Defined Contribution Plans Buyer Beware?

Written by Blair Campbell, Manager, Business Development, B.A.
October 18, 2012

Recently, I read an interesting article in Benefits Canada magazine (October 4, 2012) entitled, “Legal Risks for CAP Sponsors” written by Paul W. Litner and James Fera. This article examines the current shift towards Defined Contribution pension plans by employers over the once mighty Defined Benefits pension plans. The reason, from an employer perspective is evident; fuelled by the necessity to elude the bogged down, hefty costs and legal risks that were an obligatory element of the DB plan. But what we are just starting to learn is that these Defined Contribution plans once thought to be the new and improved alternative, not to mention much easier on the employer’s purse strings carry with it a new inherent risk: a pandora’s box of future litigation.

“Choice” is the key word here. A CAP plan or DC plan allows members a choice in the investment of pensionable assets. This choice brings with it unavoidable responsibilities for the employer, the plan administrators and even the employee. This article correctly points out that although “historically, CAPs have not been the subject of litigation in Canada,… recent regulatory developments and pension reform efforts in Canada are increasingly focused on DC plans and the legal obligations of employers.”

Employees’ retirement pensions are dependent upon the choices employees make from the investment information provided to them by the plan administrators and employers. There is little doubt that pension regulations are ramping up, and employers best beware and be aware of what their fiduciary obligations are to their employees. Those fiduciaries include “a duty of loyalty, a duty to act prudently and reasonably in the selection and monitoring of its delegates, and a duty to provide information to members” the article explains.

Trends in the United States are indicating that plan members are bringing claims against employers/administrators for excessive fees and failure to adequately disclose this information. These issues will indeed trickle down to the Canadian DC pension plan environment but what this article does not adequately cover is the concerns I have within the arena of financial education and communication by plan administrators/employers to the DC workforce. Giving employees an investment “choice” such as the ones available within a DC pension plan without properly educating them on the potential pitfalls or risk versus rewards scenarios associated with these investment plans could lead to catastrophic litigation to the employer in the future.

Regulatory agencies in Canada have noticed these concerns and have begun to further increase guidance pertaining to the employer obligations associated with DC pension plans. These guidelines for the most part do not constitute written law as of yet. However, guidelines should be followed, because with or without official rules, the fiduciary responsibility of the employer still exists.  Employers are incurring a risk that could be costly down the line if someone determines they are not meeting their fiduciary responsibility (see the Canadian Association of Pension Supervisory Authorities (CAPSA) for the most recent draft guidelines). What we need to be aware of as employers offering Defined Contribution pension plans are that guidelines are meant to be followed, and perhaps even going above and beyond those suggested guidelines pertaining to the fiduciary, due diligence, good governance and communication obligations would be ideal. There are numerous third party professional organizations that can assist employers in determining whether on not they are within the guidelines currently suggested (T.E. Wealth is one). Ensuring your employees are well advised and well educated on what pension benefits are being offered is imperative. Being ahead of this evolving regulatory movement that will sooner rather than later be comprised of stringent legal consequences is a good thing and may save employers a lot of unnecessary time and money, and as the old saying goes, “time is money.”

Print Friendly, PDF & Email

These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

seven + nine =