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Benefits and Pensions MonitorEducation, Advice, & The CAP Guidelines With the release of the Joint Forum of Financial Market Regulators’ ‘Proposed Guidelines for Capital Accumulation Plans,’ plan sponsors, service providers, and plan members are closer and closer to seeing some form of ‘best practices guidelines’ or legislation for Capital Accumulation Plans (CAPs). Since most types of CAPs require that plan members make their own investment decisions and because these decisions will have a direct impact on their income in retirement, the proposed guidelines outline what plan sponsors and service providers are responsible for in terms of providing members with investment information, decision-making tools, and advice.
These responsibilities are covered under Section 3 of the proposed guidelines, ‘Investment Information and Decision-Making Tools for CAP Members.’Although not included in the title of Section 3, Subsection 3.4 covers ‘Investment Advice’ which 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 already in the pension industry today surrounding advice versus education or decision-making tools, this does not help clarify the misconception. Plan sponsors and members often make the mistake of grouping financial advice and investment information and/or decision- making tools together. The terms are often used interchangeably when, in fact, they are very different. By providing members with information and decisionmaking tools, you are giving them tools that will aid them in making investment decisions. Advice, on the other hand, gets away from the plan member making the investment decision on their own and involves a person, computer software, etc. that tells them what they should do. So what are plan sponsors doing today? I would argue that the majority of plan sponsors today provide very little, if any, investment decision-making tools (education) or advice. This is in large part due to outdated regulations that were instituted with DB plans in mind – which the Joint Forum is now trying to rectify. Focus On Details Most pension providers and plan sponsors provide members with information that focuses on the details and administration of the plan with very little, if any, emphasis on decision-making tools (education) and retirement planning information in general. While this information is very important for members to have, plan sponsors need to ensure that members have access to education and decision-making tools. Without knowing the purpose of their pension plan, and where it fits in with other sources of retirement income such as government plans and personal savings, members will not make full use of this valuable benefit and will also be more likely to make bad decisions, which, in the long run, may come back to haunt the sponsor. There are plan sponsors that argue it is not their responsibility to help members make these decisions because members have to make many other investment decisions outside their plan, without the sponsors’ help. They feel this is no different. However, the proposed guideline’s strongly supports the view that sponsors need to provide investment information and decision-making tools. Sections 3.2 and 3.3 say:
No matter which side of the argument you are on, the bottom line is that members want this information and even if sponsors believe they are not responsible for providing it, the benefits outweigh the costs in terms of member satisfaction and objectives of the plan. Investment Advice Another important decision that plan sponsors must make is whether or not to provide investment advice. There are very few sponsors today that provide advice to their plan members and the biggest reason is they are afraid of the liabilities that surround it. Unfortunately, the Joint Forum’s proposed guidelines do not do a lot to calm this fear. They have left the decision to provide advice up to the plan sponsor and have not given a clear directive as to how it should be done. Section 3.4.1 of the guidelines states “a plan sponsor may choose to enter into an arrangement with a service provider or refer a member to a service provider who can provide the members with advice about their investment decisions.” It goes on to outline things to consider when selecting a service provider. These include:
The guidelines also state that the advice provider should have the appropriate knowledge, skills, and professional qualifications or designations to provide the advice required by CAP members and advisers that are appropriately registered or licensed must be used where required by law.
Glaring Hole Although this outlines some procedures for offering advice, there is a glaring hole that is going to keep many sponsors on the sidelines when it comes to offering advice. The guidelines do nothing to protect plan sponsors, when they have done a prudent job in selecting and administering advice, from future liability. Until sponsors feel that as long as they take the proper precautions and go through the proper procedures in providing advice to members they will be protected, most will not opt to provide advice to their members. Whether providing investment information, investment decision-making tools, and/or advice, plan sponsors need to do so in a prudent manner. This involves doing their due diligence when selecting service providers, having a well-documented process for everything they do, 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 any future liabilities that may arise.
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