In addition, plan sponsors can benchmark the proposed DC plan designs by reviewing survey information, collecting information from specific comparator companies or performing a more in-depth relative value analysis that compares the value of all elements of the pension benefits for a typical employee to the value of the benefits accrued for a similar employee in other pension plans.
Finally, once the plan design is complete, confirm all of the details (e.g., the definition of pensionable earnings).
Choosing the recordkeeper – With the plan design finalized, the next step is selecting a vendor that can best meet your requirements. The following process is often used:
- provide a request for proposal (RFP) to several recordkeepers;
- review the RFP responses;
- meet with the finalists;
- select the recordkeeper; and
- document the selection process.
Reviewing the investment lineup – Once you’ve selected a recordkeeper, it’s time to review the investment options. Consider the structure of the investment lineup first (i.e., including target date funds, etc.); this will narrow the review of the individual fund selections. Also, review the styles and processes of the investment managers, the strength of their organizations and the funds’ historical performance.
Preparing the legal documents – Legal plan documentation requirements will vary depending on the DC plan’s structure. For a new DC RPP, a new plan text must be prepared and filed with the regulators. An amendment closing the DB plan to new entrants and/or future accruals will also be required. For a DC provision within an existing DB plan, an amendment to the DB plan is required.
The plan documentation requirements for group RRSPs and DPSPs tend to be less onerous for the plan sponsor than for RPPs, as most recordkeepers include documentation in their services. A Statement of Investment Policies and Procedures is required for DC RPPs and recommended in all cases. If past service is being converted to DC, an actuarial report addressing the funding implications for the DB plan must be prepared and filed with the regulators. The conversion may not occur until the actuarial report has been approved.
Developing a communication and education strategy – A successful strategy is designed to inform and educate employees, help employees make informed decisions and meet the plan sponsor’s fiduciary responsibilities. It may include the following elements:
- employee launch announcement;
- HR and manager briefing notes;
- education and enrollment materials;
- employee information sessions; and
- option and election forms.
Especially when choice is provided to existing employees, you must ensure that adequate communication and education is provided in order to reduce the risk of potential legal claims.
Ongoing monitoring
Once you’ve rolled out the new DC plan, you can’t just forget about it. The CAP Guidelines recommend the following continuing activities:
- monitoring investments at least annually (what worked and why);
- providing investment education and decision-making support (to engage and empower employees);
- monitoring non-investment-related risk; and
- monitoring investment advice (legal requirements, consistency of advice, documentation of complaints and arm’s-length support).
To help mitigate the risk of future litigation related to the DC plan, you should also put a recordkeeper and investment manager monitoring process in place.
An overall governance structure will help the plan sponsor to address two risks:
- risk of member challenges (e.g., inappropriate/too few/too many investment options offered to plan members, improper investment advice or tools, or conflicts of interest); and
- compliance risk (e.g., risk of the DC plan not being administered in compliance with legislation or risk of the plan investments not being in compliance with legislation).
A governance structure may take many forms, but a good governance structure will allow all parties to understand their roles and responsibilities.
Putting these strategies in place will help you to transition from DB to DC without any mishaps.
Stephen Peirce is a principal in the DC consulting unit with Mercer. stephen.peirce@mercer.com
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