Study after study has shown that there’s a desperate need for financial education for employees. But does an employer need or want to be the teacher? What exactly does a pension plan provider have to do?
A company that offers a retirement plan to its employees takes on a variety of duties. It will generally be a “fiduciary” in respect of the plan members. A fiduciary is subject to the highest legal standards. A fiduciary must behave as a person of ordinary prudence would in dealing with the property of another person. So what does that mean in practice in terms of financial education?
Pension and benefit laws and guidelines don’t use the term “financial education”. Rather, they impose obligations to provide “information” and “tools” about pension and savings plans. I refer to these broadly as “financial education” in this discussion.
Not surprisingly, different types of plans have different requirements. In a plan that provides defined benefits, the legal obligation to provide financial education is minimal. It arises when members leave the plan or retire, or undergo a significant life event, such as divorce or separation. As the member has very few decisions to make, there’s less need for financial education relating to the plan itself.
The picture is quite different for plans in which members make investment decisions. Plan members really can’t make effective decisions unless they have the ability to do so. That’s where financial education comes in.
For these types of plans, there is quite extensive guidance relating to financial education. The main source of this guidance is the Guidelines for Capital Accumulation Plans (known as the “CAP Guidelines”). The CAP Guidelines are voluntary, but pension regulators expect that pension plan administrators will comply with them. They are also seen as best practices.
Interestingly, the CAP Guidelines are silent about “financial education”. In fact, the CAP Guidelines say that the plan provider need not address the entire financial circumstances of the plan member. Having said that, the CAP Guidelines set out expectations regarding the things a plan member needs in respect of the plan.
Investment Information. The plan provider should provide investment information that will assist plan members in making investment decisions within the plan. This could include information about how investment funds work, information about different types of securities, and investment product guides. Information should be in plain language and in a form that is easy to read and understand.
Decision-making Tools. The plan provider should provide tools that will assist plan members in making investment decisions within the plan. These could include calculators and projection tools, asset allocation models and investor profile questionnaires.
Ongoing Communication. It’s not enough to provide information when the member joins the plan. Plan providers must keep the information current and provide additional information from time to time.
The CAP Guidelines also address investment advice. Plan providers are not required to provide investment advice. They may enter into an arrangement with a service provider to provide investment advice. They can also refer members to a service provider. There is no expectation that they will do so. Plan providers are generally reluctant to provide investment advice for fear of liability.
What happens if the plan provider doesn’t have the necessary expertise to provide financial education? It’s not an excuse to plead ignorance. If the plan provider lacks knowledge or expertise, it must educate itself or hire someone with the necessary skills. This issue is specifically addressed in the CAP Guidelines.
Plan providers also need to provide financial education when there’s a significant change to a plan. An example is when a defined benefit plan is converted to a defined contribution plan. Members need to understand their options and the implications of their decisions. This is an area that has caused concerns for plan providers.
Plan providers often create internal committees to oversee the operation of the plan. There are several benefits to having a committee or other governance structure to help with the administration of the plan.
There’s a clear focus on who is responsible for the administration of the plan and the provision of the financial education.
Qualified people can be put on the committee, and committee members can get training in their roles.
The committee can document its processes and decisions.
The committee can also be responsible for interacting with and supervising service providers.
Plan members know whom to approach with questions.
Overall, this structure helps satisfy fiduciary obligations.
Andrew Harrison is a partner in the Toronto office of Borden Ladner Gervais LLP. He is the National Leader of the Firm's Pension and Benefits Group. Andrew has a broad financial services and commercial practice, with a focus on pension and benefits law, investments and funding and financial institutions law. Andrew has advised many different participants in pension and benefit arrangements, including plan administrators, employers, boards of directors, trustees, insurance companies, investment managers and plan beneficiaries. He also advises financial institutions on regulatory matters, and businesses on corporate and commercial matters affecting them.