There are two recent developments affecting DC plans in the U.S., which should be carefully considered by sponsors of CAPs in Canada.
The first relates to fees. Under the Employee Retirement Securities Act(ERISA)in the U.S., fees charged to plan members must be reasonable and incurred solely for the benefit of the plan members. In several recent cases, plan members have brought class actions against their employers, alleging that fees charged were, among other things, excessive and not properly disclosed to members in accordance with the employers’ fiduciary obligations. Several of these cases have called into question the propriety of revenue-sharing arrangements (as between investment managers and other plan service providers).
And the debate in the U.S. surrounding DC plan expenses continues to be front and centre in the political arena. On March 6, 2007, the House Education and Labor Committee held hearings to consider whether employers should be required to give workers a clearer understanding of the fees they are paying with respect to 401(k)plans and to explore whether the fees are carving too much money out of retirement savings.
This is a live issue for Canadian employers, notwithstanding the differences between ERISA and Canadian laws. If your CAP is a registered pension plan, provincial pension standards legislation(i) imposes fiduciary obligations on employers that act as plan administrator and(ii)requires that fees charged to the plan be reasonable.
Even if your CAP is not a registered pension plan, employers will have fiduciary duties as sponsors of the CAP. Under the common law, a fiduciary has a legal duty to act in the best interests of the plan members, which would include a duty to ensure that any fees charged by service providers or investment managers are reasonable and appropriate. And the Ontario Court of Appeal, in a decision released last year, had little difficulty in concluding that a plan administrator owes a duty of care to plan members in communicating information about the plan that could easily extend to full disclosure of fees charged to members.
The second U.S. development relates to the regulations recently issued by the Department of Labour pursuant to the Pension Protection Act. The regulations allow employers to automatically enrol participants in a 401(k)plan and, unless they otherwise elect, invest their accounts in a qualified default investment alternative(such as a lifecycle or target-retirement-date fund), with a “safe harbour” from liability for doing so.
This U.S. development has given rise to much discussion in Canada over the merits of balanced or asset allocation funds as an appropriate default option. Since no legislative change has occurred in Canada to grant employers a “safe harbour” from liability, any decision to change the default investment option under a CAP to an asset allocation fund must be justifiable under the common law obligations applicable to Canadian employers that sponsor CAPs. That is, it must be prudent and in the best interests of members.
The most important thing for employers is to recognize what their legal duties are in relation to DC plans and critically evaluate new legal developments. Where do they come from, and are they appropriate and prudent for a Canadian plan?
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in Toronto. plitner@osler.com
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