Management of defined contribution(DC)pension plans is always key, but one area that is often neglected is “benefit adequacy,” said Susan L. Nickerson, a partner in the Pension & Benefits Practice Group with Hicks Morley law firm in Toronto. Benefit adequacy could present potential lawsuits for plan administrators, she said, if administrators don’t communicate to members what their DC plan will provide — especially if there’s a conversion from a DB to a DC plan.
Building retirement income involves three components: contribution amount, investment earnings and the duration of those contributions. Many employees, however, don’t really know how much they should contribute for their retirement — and how long.
A prudent employer should manage employee expectations and, in the case of a plan conversion, ensure that members bear the risk of benefit adequacy, interest rates and longevity. Employers can be held legally liable for negligence, said Nickerson. That is, “failure to communicate what the plan can provide.”
Although the Capital Accumulation Plans(CAP)Guidelines indicate that employers need to provide decision-making tools such as calculators and projection tools, it’s really not sufficient.
To limit the risks of potential lawsuits, Nickerson suggests the following steps:
• communicate the plan to employees;
• educate employees on their responsibilities;
• evaluate the plan design and default options; and
• consider offering financial advice(or encourage employees to seek it themselves).
If employers choose to offer financial advice themselves, Nickerson offers a word of caution. An employer should establish criteria for choosing a financial advisor and monitor that advisor carefully. “The employer could be liable for the advice that the financial advisor provides.”
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