Over at Canadian Investment Review, blogger Gerry Wahl has been advising sponsors of capital accumulation plans (CAPs) about the ins and outs of their fiduciary duties under the CAP Guidelines. For the last few years, he been a regular contributor on the risks and pitfalls facing both CAP sponsors and members. And he’s even made a series of solid suggestions for building better plans, including recommendations that apply to the federal government’s proposals for pooled registered pension plans (PRPPs).
Wahl does, however, have questions for policymakers eager to implement PRPPs more widely across Canada. Namely, who’s looking out for the interests of plan members? Do the CAP Guidelines apply to PRPPs? And, if so, how?
In his latest blog post Wahl notes that uncertainty abounds when it comes to who’s overseeing PRPPs—and one of the biggest issues he believes is the potential for conflicts of interest. Right now the Pooled Registered Pension Plans Act doesn’t address accountability, which leaves the field open for administrators to potentially select inappropriate investments or use more expensive products. There’s also the potential for providers to encourage members to lock into products or other services.
So why not use passive investments to skirt around the risk? This is Wahl’s key idea and it makes sense. He’s suggesting that giving PRPP members a menu of passive products like index funds or exchange-traded funds (ETFs) would provide benefits like better returns after fees and reduced volatility. However, more importantly, they would also minimize the potential for administrators to put higher fee and low performing options in front of members—or lock them into products.
Wahl’s case for putting ETFs and index products into PRPPs could also extend to other CAPs, where fees and performance are issues that could impact the ability of members to save for retirement.
It’s an interesting part of the discussion—ETF proponents have long argued they make sense in DC plans.
One of the problems here though are transaction costs could nip into returns for DC plan members whose contributions are made in small, regular installments.
But the passive approach is a compelling one for sponsors and members alike concerned with minimizing fees over time and eliminating conflicts of interest.
What do you think of Wahl’s argument? Should passive investments be the go-to option for CAP plans and PRPPs?