Converting from DB to DC?

Then make sure your members understand the fees.

August 16, 2011

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954631_tooniesIn this series of articles on fees and performance, a number of issues have been identified that a sponsor should be aware of as part of their fiduciary responsibilities in assessing the reasonableness of fees and evaluating service provider performance.

Many of these issues are overlooked by sponsors while CAP members often underestimate or ignore the significant impact of fees on the accumulation of retirement savings.

CAP sponsors should be aware of the actual amount of fees members are paying to each service provider part of assessing whether or not fees charged are reasonable.

Disclosing the actual fees CAP members pay to each type of service provider on quarterly account statements would be a step in the right direction. It might also encourage members to get more involved in their CAP plan and make greater use of the record keeper and advisor services.

However, there are other broader issues that are also worth considering when looking at the fee structure for a plan or when converting from a DB plan to a DC one.

Fiduciary Responsibility – The Question of Equity

In its consultation paper of November 30, 2009, CAPSA outlines prudence standards and the role of the administrator. Two of the administrator’s basic obligations are to act prudently and treat all beneficiaries fairly, in an even-handed manner. An administrator must also always act in the best interests of plan beneficiaries. Therefore, sponsors and administrators should consider the following with respect to their CAP structures:

  • Is it appropriate that all members (with investments where fees are applied) pay for services they may not utilize — e.g. advisor or record keeper fees?
  • Is it equitable that members who only invest in GIs or other similar products, where fees are not assessed, pay nothing for the advisor and record keeping services?
  • If a sponsor uses the record keeper or advisor to assist in administering the plan, is it appropriate that members essentially pay these administrative costs cost as opposed to the sponsor?
  • If balanced funds and/or life cycle funds are provided by the record keeper does the record keeper use also use their own “other” funds in the portfolio and do these funds provide the best fit in terms of risk and return versus cost. Rather, is there any conflict of interest with respect to performance and fees? What level of fee disclosure is appropriate in this type of situation?
  • Have all significant direct and indirect fees and costs paid by members been disclosed?
  • What does the plan document say about who pays the fees and costs of the CAP?

Fee Issues – DB to DC Conversions

Three recent Canadian court cases (Halliburton, St. Mary’s Cement and Tolko) highlight the importance of disclosing all pertinent facts to DB plan members being offered the opportunity convert to a DC plan. While each of these cases is unique they clearly indicate the importance of clear and concise communication of key information such as conversion formulae, costs and risks. When converting from a DB to a DC plan, there are also some disclosure issues to consider regarding fees paid by members. Questions to ask include:

  • Have the members been made aware of the fact that they will be paying the fund manager, record keeper, advisor fees and fund manager administration costs which they would not otherwise pay in the DB plan?
  • Have members been provided with an estimate of the total fees and costs they will pay in the DC plan over their working career?
  • Have the  fees and costs been explained to the members and factored into the DB to DC conversion discount rate?
  • Are the members aware that they may be paying for all or a portion of the sponsors governance costs (i.e., Are the members aware that they may be paying for the services of an advisor whether they use the services or not)?
  • Have members been informed that some CAP members may pay minimal or no direct fees or costs for record keeper and advisor services if invested primarily in a guaranteed investment?
  • Has the impact of fees on asset accumulation been clearly and simply explained to the members?
  • Is the communication to potential DC plan members about fees and costs clear, concise and understandable to less financially sophisticated members?


The issue of CAP fees is complex and has a significant impact on CAP member’s retirement savings.

Sponsors must therefore be diligent in overseeing the costs imposed on plan members. The breakdown of the amounts actually paid to each service provider is a key starting point in assessing the reasonableness of the fees and performance of the service providers.

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You make some interesting comments which I will try to address. I think the issue of members paying no fees/costs for GICs is again bit of a red herring. Banks offer competitively priced GICs and most sponsors and members assume the GICs available as an investment option in their plans are competitive in terms of market interest rates. The issuer of the GIC which is used as a CAP investment option undoubtedly takes into consideration costs and effectively reduces the interest paid ion the GIC . However, the issuer also usually provides an interest rate premium of 30-40 bps (significant when you consider the rates on 1-5 GICs) which likely offsets all or most of the embedded costs/fees. The amount the issuer makes on a GIC will therefore primarily depend on interest rate spreads as you point out. Since the GIC should be competitively priced, the cost/fee embedded in the interest rate is likely partially or totally offset by the 30-40 BPs. Given that interest rates and spreads change regularly it is debatable how much the net fee (cost net of premium) if anything, actually is. Determining the fee, as you suggest, is difficult and is made even more difficult by the fact that members often hold a series of GICs via acquisitions through regular contributions vs. a single GIC. The point that I think you have over looked is that the embedded fee in GIC is in a fund manager fee similar to the fees paid to other fund managers. Record keeper and advisor fees are not applied to GICs. Therefore members investing in a GIC may or may not end up effectively paying a GIC fund manager fee for a specific GIC but they do not pay the record keeper and advisor fees. In other words, the members not invested in GICs pay the record keeper and advisor costs which results in an inequity. One of the objectives of the CAP Guidelines id to improve transparency and it t is recommended that fees paid by members for each type of service be disclosed. Because the fund manager portion of the GIC is not or cannot be determined and is not disclosed I don’t agree that what I have said is grossly misleading. The interest rates paid on GICs ``can be benchmarked against the rates paid by banks however few sponsors appear to do this despite the fact there members may have significant amounts invested in GICs. The sponsor should also ensure the30-40 bp premium is being paid. With respect to your comment “the fiduciary risks despite all the hooo haw around the CAP guidelines are to date minimal at best” is perhaps misleading. The Joint Forum of Financial market Regulators, in establishing the CAP guidelines, outlined their expectations with respect to the operation of CAPs regardless of the regulatory regime. The Guidelines are generally accepted as an indicator of best practices and would likely be a considered an indication of prudent oversight of a CAP. Whether or not the Guidelines have been tested in court is another matter. Ignoring the CAP Guidelines poses a potential legal risk which most sponsors would likely rather avoid. Most sponsors want guidance in the administration and oversight of their CAPs and follow the Guidelines. I appreciate your comments since they provide an opportunity to improve the awareness of some of the issues related to GICs that sponsors and administrators should be aware of.


Gerry it is grossly misleading to suggest that GIC investors in a CAP plan pay no fees. Disclosure of those fees would however be very difficult as most suppliers will not disclose the spreads they earn off their portfolio of investments backing their GIC products. The questions you raise are just further validation of the reasons why most new plan sponsors do not want to have Pension Plans subject to multiple regulators and legislation aimed at DB plans but still applied to DC. CAP plans using the other non-regulated vehicles are a much easier way to go and the fiduciary risks despite all the hooo haw around the CAP guidelines are to date minimal at best.


As you are probably aware the legislative requirements regarding fee disclosure are minimal (or non- existent). The Cap Guidelines – Section 4.4 – however recommends that the “Sponsors should provide CAP members with the description and amount of all fees , expenses …borne by members including …investment fund management fees, investment fund operating expenses, record keeping fees …and fees for services provided by service providers e.g. advisors). However the Guidelines go on to say “When appropriate, these fees ... may be disclosed on an aggregate basis, provided the nature of the fees …is disclosed”. What you generally see is aggregate fee disclosure vs. the detailed disclosure of costs by fund manager, record keeper and other service providers (advisors) and this may be because the aggregate disclosure approach is simply easier and raises fewer questions and issues. However, if the sponsor asks for the detail of the amounts (fees) paid by members e.g. annually, it should be provided. Whether aggregate fee disclosure is “appropriate” is a question to consider. Under Section 6 .1 of the CAP Guidelines it is recommended that the sponsor review service providers and establish criteria for the review. Logically and from a fiduciary perspective the type of services, performance and cost should be part of such a review. Therefore sponsors should understand and request the amounts paid to each service provider as part of assessing their performance and from a fiduciary perspective ensure the members receive value for the cost of the services they pay for. Disclosing the fund manager fees (at least in aggregate), record keeping and advisor costs paid by the members on a year-to-date basis on their quarterly statements would go a long ways in terms of greater fee transparency. It may also result in members making greater use of the services and tools they are paying for. With respect to DB to DC conversions, it is apparent there are no specific requirements per se regarding fee disclosure or other important types of information. Some of the wording and gaps in the CAP Guidelines create difficulties and confusion for sponsors and administrators and demonstrate the type of problems and issues that could result from a principal based approach to pension legislation.


How likely is fee disclosure in the absence of legislative transparency?

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