New guidelines push pension education

Capital Accumulation Plans need some explaining — and don’t forget about financial planning in general
By Brian Hayhoe
|Canadian HR Reporter|Last Updated: 10/28/2005

With the suggested implementation date of Dec. 31, 2005 for the Guidelines for Capital Accumulation Plans (CAP), plan sponsors are busy reviewing processes.

The CAP guidelines, developed by the Joint Forum of Financial Market Regulators, were released last year, and are available

online

.

The majority of CAPs require plan members to make important investment decisions that will directly impact their retirement. The CAP guidelines stipulate what plan sponsors are responsible for providing to members when it comes to investment information, decision-making tools and advice. These responsibilities are laid out under section 3 of the guidelines.

Investment advice is significantly different than investment information and decision-making tools. At first glance this may not seem like a big issue, but given the existing amount of confusion in the pension industry today, it is much more important than it appears to be.

The most common confusion is mixing up information, decision-making tools and advice. The terms are often used interchangeably when in fact they are very different.

Information is communications about the plan such as an overview of how the plan works, fund options, fund managers, automatic withdrawals and account statements.

Investment decision-making tools are aids that help plan members make investment decisions such as calculators, asset allocation models, risk assessment questionnaires and fund analysis tools.

Advice gets away from the plan member making the investment decision on their own and involves an investment advisor or computer software that advises plan members on how they should invest plan assets.

In the past, most employers focused efforts on the plan itself with little or no education on the fundamentals of saving, money management, making investment decisions or projecting a retirement income. Educating members on the plan usually consisted of explaining how it worked and not much else.

Providing financial education

The CAP guidelines ask employers to take a much more holistic approach to financial education efforts. According to a 2004 report by Sun Life Financial, entitled

The Road Ahead

, “almost half of plan sponsors (47 per cent) feel that it is necessary to provide members with education on basic personal financial planning skills.”

Without knowing the purpose of their pension plan and how it fits in with other sources of retirement income, such as government plans and other personal savings, members will not make full use of this valuable benefit. They will also be more likely to make bad decisions, which in the long run can come back to hurt the sponsor.

Plan sponsors that argue it’s not their responsibility to help members make investment decisions leave themselves open to serious risk. Section 3.2 and 3.3 of the CAP guidelines state: “The CAP sponsor should provide CAP members with investment information to assist the members in making investment decisions within the plan.”

Sponsors that choose to do nothing are leaving themselves open to the risk that plan members who have made poor decisions come back to them looking for compensation. When this happens the courts will likely look at what the sponsor provided in comparison to the guidelines when making a decision.

The guidelines fail to outline how plan sponsors can help their members better understand financial planning, and equally important, how their CAP fits into their overall financial planning. For some members their CAP may represent a majority of their retirement income, while for others it may only represent a fraction.

Will you provide investment advice?

Another important choice that plan sponsors must make is whether or not to provide investment advice.

Most sponsors do not provide advice to plan members. The biggest reason is they are afraid of the liabilities that could arise.

The Road Ahead

report found 35 per cent of plan sponsors said the biggest reason for not offering advice was the possibility of litigation and risk.

Unfortunately, the CAP guidelines don’t do much to calm this fear. They leave the decision of whether or not to provide advice squarely on the shoulders of sponsors with no clear directive as to how to do so.

Section 3.4.1 of the guidelines does state: “If the CAP sponsor chooses to enter into an arrangement with a service provider, or to refer a member to a service provider who can provide investment advice to the members, the CAP sponsor should establish criteria to be used in selecting the service provider and use the criteria to select the service provider.” It goes on to outline factors to consider when selecting a service provider:

•the criteria used to select service providers generally;

•any real or perceived lack of independence of the service provider relative to other service providers, the CAP sponsor and its members;

•any legal requirements individuals must meet before providing investment advice; and

•any complaints filed against the advisor or his or her firm and any disciplinary actions taken (if known).

Whether providing investment information, investment decision-making tools or advice, plan sponsors need to do so in a prudent manner. This includes due diligence when selecting service providers, having a well-documented process and avoiding any real or perceived conflicts of interest between plan members, plan sponsors and service providers. This will go a long way in protecting sponsors from future liabilities.

The benefits of implementing a financial education program go beyond fulfilling an employer’s responsibility to members of the CAP.

The big picture on retirement savings

Sponsors that realize this are going beyond just providing investment information and decision-making tools (with just the plan in mind). They’re offering a more holistic approach. This involves not only teaching members about the plan itself and how it works, but educating them on important concepts like how their pension plan fits into their overall financial plan.

One of the most overlooked areas of financial education is helping people determine where their savings will come from. Most employees understand that saving for retirement is important, but they have trouble finding enough funds to save. A solid financial education program will address these issues by teaching members about money management and using debt and credit wisely.

Probably the most direct benefit of implementing a financial education program comes in the form of increased plan participation and contributions. This should be good news for the 25 per cent of plan sponsors that said employee participation in the pension plan is their top challenge, according to

The Road Ahead

report.

A study released earlier this year by Steven A. Nyce from the Wharton School of the University of Pennsylvania shows the effects of a good financial communication program on participation rates and contributions. The study covered more than 300,000 employees and looked at how improving a financial communication program in four main areas (plan information, financial education, retirement income projections and web based education) affected participation rates and contribution levels in 401(k) type plans in the United States.

The study found that an enhanced financial communication program can be an effective method of raising participation and contribution rates. The largest impact on rates was for firms that used the Internet and web-based tools as a medium.

It also confirmed that enhancing a financial communication program can boost employee enrollment as much as increasing the company match rate. This is a significant finding considering the cost of enhancing a financial communication program can be significantly lower than increasing the match rate.

Other benefits that come from educating members on financial issues include reduced absenteeism, increased morale and employee retention.

So when it’s time to review your plan member education program be well aware of what the CAP guidelines require. Also consider the added benefits of increased plan participation, reduced absenteeism and higher morale that come from offering comprehensive financial education programs. Employees will thank you for it.

Brian Hayhoe is the chief operating officer of Acquaint Financial. For more information contact bhayhoe@
acquaintfinancial.com
or www.AcquaintFinancial.com.

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