2. Benefit Adequacy: When setting up their plan, new sponsors tend to focus on the competitiveness of the formula within their industry. Sponsors should understand the replacement ratios their DC plans can reasonably be expected to provide. This information should be incorporated into the communication strategy for the program to create reasonable expectations on the part of the plan members. It will assist them in making informed decisions about plan contribution levels, plan investments and savings levels requirements outside of the program.
3. Investment Advice: While many members are looking for investment advice, historically, many Canadian sponsors have declined to offer advice, for fear of litigation. The CAP Guidelines do not require plan sponsors to offer investment advice to members. However, where it is provided, the plan sponsor must monitor the advice provider using the original selection criteria. Given the difficulties in monitoring the quality of advice provided, the new privacy legislation and the absence of a safe harbour, it is unlikely that sponsors will start offering investment advice.
4. Documenting/Retention: A new requirement introduced by the CAP Guidelines is the need to adopt a formal document retention policy. This policy should cover key internal plan documentation and decision support documentation, documents and member communication material and records retained by the recordkeeper. These policies and a retention process will need to be negotiated with the plan recordkeeper, and internal and external policy compliance will need to be monitored. The policy should also outline the obligations of recordkeeper in the event of their replacement.
5. Investment Manager Monitoring: Section 6.3 of the CAP Guidelines requires a plan sponsor to monitor plan investments. An effective monitoring program should incorporate the following elements: quantitative analysis, including benchmark and relative performance; an analysis of risk characteristics and risk adjusted returns; qualitative analysis, including an assessment of organizational strength, turnover of personnel, clients and assets, changes to the decision-making process and style analysis(often these factors are a better short-term indicator of problems than quantitative analysis). It is also critical that the review be conducted independently of the investment manager and the recordkeeper, who are offering the product. The analysis can be undertaken in-house or outsourced to an independent thirdparty consultant, where the sponsor does not have the required analytical investment capabilities.
6. Recordkeeping Monitoring: As with plan investments, the CAP Guidelines require a plan sponsor to periodically evaluate the performance of the recordkeeper against the original selection criteria. This assessment process should include: an evaluation of GIC risk exposure, rates and the credit ratings of the issuer(where GICs are offered); an assessment of current service levels; a review of member communications; and a plan compliance review.
7. Managing Fees: In a DC plan, the plan sponsor negotiates fees which the members normally pay, in the form of asset-based fees that are applied to reduce the investment return of the market-based funds. The CAP Guidelines’ requirement that fees be fully disclosed to members will introduce new member awareness and scrutiny of fees. In this environment, it is even more critical that sponsors benchmark fees over time to ensure competitiveness and, where warranted, renegotiate fees with the recordkeeper to ensure that members share in increased profitability of the plan.
Colin Ripsman is a principal at Mercer Investment Consulting in the Toronto office.
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