Firms need to educate employees about making important financial decisions
As more workplaces make the move from defined benefit pension plans to defined contribution plans, the ability of employees to make sound financial decisions and employer responsibility for not educating staff is coming into question.
Workplace pension plans are of increasing concern to both employers and employees. Over the past year the value of many pension plan assets have dropped dramatically as stock markets plunged in the wake of corporate scandals.
This decline in the value of an employee’s pension fund raises another issue: Is the employer liable for any of the downfall or is the employee left alone to shoulder the entire loss? In the case of a defined benefit plan, the employer is liable for the shortfall. Because of this, many employers offer new employees a defined contribution pension plan. Some employers have even converted existing defined benefit plans into defined contribution plans that are, in most cases, cheaper and more accounting friendly.
Although defined contribution plans are, for the most part, cheaper to operate they do pose a different challenge. Due to their nature the investment responsibility, in terms of selecting investments, has shifted from professional money managers, in the case of defined benefit plans, to the individual employee. But do employees have the knowledge and skills to make these critical decisions? In most cases the answer is “no” which means the employer needs to determine if they are responsible for providing employees with the necessary education and advice to help make these critical decisions.
Even though there is little Canadian legislative guidance in this area, defined contribution plan sponsors are bound by the common-law principles and duties of care developed for fiduciaries. Under the common law, a fiduciary is defined as a person or organization in a relationship with a third party in which the fiduciary has the ability, or discretion, to affect the financial interests of the third party and the third party places their trust of confidence in the fiduciary. Employers are acting as fiduciaries because they, as plan sponsor, select the investment options that investment managers offered under the plan and they communicate these options to employees.
If fiduciaries do not have the required expertise to act they are expected to obtain the expertise of a specialist. Furthermore, a fiduciary is expected to act in the best interests of the beneficiaries and avoid conflicts between the fiduciary’s interests and those of the beneficiaries.
The employer has four options when it comes to assisting employees with financial decisions under defined contribution plans:
•do nothing;
•offer financial education;
•offer financial advice; or
•offer both financial education and financial advice.
Many employers realize they should be offering some kind of investment selection help but often shy away from the task due to a lack of education and information. Employers don’t want to provide employees with investment advice or education for fear the employee will come back to the employer if they get bad advice. But these same employers could be on the hook if they do nothing at all.
To help clear this misconception it is important to understand that there is a difference between financial education and financial advice. By providing financial education, firms are educating employees on personal financial planning and providing them with the tools to make their own financial decisions. This type of assistance can take the form of a self-study workbook, online materials or seminars.
Providing financial advice is a grey area in terms of helping employees with their financial lives. It should be understood, however, that financial advice should only be offered through one-on-one individual sessions. It should also be made clear to employees receiving advice what they can expect and what the risks are.
There is a distinct difference between providing employees with a general financial education that they can use to make their own financial decisions and providing a channel through which they can receive specific financial advice.
There are certain items to keep in mind when choosing a provider:
•Source of education and advice. Ensure the provider of the information isn’t biased or pushing a product.
•Qualifications. Does the financial advisor have any industry designations? Are there any provincial disclosures registered against this advisor? How long has this advisor been in business for?
•Compensation. Nothing is free and employers will get what they pay for. Some organizations that offer free education provide seminars or advice with the idea they can then market additional products and services to employees. Others claim it is free but have priced the services into existing fees charged for other services such as plan management or administration fees. Is the provider getting compensation based on a commission of some kind or are they charging on a fee-for-service model where the employer is paying specifically for financial education and advice?
•Conflicts of interest. Are there any potential conflicts of interest? The firm providing the education might have an interest in promoting products or services instead of giving independent, objective information. Offering financial education through a firm that is affiliated with selling investment products could be viewed as a potential conflict of interest.
Before making a decision to go with a specific vendor, ask for references to learn more about provider and make sure to call the references directly. Be prepared to ask specific questions relating to quality, objectivity and followup service. It might be helpful to request a sample presentation or inquire whether or not it is possible to sit in on a portion of a seminar.
Asaf Shad is president and CEO of Acquaint Financial Inc., an independent financial education and counselling services firm. He can be reached at (416) 622-4441, ext. 331, [email protected] or www.AcquaintFinancial.com.
Workplace pension plans are of increasing concern to both employers and employees. Over the past year the value of many pension plan assets have dropped dramatically as stock markets plunged in the wake of corporate scandals.
This decline in the value of an employee’s pension fund raises another issue: Is the employer liable for any of the downfall or is the employee left alone to shoulder the entire loss? In the case of a defined benefit plan, the employer is liable for the shortfall. Because of this, many employers offer new employees a defined contribution pension plan. Some employers have even converted existing defined benefit plans into defined contribution plans that are, in most cases, cheaper and more accounting friendly.
Although defined contribution plans are, for the most part, cheaper to operate they do pose a different challenge. Due to their nature the investment responsibility, in terms of selecting investments, has shifted from professional money managers, in the case of defined benefit plans, to the individual employee. But do employees have the knowledge and skills to make these critical decisions? In most cases the answer is “no” which means the employer needs to determine if they are responsible for providing employees with the necessary education and advice to help make these critical decisions.
Even though there is little Canadian legislative guidance in this area, defined contribution plan sponsors are bound by the common-law principles and duties of care developed for fiduciaries. Under the common law, a fiduciary is defined as a person or organization in a relationship with a third party in which the fiduciary has the ability, or discretion, to affect the financial interests of the third party and the third party places their trust of confidence in the fiduciary. Employers are acting as fiduciaries because they, as plan sponsor, select the investment options that investment managers offered under the plan and they communicate these options to employees.
If fiduciaries do not have the required expertise to act they are expected to obtain the expertise of a specialist. Furthermore, a fiduciary is expected to act in the best interests of the beneficiaries and avoid conflicts between the fiduciary’s interests and those of the beneficiaries.
The employer has four options when it comes to assisting employees with financial decisions under defined contribution plans:
•do nothing;
•offer financial education;
•offer financial advice; or
•offer both financial education and financial advice.
Many employers realize they should be offering some kind of investment selection help but often shy away from the task due to a lack of education and information. Employers don’t want to provide employees with investment advice or education for fear the employee will come back to the employer if they get bad advice. But these same employers could be on the hook if they do nothing at all.
To help clear this misconception it is important to understand that there is a difference between financial education and financial advice. By providing financial education, firms are educating employees on personal financial planning and providing them with the tools to make their own financial decisions. This type of assistance can take the form of a self-study workbook, online materials or seminars.
Providing financial advice is a grey area in terms of helping employees with their financial lives. It should be understood, however, that financial advice should only be offered through one-on-one individual sessions. It should also be made clear to employees receiving advice what they can expect and what the risks are.
There is a distinct difference between providing employees with a general financial education that they can use to make their own financial decisions and providing a channel through which they can receive specific financial advice.
There are certain items to keep in mind when choosing a provider:
•Source of education and advice. Ensure the provider of the information isn’t biased or pushing a product.
•Qualifications. Does the financial advisor have any industry designations? Are there any provincial disclosures registered against this advisor? How long has this advisor been in business for?
•Compensation. Nothing is free and employers will get what they pay for. Some organizations that offer free education provide seminars or advice with the idea they can then market additional products and services to employees. Others claim it is free but have priced the services into existing fees charged for other services such as plan management or administration fees. Is the provider getting compensation based on a commission of some kind or are they charging on a fee-for-service model where the employer is paying specifically for financial education and advice?
•Conflicts of interest. Are there any potential conflicts of interest? The firm providing the education might have an interest in promoting products or services instead of giving independent, objective information. Offering financial education through a firm that is affiliated with selling investment products could be viewed as a potential conflict of interest.
Before making a decision to go with a specific vendor, ask for references to learn more about provider and make sure to call the references directly. Be prepared to ask specific questions relating to quality, objectivity and followup service. It might be helpful to request a sample presentation or inquire whether or not it is possible to sit in on a portion of a seminar.
Asaf Shad is president and CEO of Acquaint Financial Inc., an independent financial education and counselling services firm. He can be reached at (416) 622-4441, ext. 331, [email protected] or www.AcquaintFinancial.com.
