It is always important to apply a high standard of care when dealing with other people’s money. An advisable standard is to treat this money as if it were your own. With this in mind, particular care should be taken relative to:
Default options: Often, most plan members are in the default option. Ask your service provider for a process to eliminate this need and ensure that members clearly make each investment decision. After all, one size rarely fits all.
Cost to the member: Understanding management expense ratios for underlying funds in segregated funds is a start. However, as all charges back to the fund are expenses borne by members, all must be disclosed and understood, including such costs as administrative fees, chargebacks/ adjustments and third-party fees. These costs cut directly into fund performance. Would you buy a product without understanding what you purchased, its performance and its cost? Of course not. This is your duty to the member.
Performance measurement: performance against appropriate benchmarks must also be net of costs to be meaningful.
LACK OF COMMUNICATIONS
For your membership to create and follow appropriate investment strategies, you must ensure that at least the following basics are covered:
Clear definition of member’s role: to educate themselves, form their own investment plans, select investments initially and manage their plans.
Clear definition of plan sponsor’s role: including selecting investments, facilitating education and savings and ongoing oversight.
Clear indication of the costs and performance of investments so that members can make appropriate choices on uncontested information.
Simplified educational programs: using a variety of media and tools in everyday language.
LACK OF PROOF
Unfortunately, you also require proof of your standard of care. But help is at hand. Your consultant can provide a full governance plan and documented investment strategy. Look to your service provider for:
A compliance certificate: relative to the administrative requirements of the Guidelines.
Documented policies: concerning disclosure of member costs, market timing, frequent trading, privacy and record retention. Do not take record retention for granted, as policies vary widely; from as little as one month to seven years (e.g., for net unit values). And yet, accessible data is critical to a court finding in your favour.
Proof of ongoing assistance: to help members stay on track. Consider a Member Investment Trade Review process, checking trades for suitability.
Proof of oversight: in regular review reports to evaluate plan effectiveness (e.g., demographic reports, help desk analysis, annual education/ communications schedules). The best protection for a plan sponsor is to meet, and even exceed, the CAP Guidelines. But remember, you are not alone. Your consultant and service provider are able to help, especially with provision of proof. At best, this proof will never be needed. At worst? Your efforts will save the day.
Joan Johannson is managing director and senior vice-president at Integra Group Retirement Services in Toronto. Jjohannson@INTEGRA.com
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