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Dentons' Mary Picard presented "DC Plan Issues" at the Federated Press Pension Law & Litigation Conference on June 11, 2013. The following topics are discussed in the presentation in the context of DC ...

Dentons' Mary Picard presented "DC Plan Issues" at the Federated Press Pension Law & Litigation Conference on June 11, 2013. The following topics are discussed in the presentation in the context of DC registered pension plans and other capital accumulation plans (Group RRSPs, DPSPs, Non-Reg plans, TFSAs, etc.):
- DC plan risks and potential liabilities
- Advising plan members on investment decisions
- DC plan expenses and disclosure
- Improving plan design to address investor behaviour
- What's my number?

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DC Plan Issues DC Plan Issues Presentation Transcript

  • Federated Press: 9th Pension Law & Litigation ConferenceDC PLAN ISSUESJune 11, 2013Toronto, CanadaMary PicardPartnerDentons Canada LLPTel: (416) 863-4469Email: mary.picard@dentons.com
  • Topics that will be addressed in today’s presentation:2(1) DC plan risks and potential liabilities(2) Advising plan members on investment decisions(3) DC plan expenses and disclosure(4) Improving plan design to address investor behaviour(5) What’s my number?* * * * * *These issues will be addressed in the context of DCregistered pension plans and other capital accumulationplans (Group RRSPs, DPSPs, Non-Reg plans, TFSAs, etc.)
  • DC plan risks and potential liabilities3First question: is it a registered pension plan?• risks are higher than with Group RRSPs and other capital accumulationplans: complainants have legal support from pension regulators• Canadian Association of Pension Supervisory Authorities (“CAPSA”) isactive – see 2004 Guideline and * new * guideline released in draft inJuly 2012Second question: what country are you in?• dearth of litigation on DC plan issues in Canada• “Confederation Life” failure triggered talk of claims but nothing came of it• DB to DC plan conversion generated B.C. lawsuits (Teck and Tolko)
  • Look to the U.S. to see what the litigation risks arefor DC plans…4Wal-Mart:• plan offered 9 retail mutual funds and Wal-Mart common stock; allegation was that Wal-Mart did not use its considerable “buying power” to try to find more, and better-priced,investment options• revenue-sharing with trustee• Court allowed claim to proceed to trial on the basis that:- allegations of flawed process could support fiduciary breach claim- failure to disclose revenue-sharing information could mislead members• no trial: Wal-Mart settled in 2012 for $13.5 millionlearnings for Canadian plan sponsors: investigate & understand exactly who is getting $ get expert advice on whether the fees are appropriate, and document that process monitor fees continuously ensure fees are disclosed properly to members
  • Look to the U.S. to see what the litigation risks arefor DC plans…5Unisys:Unisys plan offered 67 mutual funds, stable value fund, employer stock fund andfour commingled pools.$1.9 billion of $2 billion total assets in the plan were invested in the mutual funds.Court said:“in light of the reasonable mix and range of investment options in the Unisys plan,plaintiffs’ factual allegations about Unisys’s conduct do not plausibly support theirclaims [of fiduciary breach]”.
  • Look to the U.S. to see what the litigation risks arefor DC plans…6Tussey v. ABB:Class action award by a Missouri court of $37 million against Fidelity, thecompany (ABB) and the retirement committee membersCourt found:• ABB failed to monitor the fees paid to Fidelity, who was paid too much(revenue sharing arrangement). “ABB never calculated the dollaramount of the recordkeeping fees the Plan paid to Fidelity…nor did itconsider how the Plan’s size could be leveraged to reduce recordkeepingcosts.”• Fidelity misapplied “float income” as part of a mapping strategy, such thatsome plans subsidized other plans, inappropriately.
  • Advising plan members on investment decisions7Recent activity by several service providers offering this --• all employees, and/or employees approaching retirement• could be limited to advice about only the funds offered by the provider• could refer employees to life insurance, financial planning, a host of otherfinancial products• sometimes enrolment forms expressly give permission for cross-selling• not illegal• no legislative guidance
  • Is it okay to offer “investment advice”? Here’s whatthe regulators have said:82004 CAPSA Guideline No. 3, section 6.2 (also adopted by regulatorswho govern Group RRSPs and other non-registered pension plans):“Where applicable, a CAP sponsor should periodically review serviceproviders with whom the CAP sponsor has an arrangement or to whom theCAP sponsor has referred CAP members to help them make theirinvestment decisions. As with other service providers, the CAP sponsorshould establish criteria for the periodic review and use these criteriato conduct the review.Because the primary relationship of a service provider who providesinvestment advice is with each member, it will not be possible or practicalfor the CAP sponsor to directly review the quality of the advice beingprovided.
  • The regulators have said this about investment advice:9“Factors for the CAP sponsor to consider when establishing criteria for theperiodic review of service providers include:• criteria used to select the service provider;• any complaints arising from the members; and• any complaints arising from the CAP sponsor or other service providersNot terribly helpful? How about:o Get the service provider to commit in writing to limits of adviceo Require specific training and ongoing certification of advisorso Immediate disclosure of complaints, regulatory inquiries for any other plansponsor’s plan memberso Get, and monitor ongoing compliance, with the service provider’s own internalquality control processes
  • DC plan expenses and disclosure10• U.S. experience shows this to be a likely area of litigation in Canada• Canadian regulators are not investigating or pursuing• DISCLOSURE, DISCLOSURE, DISCLOSURE Learn from the U.S. court cases, and ask your lawyer, consultant,service provider, to advise/certify/confirm that fees are reasonable, andadequately disclosed according to fiduciary obligation and CAPSAGuideline recommendations. At least every three years, pay an external, independent advisor toscrutinize & attempt to re-negotiate fees (they’re coming down!) Ask about charging employer expenses to DC accounts. Be careful with “revenue sharing”.
  • 2004 CAP Guideline section 4.4 says:11The CAP sponsor should provide CAP members with the description and amount of all fees, expenses andpenalties relating to the plan that are borne by the members, including:• any costs that must be paid when investments are bought or sold;• costs associated with accessing or using any of the investment information, decision-making tools orinvestment advice provided by the CAP sponsor;• investment fund management fees;• investment fund operating expenses (include audit, legal and custodial fees, cost of financial statementsand other reports or filings, taxes, transfer agency fees, pricing and bookkeeping fees);• record keeping fees;• any costs for transferring among investment options (including penalties, book and market valueadjustments, tax consequences);• account fees; and,• fees for services provided by service providers.4.4 – DESCRIPTION OF FEES, EXPENSES AND PENALTIESWhere appropriate, these fees, expenses andpenalties may be disclosed on an aggregate basis,provided the nature of the fees, expenses andpenalties is disclosed. Where fees, expenses andpenalties are incurred by members by virtue ofmember choices (e.g., transfer fees, additionalinvestment information or tools, etc.) such fees,expenses and penalties should not be aggregated.
  • Improving plan design to address investor behaviour12What is “investor behaviour”?ignorance and inactivityDOL in the U.S. has given comfort, where these are default funds:Target-date funds Passive or actively-managed Glide-path? Locked-in? Constructed by plan sponsor?
  • What’s my number?13CAPSA (Canadian Association of Pension Supervisory Authorities) issuednew draft guideline for DC pension plans in July 2012final guideline not yet releasedSection 3.3:“…plan administrators should provide members with information to helpthem understand and estimate their plan benefits on retirement. Theyshould consider providing members with the following information on anannual basis:• Estimate of accumulated value of the member’s account at retirement.• Estimate of the benefit that will result from the accumulated value.Plan administrators should inform members that statements regardingfuture benefits are estimates. They should also include the assumptionsused in estimating the future benefits.”
  • (continued…) CAPSA is proposing to recommend…14“Plan administrators should describe to members the purpose of thepension plan. In particular, they should disclose if the plan is expected toprovide an adequate retirement income in conjunction with othergovernment pension programs or it is expected that additional sources ofretirement income will be required.This may be best achieved by disclosing the targeted pension that isexpected for a member (or sample of members) with qualifications on:• Term the member would have to participate in the pension plan.• Member’s contribution rate (if optional under the pension plan).• Member’s assumed portfolio of investments.”
  • Canadian reaction to the proposal by pension regulators that planadministrators provide estimates about members’ DC account:15The lawyers said:“The [Canadian Bar Association pension lawyers’ division] has concernswith the recommendation that the administrator provide members withannual estimates of accumulated value of DC accounts at retirement andestimates of benefits arising from that value and the adequacy ofretirement income expected to be provided by the pension plan.Information of this nature depends on individual circumstances which maychange over time. The disclosure is onerous on the pension planadministrator and the estimates may be misleading to members. Thedisclosure will likely be so significantly qualified that the information will notbe very helpful to a member. The [CBA pension section] is of the view thatinformation of this nature relates to complex issues that are more suitablefor qualified advisors.”Submission of the National Pensions and Benefits Law Sectionof the Canadian Bar Association, October 2012
  • Canadian reaction to the proposal by pension regulators that planadministrators provide estimates about members’ DC account:16The ACPM said:“Section 3.3 of the Draft Guidelines is of concern to ACPM as it couldresult in inconsistency and confusion amongst the information that amember receives as each service provider will use different methodologyfor these calculations. If CAPSA insists on keeping this recommendationin the Draft Guidelines, ACPM suggests that the establishment of criteriafor the calculation of “Projected Account Balances” would ensureuniformity amongst the providers of such information to plan members.In addition, we strongly oppose the suggestion that Plan administrators‘should disclose if the plan is expected to provide an adequate retirementincome in conjunction with other government pension programs or it isexpected that additional sources of retirement income will be required’.We don’t think that a Plan administrator has the ability to determine this…This potentially exposes Plan administrators to a much higher level ofliability.”Comment letter of the Association of Canadian Pension Management dated November 9, 2012
  • And what about the U.S.? Are employers required to giveDC plan members estimates as to what their DC accountswill generate in future?17Department of Labor (regulator under U.S. pension legislation: ERISA)released Advance Notice of Proposed Rulemaking on May 7, 2013:“First, the Department is considering a rule that would require aparticipant’s accrued benefits to be expressed on his pension benefitstatement as an estimated lifetime stream of payments, in addition tobeing presented as an account balance.Second, the Department is also considering a rule that would require aparticipant’s accrued benefits to be projected to his retirement date andthen converted to and expressed as an estimated lifetime stream ofpayments.”
  • U.S. Department of Labor is proposing specificmethodology that employers can use to forecast DCaccount “monthly lifetime income stream”:18“safe harbor” protections will apply if:The following methodology is used for projecting an account balance:contributions continue to retirement age at the current annual contributionamount, increased by 3% per yearinvestment returns are 7 % (nominal)an inflation rate of 3% per year is used for discounting the projected accountbalance to today’s dollarsMethodology is proposed for converting an account balance into a lifetimeincome stream:see: https://www.federalregister.gov/articles/2013/05/08/2013-10636/pension-benefit-statementsbasically, rate of interest equal to the 10-year T-bill rate
  • The preceding presentation contains examples ofthe kinds of issues companies dealing withpension plans could face. If you are faced withone of these issues, please retain professionalassistance as each situation is unique.
  • Mary PicardPartnerDentons Canada LLP77 King Street West, Suite 400Toronto-Dominion CentreToronto, ON M5K 0A1Tel: (416) 863-4469Email: mary.picard@dentons.com© 2013 Dentons. Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking,action based on its content. Please see dentons.com for Legal Notices.