Despite companies’ conversion from expensive, cumbersome defined benefit(DB)pension plans to the more cost-effective, compact defined contribution(DC)plans in the last 10 years, a DC plan can still be burdensome to employers.

“It’s becoming clear that DC plans are not as low maintenance as they seem,” said Stephanie Kalinowski, a partner at law firm Hicks Morley at the Intercontinental Hotel in Toronto yesterday.

To keep employers’ frustration to a minimum, Kalinowski and her fellow partner Susan Nickerson outlined four points and recommendations to “tune up” DC plans.

Use of DB surplus for DC contributions
In March 2006, the Ontario Divisional Court ruled on the Kerry case that a conversion from DB to DC is similar to that of a plan merger, so in essence there are two plans, two funds and two distinct groups of members. Therefore, DB surplus can only be used for DB members, not for DC members.

Recommendations
The Court of Appeal may overturn the decision at some point. In the meantime, if you are using DB surplus for DC contributions, Kalinowski suggested reviewing your plan and to consider any adjustments to your current practices.

Offering company shares as an investment option
If you’re offering company shares, remember…
• CAP guidelines: With employer stock as an option, consider diversification, risk level and liquidity, and disclose any risks associated with investing in a single stock to plan members.
• Fiduciary duties: “The reasons for offering company stock should be objectively examined,” said Kalinowski. Is it more about the benefit of the company or the members?
• U.S. class actions: These cases allege that companies knew there were events happening(or going to happen)that would have a negative impact on the stock’s value and the companies failed to relay this information to plan members or even remove the particular stock as an option.

Recommendations
• Examine your reasons for offering company stock and ask whether would they stand up to scrutiny.
• Consider whether other investment options provide members with enough opportunity to diversify.
• Monitor your plan to see if members have enough diversification.
• Review your communication and investment education.
• Reconsider if mandatory investment in contributions in employer stock is appropriate for members who are nearing retirement.

Disengaged members
With many DC plans having a default option plan, many members choose this option and remain in it for years instead of making their own investment decisions.

Recommendations
• Find out the number of DC members who have invested in the default option&#8212and do this on an ongoing basis.
• Review information and communicate it to plan members. For example, provide an annual reminder to members that they’re still in the default option plan.

Former plan members
When employees leave, sometimes they fail to transfer account balances to a locked-in RRSP or RRIF, for example. Many members still have their balances in your plan.

Recommendations
• Find these former members through company records, beneficiaries or government searches. “And in some cases, although more expensive, hire a private investigator,” Nickerson said.
• Purchase annuities.
• Impose fees on accounts that are remaining in your plan.

To comment on this story email brooke.smith@rci.rogers.com.