This is Part 2 in our coverage of the 2012 DC Plan Summit, held in Mont Tremblant, Que.
Governance remains a crucial issue in the management of a DC plan. Two speakers at the 2012 DC Plan Summit shared their views on the current trends that plan sponsors should pay attention to and act on, including closer management of investments and transparency around roles and fees.
Over the three years ending in June 2011, based on Statistics Canada data, DC plan assets (not including hybrid plans) grew at an annual rate of about 7% to $49 billion.
“DCs were growing faster than DB plan assets, which grew at about 5% per year during the same three-year period,” said Benoit Paradis, executive vice-president with MFS McLean Budden in Montreal.
While this is good news, there is also a downside. “The problem is that many DC plans have limited oversight by internal financial experts. Recordkeepers provide most of the monitoring and governance, and there is limited involvement of the CFO or the treasurer’s office, which is in contrast to DB plans,” he explained.
This leaves plan sponsors more exposed to litigation risk, despite their efforts to increase training and plan communication. Paradis said “many plans need stronger investment oversight to place them on par with their institutional peers.” This is critical because pension misrepresentation claims against companies are on the rise in the U.S., and there have even been a few cases in Canada. Paradis said the best practice for employers to reduce this exposure is to set a methodical investment review and make sure to clearly distinguish between the employer providing facts to the members and providing advice.
“Plan sponsors might want to be a bit more alert in terms of regular reviews involving the CFO office and the treasurer’s office, and make sure that experts are included when investment decisions are being made for the DC plan and in terms of reviewing communications to plan members.”
Watch: Benoit Paradis talks about engaging plan members
Paradis believes the current DC plan investment choices are not very well diversified, due to the large number of style-based equity options that are often highly correlated. A solution would be to reduce the number of choices and include low or non-correlated assets to improve the risk/return profile of participants’ portfolios. He also advised that the default option should be a target date fund (TDF) whenever possible.
“The goal should be to provide more choice in assembling the building blocks of a diversified portfolio, rather than esoteric strategies,” he said.
When it comes to plan management challenges, Canadian DC plan sponsors often look south of the border to American companies that are a few years ahead in dealing with these challenges. Gisèle Sutherland, associate general counsel, vice-president with BMO Financial Group, joined the conference from Madison, Wis., to share her insights on trends in the marketplace.
“Today, it comes down to fee disclosure and who is a fiduciary,” she said.
In the U.S., there are new regulatory requirements regarding disclosure of fees. “ERISA Section 408(b)(2) indicates that providers or plan sponsors may not enter into a contract for services for a retirement plan unless those services are necessary for its administration and the compensation for those services is reasonable,” explained Sutherland.
Watch: Gisèle Sutherland discusses the top U.S. pension trends
While companies struggle to meet the July 2012 disclosure deadline, there are a number of questions being raised. How often do fees need to be disclosed? How detailed does the disclosure need to be? And how can all of this be communicated without overwhelming the plan members?
In addition, the U.S. government has moved to broaden the regulatory definition of fiduciary, said Sutherland. The proposed regulation met with such backlash that it has been withdrawn; nonetheless, change is coming in that regard.
One of the problems with expanding the definition to those who make any investment recommendations is that fee structures are not set up assuming fiduciary status.
“Your fee structures have to be investment-neutral. You cannot recommend an investment that causes a higher fee to be paid to you, if you are an investment fiduciary,” said Sutherland. “The Department of Labor wants a fiduciary to be focused on growth of the entire portfolio, not on a particular fund and what it pays to the fiduciary.”
While these regulations obviously don’t apply to Canadian plan providers, they do indicate potential future issues that plan sponsors should consider, such as increasing transparency around services provided and associated fees, as well as the implications of being a fiduciary.
Leigh Doyle is a freelance writer based in Toronto. leigh.doyle@gmail.com
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