Although terms such as fiduciary duty, independence, unbiased and objective are not staples of employer-sponsored retirement plans today, they will likely feature prominently in the not-so-distant future. Recent events such as the downfall of Enron and the rapid growth of defined contribution (DC) pension plans have led regulators to reconsider current regulations.
According to research from Statistics Canada, between 1996 and 1998, the number of Canadians covered by DC plans grew by close to 20 per cent, the largest increase over the last 10 years. While an alarming number of companies are choosing to provide employees with what can be called “do-it-yourself retirement plans” (defined contribution plans, group RRSPs, DPSPs), regulators have yet to catch-up with the move. But with cases like the collapse of Enron, regulators are likely to act sooner rather than later.
With the “do-it-yourself” type of retirement plans, employees are responsible for choosing the investments that could make or break their retirements. This contrasts with the more traditional defined benefit (DB) plans where the risk is born by the employer. If the DB plans investment returns are not adequate enough to satisfy the employee’s pension, the employers are responsible for the shortfall. On top of that, DB plan investment decisions are made by professional money managers.
If employees do not have the understanding to make the proper choices when it comes to investing for retirement, what are plan sponsors doing to make sure employees are educated? A survey, conducted by Watson Wyatt and released in January, found more than two-thirds of Canadian employers with DC plans allow employees to make all their own investment decisions. Yet only a quarter of those firms offer any financial counselling to help members make investment decisions.
How important are the retirement decisions staff make regarding employer-sponsored pension plans? Indications are that a large number of Canadians are unprepared for retirement, and therefore corporate pension plan guidance is essential.
Human Resources Development Canada reports that despite the increased popularity of private pension programs, public pensions still make up 50 per cent of the average Canadian’s retirement income. At first glance this might not appear to be a concern but if public pension plans are not able to support Canadians in the future, a view held by many people, then Canadians could be in trouble.
A recent Statistics Canada survey found that about 33 per cent of all families with a major earner aged 45 to 64 will not have enough assets to generate an income in retirement that will replace two-thirds of their pre-retirement earnings, typically the amount retirees need to maintain their pre-retirement standard of living.
Another survey by Gallup Canada, for the Canadian Association of Financial Planners, found 51.5 per cent of all Canadians have no idea how much money they need for a comfortable retirement. In addition, 56.7 per cent said the best time to start using a financial planner was between the ages of 18 and 29, yet only one in five people in this age group actually has a planner. Canadians recognize the importance of starting financial planning early, but don’t appear to be doing much about it.
Suppose an employee is nearing retirement and has not accumulated enough funds to retire because he wasn’t armed with the proper tools to make intelligent investment decisions. Let’s further assume that the majority of his assets are held in a defined contribution type pension plan sponsored by his employer. Could the employee have recourse on the employer for not taking the appropriate steps necessary to ensure employees have been provided with the necessary concepts on how to plan for their retirements? Do plan sponsors want to take that chance?
Even though there is little Canadian legislative guidance in this area, DC plan sponsors are bound by the common-law principles and duties of care developed for fiduciaries. Under the common law, a fiduciary is defined as a person or organization in a relationship with a third party in which the fiduciary has the ability, or discretion, to affect the financial interests of the third party, and the third party places trust or confidence in the fiduciary. Employers are acting as fiduciaries because, as plan sponsors, they select the investment options that investment managers offer under a plan and communicate these options to employees.
If fiduciaries do not have the required expertise to act, they are expected to obtain the expertise of a specialist. Furthermore, a fiduciary is expected to act in the best interests of the beneficiaries and to avoid conflicts between the fiduciary’s interests and those of the beneficiaries.
There are more and more cases, such as Enron, where the issue of fiduciary duty is the focal point. Others include Bell Canada, which was faced with a suit by retirees who lost savings when Confederation Life went into liquidation, and Lucent Technologies, where U.S. employees filed suit over inclusion of Lucent stock in their retirement program. (For more see the related article “Who’s looking after the Group RRSP" by clicking the link at the end of this article.)
In the infamous Enron case employees were encouraged by the company to purchase Enron stock in their U.S. 401K retirement plans (a DC plan). When the stock fell to just pennies a share many of them lost their retirement savings. This may have been avoided if Enron had taken steps to educate employees on basic investing concepts, such as diversification, which teaches investors not to put all their eggs in one basket.
These kinds of cases are forcing regulators to take action in order to prevent them from happening again. For example, there is now a bill in front of the U.S. Congress that would make education mandatory for 401K plan participants. It likely will not be long before regulators in Canada take action to help prevent these types of problems from occurring in this country.
An increasing number of companies are taking a proactive role in helping to educate employees on financial issues. By doing this, employees are in a much better position to make sound investment decisions. A study by William M. Mercer Limited revealed 39 per cent of DC plan sponsors offer no investment education at all, but almost one-half of those surveyed said they plan to add individual or retirement counselling to their investment education programs in the next 12 months. Another study conducted by Deloitte and Touche asked certified employee benefit specialists what they believed were the five most important issues to employees for 2002. Four out of the top five regarded financial education and financial assistance.
There are many things to consider when setting up a financial education program. Providing generic information is not enough. If members do not know how to apply that information to their own personal situations they will not be able to make informed investment decisions. Employee education should be provided by an independent party that is not tied to the plan sponsor or administrator and does not sell investment products. If you are getting the education for free, warning bells should go off because the phrase, “nothing is free,” is true in most cases.
Plan sponsors must make sure there are no conflicts of interest. The program should be flexible enough to accommodate varying levels of investment knowledge and learning techniques. A program that keeps employees learning new concepts and theories will increase their knowledge base and help them make better decisions. Various delivery approaches, such as one-on-one, group workshops, online education and visual presentations, provide a solution for most types of financial issues. Finally, the program should be monitored to make sure employees understand the concepts they need to make wise financial decisions.
The courts are not required to second-guess the actions of plan sponsors when it comes to Canadian law on fiduciary duties. Instead, courts are looking for a solid governance model in place. If a rational program is being followed and all the issues have been given proper consideration by the fiduciaries, the courts are better able to find that the fiduciary duties of the plan sponsor have been met.
Brian Hayhoe is the Chief Operating Officer of Acquaint Financial Inc., a provider of financial education and employee retirement planning programs. For more information contact 1-877-737-8955 or visit www.AcquaintFinancial.com.
According to research from Statistics Canada, between 1996 and 1998, the number of Canadians covered by DC plans grew by close to 20 per cent, the largest increase over the last 10 years. While an alarming number of companies are choosing to provide employees with what can be called “do-it-yourself retirement plans” (defined contribution plans, group RRSPs, DPSPs), regulators have yet to catch-up with the move. But with cases like the collapse of Enron, regulators are likely to act sooner rather than later.
With the “do-it-yourself” type of retirement plans, employees are responsible for choosing the investments that could make or break their retirements. This contrasts with the more traditional defined benefit (DB) plans where the risk is born by the employer. If the DB plans investment returns are not adequate enough to satisfy the employee’s pension, the employers are responsible for the shortfall. On top of that, DB plan investment decisions are made by professional money managers.
If employees do not have the understanding to make the proper choices when it comes to investing for retirement, what are plan sponsors doing to make sure employees are educated? A survey, conducted by Watson Wyatt and released in January, found more than two-thirds of Canadian employers with DC plans allow employees to make all their own investment decisions. Yet only a quarter of those firms offer any financial counselling to help members make investment decisions.
How important are the retirement decisions staff make regarding employer-sponsored pension plans? Indications are that a large number of Canadians are unprepared for retirement, and therefore corporate pension plan guidance is essential.
Human Resources Development Canada reports that despite the increased popularity of private pension programs, public pensions still make up 50 per cent of the average Canadian’s retirement income. At first glance this might not appear to be a concern but if public pension plans are not able to support Canadians in the future, a view held by many people, then Canadians could be in trouble.
A recent Statistics Canada survey found that about 33 per cent of all families with a major earner aged 45 to 64 will not have enough assets to generate an income in retirement that will replace two-thirds of their pre-retirement earnings, typically the amount retirees need to maintain their pre-retirement standard of living.
Another survey by Gallup Canada, for the Canadian Association of Financial Planners, found 51.5 per cent of all Canadians have no idea how much money they need for a comfortable retirement. In addition, 56.7 per cent said the best time to start using a financial planner was between the ages of 18 and 29, yet only one in five people in this age group actually has a planner. Canadians recognize the importance of starting financial planning early, but don’t appear to be doing much about it.
Suppose an employee is nearing retirement and has not accumulated enough funds to retire because he wasn’t armed with the proper tools to make intelligent investment decisions. Let’s further assume that the majority of his assets are held in a defined contribution type pension plan sponsored by his employer. Could the employee have recourse on the employer for not taking the appropriate steps necessary to ensure employees have been provided with the necessary concepts on how to plan for their retirements? Do plan sponsors want to take that chance?
Even though there is little Canadian legislative guidance in this area, DC plan sponsors are bound by the common-law principles and duties of care developed for fiduciaries. Under the common law, a fiduciary is defined as a person or organization in a relationship with a third party in which the fiduciary has the ability, or discretion, to affect the financial interests of the third party, and the third party places trust or confidence in the fiduciary. Employers are acting as fiduciaries because, as plan sponsors, they select the investment options that investment managers offer under a plan and communicate these options to employees.
If fiduciaries do not have the required expertise to act, they are expected to obtain the expertise of a specialist. Furthermore, a fiduciary is expected to act in the best interests of the beneficiaries and to avoid conflicts between the fiduciary’s interests and those of the beneficiaries.
There are more and more cases, such as Enron, where the issue of fiduciary duty is the focal point. Others include Bell Canada, which was faced with a suit by retirees who lost savings when Confederation Life went into liquidation, and Lucent Technologies, where U.S. employees filed suit over inclusion of Lucent stock in their retirement program. (For more see the related article “Who’s looking after the Group RRSP" by clicking the link at the end of this article.)
In the infamous Enron case employees were encouraged by the company to purchase Enron stock in their U.S. 401K retirement plans (a DC plan). When the stock fell to just pennies a share many of them lost their retirement savings. This may have been avoided if Enron had taken steps to educate employees on basic investing concepts, such as diversification, which teaches investors not to put all their eggs in one basket.
These kinds of cases are forcing regulators to take action in order to prevent them from happening again. For example, there is now a bill in front of the U.S. Congress that would make education mandatory for 401K plan participants. It likely will not be long before regulators in Canada take action to help prevent these types of problems from occurring in this country.
An increasing number of companies are taking a proactive role in helping to educate employees on financial issues. By doing this, employees are in a much better position to make sound investment decisions. A study by William M. Mercer Limited revealed 39 per cent of DC plan sponsors offer no investment education at all, but almost one-half of those surveyed said they plan to add individual or retirement counselling to their investment education programs in the next 12 months. Another study conducted by Deloitte and Touche asked certified employee benefit specialists what they believed were the five most important issues to employees for 2002. Four out of the top five regarded financial education and financial assistance.
There are many things to consider when setting up a financial education program. Providing generic information is not enough. If members do not know how to apply that information to their own personal situations they will not be able to make informed investment decisions. Employee education should be provided by an independent party that is not tied to the plan sponsor or administrator and does not sell investment products. If you are getting the education for free, warning bells should go off because the phrase, “nothing is free,” is true in most cases.
Plan sponsors must make sure there are no conflicts of interest. The program should be flexible enough to accommodate varying levels of investment knowledge and learning techniques. A program that keeps employees learning new concepts and theories will increase their knowledge base and help them make better decisions. Various delivery approaches, such as one-on-one, group workshops, online education and visual presentations, provide a solution for most types of financial issues. Finally, the program should be monitored to make sure employees understand the concepts they need to make wise financial decisions.
The courts are not required to second-guess the actions of plan sponsors when it comes to Canadian law on fiduciary duties. Instead, courts are looking for a solid governance model in place. If a rational program is being followed and all the issues have been given proper consideration by the fiduciaries, the courts are better able to find that the fiduciary duties of the plan sponsor have been met.
Brian Hayhoe is the Chief Operating Officer of Acquaint Financial Inc., a provider of financial education and employee retirement planning programs. For more information contact 1-877-737-8955 or visit www.AcquaintFinancial.com.
