A quick guide to DC pension compliance
BY Desjardins Financial Security | February 6, 2011
Over the last couple of years, small to medium business (SMB) owners have had a lot on their minds. Some have struggled to stay afloat, while others have expanded. To ensure that they’re attracting and retaining the best talent, some SMBs are offering competitive benefit packages that may also include a retirement benefit plan.
However, over the years, setting up this type of plan has become more complicated. One key issue is the selection of the investment funds that will be made available to the participants. Decisions need to be made about how many funds will be chosen, from which asset classes, which fund managers will be selected and who will be responsible to make these decisions? Then, in light of the recent financial crisis, who will be responsible for monitoring the funds’ performance and for making necessary adjustments if there are losses? These questions are critical considering that many investors lost on average 15% to 25% of their investment book value. There’s no one single answer, but a solution can be found by referring to the CAP Guidelines.
A Cap Guidelines Refresher
The Joint Forum Working Committee on Capital Accumulation Plans was established in 1999 to review the education and support given to CAP participants who are given the responsibility to choose their own investments. The goal was to protect the consumer by ensuring that investing becomes more understandable and transparent. This would be achieved, in part, by defining the roles and responsibilities of plan sponsors, service providers and plan participants. The guidelines were also designed to ensure that plan participants were well-prepared to make their investment selections and that they were consistently provided information about the status of their investments.
When setting up a CAP, it’s important to understand the SMBs’ and/or plan sponsor’s expectations for the plan so that they receive best solution for their company. Plan sponsors should be encouraged to also know their employees’ retirement savings goals and investment profiles. This helps them to define the purpose of their plan and to identify the most efficient retirement solution to their participants. For example: are they focused on finding top talent, becoming more competitive, looking to help employees save for retirement, or are they simply looking for a tax deduction.
The fund selection process runs much smoother when the purpose of the plan and the participants’ profiles are well-defined. Other important considerations during this stage include:
- what are the key considerations involved with creating the plan
- who will lead the fund selection process
- who will offer advice about the funds to the plan sponsor
To ensure that the process runs smoothly, these points should also be followed:
- ensure that the fund management team has a long-standing successful track record
- have a solid understanding of their work-style and investment philosophy
- confirm that there will be effective communication with unit holders
- thoroughly research their fund’s performance history based on an appropriate benchmark
- confirm that the cost of managing the funds will be affordable
Number of Funds
The SMB, plan sponsor or the third party will have to decide on the number of funds to be offered during the fund selection process. Having the right amount makes it easy for participants to choose. Keep in mind that fewer investment choices may simplify the decision-making process for those who might otherwise be overwhelmed by having too much to choose from. Also, the correct number of funds means that the service provider can effectively monitor each fund’s progress. Another solution for SMBs and/or plan sponsors is to choose pre-selected packages. This choice is particularly empowering and reassuring for participants. In case a participant does not choose from one of the selected funds, the plan sponsor is required to ensure that a default fund is selected on behalf of the participant. The plan sponsor is also responsible for making sure that there is a process to review fund performance and remove those funds that under-perform.
Once the CAP plan has been created, participants will need to understand their roles and responsibilities. For example, they should understand how and why the plan has been created. Any associated contribution limits, available investment options and fees should be clearly defined. They should also be made aware of the name of the service provider as well as the availability of calculators and other financial and research tools. They should also be required to evaluate their investment risk, select their ideal fund and determine an affordable contribution amount.
Once the plan has been set up, participants will require ongoing support. For example, they should be provided with easy-to-use investment information and decision-making tools. They should also be provided with ongoing communication channels which could include individual or group meetings, call centres, plan website and periodical mailings such as newsletters, account statements and other plan related information. Most importantly, participants should receive periodic fund reviews. The purpose is to ensure that the plan is meeting everyone’s needs. These reviews should address questions such as:
- Are all the parties still maintaining their roles and responsibilities per the initial contractual agreement?
- Does the plan still meet the employer’s initial objective and are they still complying with the CAP guidelines?
- Is the service provider doing a good job of managing the plan?
- Are participants still able to consult the online tools and are they satisfied with the call centre ability to respond to their questions? Analyze what needs adjusting and make the required changes.
Finally, a successful CAP is one in which all the responsible parties are diligently and correctly fulfilling their obligations. This includes ensuring that participants are enrolled in a retirement plan that they understand and that meets their needs. Most importantly, a successful CAP maintains the highest level of governance standards.
For more information, visit the group retirement section at: www.ForesightSolution.com.