Canadian Investment Review

Converting from DB to DC?

Written by Gerry Wahl on Tuesday, August 16th, 2011 at 8:41 am

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:

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:

Conclusion

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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