISA provides very limited fee disclosure requirements to plan participants.

In recent years, plan sponsors in the U.S. have been the subject of increased class action litigation initiated by plan participants who are dissatisfied with investment choices and their subsequent account returns. Notably, in Hecker v. John Deere & Company, DC plan members alleged that their employer and its trustee offered investment options with “excessive and unreasonable costs” and failed to adequately disclose plan fees and expenses. While the court held that John Deere’s fee disclosure did not violate the company’s duties under ERISA, the decision was grounded in the specific design of the particular 401(k) plan. Although the plan members in the John Deere case were unsuccessful in their suit, there have been more cases brought against other plan sponsors with similar grievances.

In response to this increased fee disclosure litigation in the U.S., in June 2009, the House Education and Labor Committee approved a bill mandating specific fee disclosure requirements. Among other things, the 401(k) Fair Disclosure and Pension Security Act of 2009 requires 401(k) plans to disclose fees that will be taken from the participants’ accounts in the form of a dollar figure on their quarterly statements. Service providers and administrators are further required to disclose all fees charged to 401(k) plan accounts and break them down into four categories: administrative fees, investment management fees, transaction fees and other fees.

It is anticipated, but not certain, that this bill will be considered by the House Ways and Means Committee next before it is put to a full House vote.

Fee Disclosure Checklist
While litigation in Canada has typically focused on DB pension plans to date, the Canadian legal landscape often follows closely behind the U.S.—meaning that litigation relating to DC fee disclosure may be on the horizon. The CAP Guidelines and the OSFI Guideline both provide regulatory guidance on the industry standards for disclosure. In order to ensure meaningful fee disclosure to plan participants, in adherence with the advisory direction provided by these pension regulators, plan sponsors should adhere to the following checklist:

• Ensure ongoing compliance with the CAP Guidelines.
• Ensure ongoing compliance with the OSFI Guideline.
• Establish a benchmark by which the reasonableness of fees is assessed.
• Consider the extent to which fee disclosure should be made to plan members on an aggregate or disaggregate basis. Disclosure of fees should be tailored to the individual plan participants and should include enough detail to allow participants to make informed investment decisions.
• Make sure that the substance of fee disclosure is clearly communicated so that all plan participants can easily understand the fees being paid.
• Document decisions relating to the types of fees and expenses charged to the plan.
• Direct plan participants to handouts, web- sites and other resources where they can access more detailed plan information.

Wendy Litner is an associate in the labour and employment department of Borden Ladner Gervais LLP.
wlitner@blgcanada.com

> click here for a PDF version of this article