The responsibilities of Canadian DC sponsors during the deculumation phase remain unclear despite the recent issuance of more national guidelines. Still, employers can help members in a number of ways, experts argue.
“The conversion from savings to income is very difficult,” said Janice Holman, a principal at Eckler, speaking at a recent webinar organized by the Canadian Pension & Benefits Institute. “These decisions are very complex for the average person.”
DC members face a number of threats during the payout phase, including longevity, inflation and investment risks, Holman explained. Loss of cognitive abilities due to dementia can also make it difficult to make sound financial decisions, she added.
What further complicates things is that many members may not understand the decumulation options presented to them—and these options may not be in their best interest, Holman explained.
So what can and should employers do to help members?
In March 2014, the Canadian Association of Pension Supervisory Authorities (CAPSA) released Guideline No. 8: Defined Contribution Pension Plans Guideline.
The guideline, which isn’t legally binding, further clarifies the responsibilities of DC plan sponsors. It recommends they should provide members with projections of their account balances at retirement as well as with thorough information about the decumulation products available to them.
Despite these guidelines, “the obligations of a plan sponsor are still fairly unclear,” said Holman. “A precedent of a case would be helpful to help clarify the roles.”
But employers can still take a number of actions.
One is paying attention to communication materials. In accordance with the CAPSA guidelines, it’s crucial to give plan members impartial details about the decumulation products they can choose from and the fees they come with.
Employers also need to be mindful that the very act of picking a certain provider and describing its offerings in communication materials amounts to an endorsement of that provider, Holman explained.
That’s why employers shouldn’t simply accept the rollover product their provider offers—they should compare it to other products on the market to ensure it will give members the best value, Holman added.
Additionally, she said, when it comes to dealing with providers, employers should use their size and leverage to negotiate lower group fees for plan members.
Yet another way a company could help is by setting up its own decumulation vehicle, such as a registered retirement income fund (RRIF) or a life income fund (LIF).
“These would still probably be administered by a third party, but you would act as a plan sponsor and select the investment options that you want to be available,” Holman said. Often, the investment options an employer offers in the accumulation phase are mirrored in the RRIF or LIF, she explained, adding that for their decumulation vehicles, employers might also be able to keep the fees from their accumulation vehicles.
“Regardless of what you decide to do, you should be documenting your decisions,” Holman said.
And employers need to keep in mind that, as the pension industry’s focus on decumulation keeps growing, their role might expand, Holman added.
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