Converting from DB to DC?
Then make sure your members understand the fees.
August 16, 2011
In 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.