Low costs were put forward as one of the key advantages of PRPPs. What does at low cost mean in practical terms Communication and education are areas of major concern to CAP sponsors but are not addressed in the Act or regulations. A significant administration and fiduciary burden will be assumed by a PRPP administrator. Will an administrator be able to deliver low costs under these circumstances?
Fee Disclosure
The fees paid by members are a major DC issue. In the U.S., recent ERISA legislation significantly strengthened fee disclosure requirements (ERISA 408(b)(2)). The impact however has been debatable with many service providers managing to circumvent disclosing any meaningful information: getting a straight answer on the amount members pay and for what is difficult.
In Canada the PRPP Act only requires that the administrator provide a PRPP at a low cost and with a description of fees.[1] The regulations state that “costs are to be at or below … defined contribution plans .. of groups of 500 or more members”.[2]
Does this make sense?
The key determinate in lowering fees is the dollar amount of assets not the number of members in a plan. If there are a large number of members in a plan, then the costs should be higher not lower. Given the unique nature of DC plans, will the Superintendent be able to make meaningful comparisons based on the number of members in a plan? Where will this sensitive pricing data come from? Who will have access to the data? How often will it be done? What will this cost and, who will pay for it?
To add to the uncertainty, “costs” are defined as “all fees, levies and other charges that reduce a member’s return on investment other than those triggered by the actions of the member”. [3] Is the selection of an investment option not the member’s action and are the fees excluded from the low cost requirement?
The fund manager component of fees paid by PRPP members will differ between PRPP providers. Disclosure of the fund manager component of fees is therefore important in selecting a PRPP provider. As discussed in the previous article, using a passive approach would facilitate fund manager fee comparisons and selection of PRPP providers.
The fee issue could be addressed by requiring the administrator to disclose each component of fees. i.e. the record keeping (admin), fund manager and financial advisor (if applicable). A requirement to provide an easily understood fee breakdown format (record keeper/admin, fund manager and advisor) of the costs paid by a member on member statements would be useful information. In selecting and monitoring a PRPP provider a sponsor must be able to compare the cost components: the administrator portion is particularly important given the scope of the administrator’s duties.
Education and Communication
Communication and education are important, awkward, and costly CAP issues. The CAP Guidelines recommend that a sponsor provide investment information and decision-making tools.[4] This topic is not addressed in the ACT or regulations. Under the CAP Guidelines the roles and responsibility for communication and education are clear; however, it is debatable whether the PRPP Act falls under the CAP Guidelines. Direction is needed in the legislation on the issue of communication and education.
For example, investment risk is an important but confusing topic for most DC and PRPP members. The CAP Guidelines and PRPP requirements on this key issue are minimal: only the degree of risk associated with an investment needs to be described.[5] Since PPRP members bear the investment and longevity risk they need more information on these issues and better tools to manage risk (a simplistic risk profiling approach is not adequate).
The awareness and understanding of investment risk could be improved by providing a definition of risk(s) and requiring disclosure of historical information regarding the volatility of each investment option.
Employers need to understand their roles and responsibilities for communication and education when considering a PRPP.
Conclusion
Suggesting that specific direction on a number of contentious issues be included in the PRPP legislation is not unreasonable. The new Alberta and proposed BC pension Acts for example have not been shy about including detailed governance requirements. Adding the governance sections of the Alberta and BC pension Acts would improve the PRPP legislation and governance.
Given the level of sophistication of investors likely to be in PRPPs, the low cost objective, the expectation of reasonable and defensible market returns, and the need for transparency, the changes outlined in this set of articles would have enhanced the federal PRPP program . Keeping it simple (KISS), and effective, should be the primary goal for PRPP legislation.
‘Ah! what a chance missed! God! what a chance missed!’[6]
[1] PRPPA S26 & PRPP Regs P23(c)(vii)
[2]PRPP Regs SS20(a)
[3] PRPPA S1
[4] CAP Guidelines 2004 S3.2
[5] CAP Guidelines 2004 S3 & S 4.2.1 & Regs 23(1)
[6] Joseph Conrad » Lord Jim » Chapter 7