Employee Financial Literacy Blog

Pension Providers’ Obligations to Provide Financial Education

Posted by Frank Wiginton on Thu, Jul 18, 2013

By Andrew Harrison, Partner, Borden Ladner Gervais LLP

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.

Employee Financial education, Cap GuidelinesFor 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, BLGAndrew 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.

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Tags: Capital Accumulation Plan Requirements, Employee Litigation, employee financial education

Providing Employee Financial Education - A Litigator's Perspective

Posted by Frank Wiginton on Mon, Jul 15, 2013

A LitigEmployee Financial Educationation Lawyer’s Perspective on the Benefits and Risks Associated with Providing Financial Education to Employees

by Markus F. Kremer, Borden Ladner Gervais LLP

As a litigator, I often meet employers for the first time when they are being sued by their employees. This gives me a unique perspective on employee financial education.  My focus is on how employers can conduct their business in order to try to avoid or win lawsuits.  Coming from this perspective, I see both risks and benefits in educating employees on financial issues.

What are the risks?

Words matter.  Employers need to remember that they may be legally responsible if they provide incorrect facts or bad advice to their employees.  As a result, you should always exercise caution when discussing financial issues with your employees.

Employers who want to minimize the risk of being sued should remember the following:

Know the statutory requirements.  Legislation requires the administrators of registered pension plans to provide certain information to members (e.g.: notices of plan amendments).  For registered pension plans, there are also prescribed forms that must be used when interacting with plan members.  Everyone who deals with employees needs to be aware of these statutory requirements.

Know the industry standards.  Best practices, industry standards and guidelines are not laws, but they can affect judges’ decisions.  They are like the instruction manual for a snow blower.  You are not breaking any law by disregarding the operating instructions.  If you injure someone, a judge must decide whether you acted reasonably.  That judge will consider the fact that you did not follow the instructions.

Whenever possible, give facts, not advice.  When you provide facts to your employees, you will only be liable for damages if the facts were wrong.  If you provide advice to employees, you will have to prove that the advice was reasonable if you are sued.  A court is not supposed to evaluate the reasonableness of the advice by using hindsight.  However, it can be hard to prove that advice that produced a bad result was reasonable. Suppose, for example, that you are discussing with your employees a particular investment option under a group RRSP.  When you tell your employees the historical rates of return for the option, you are providing facts.  This is unlikely to result in liability.  When you tell individual members to choose that particular option, you are giving them advice.  This is more risky.

Call in the experts.  When you hire an outside consulting firm to provide financial education, you benefit from their expertise.  This is particularly important if your company does not have that expertise itself.  If you select the right consultant and put the right agreement in place, this may also protect you from liability.

Keep records.  It will be easier to prove that you acted reasonably if you have detailed records of the information you provided to your employees.

What are the benefits?

There are two major benefits that flow from providing financial education to employees:

Happy employees don’t sue their employers.  Anyone can start a lawsuit by drafting a Statement of Claim and paying a filing fee.  There is no way to prevent someone from suing you.  The best insurance against employee claims is a happy workforce (and happy retirees).  Helping employees achieve their financial goals is the best way to make sure they will have no reason to sue you.

Education can be a way to manage expectations.  Whether your employees are happy or unhappy depends largely on whether their financial situation ends up being better or worse than they expected.  Keeping employees informed about risks and ensuring that their expectations are reasonable can prevent future problems.

What they don’t know could hurt you.  Employees have to prove that they relied on incorrect facts or bad advice that their employers provided to them.  It will be harder for your employees to prove blind reliance if they are well-educated.  An unsophisticated workforce is more likely to follow advice without using their own judgment.  If this results in financial losses, they will look to you for compensation.

The last word …

Providing financial education to employees is not without its risks.  However, if it is done properly, it may decrease the likelihood that your employees can sue you successfully.

Markus KremerMarkus Kremer is a partner in Borden Ladner Gervais LLP’s commercial litigation group, specializing in pension litigation.  Markus has appeared as counsel on pension matters before all levels of Court in Ontario, before the Federal Court and the Supreme Court of Canada, and before Ontario's Financial Services Tribunal.  He is a former member of the Ontario Bar Association's Pension & Benefits Section Executive and has published articles on a wide range of pension topics.  He has litigated pension cases involving issues as diverse as: the ownership and distribution of surplus in a pension plan; payment of administrative expenses from pension funds; negligent administration of pension plans and negligent investment of pension funds; and employee misrepresentation claims.  He has represented both plaintiffs and defendants in pension class actions.  Markus was selected for inclusion in the 2010, 2011 and 2012 editions of The Best Lawyers in Canada in the area of Employee Benefits Law.

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Tags: Capital Accumulation Plan Requirements, Employee Litigation, employee financial education