Annual reviews of the benefits packages offered to staff are one of many responsibilities under the purview of HR and Finance leaders in organizations across Canada. Along with reviewing health and dental benefits, assessing the group retirement plan is an often overlooked and yet critical element of this annual housekeeping.
Before delving into the specifics of what a group retirement plan review ought to include, it is worthwhile to pause and think about why a review is necessary in the first place.
Why reviewing group retirement plans matters
In 2004, the Joint Forum of Financial Market Regulators published a document outlining the expectations of regulators with regards to the operation of Capital Accumulation Plans (i.e. group RRSPs, DCPPs, DPSPs, etc.). According to those Guidelines for Capital Accumulation Plans (also known as the CAP Guidelines), a retirement plan sponsor “should periodically review all service providers it engages, investment options available in the plan, records maintenance, and decision-making tools provided to members.” This means that by virtue of offering a group retirement plan to employees, a sponsor is expected to perform a regular due diligence to ensure that the plan is performing as intended. This is obviously in line with the fiduciary responsibility outlined in other government regulations and guidelines.
Since a plan member’s retirement outcome is directly linked to how well their investments perform over the long-term, being able to assess the performance and risk of the investments used against a benchmark is critical. The same can be said of the fees associated with those investments as they have the potential to substantially eat away at returns.
Plan sponsors that forego the review process therefore risk having some or perhaps many of their members being invested in unsuitable funds that are either underperforming or overpriced. Sadly, that’s a common phenomenon in group RRSPs where there is a tendency to leave the full responsibility on employees to review their investments. Considering the fact that the idea behind offering employees a group retirement plan is to better prepare them for life after work, it would make more sense for plan sponsors to take measures to ensure their investment in a retirement plan is yielding positive results.
Reviewing the quality and consistency of the service offered by the provider is undoubtedly one of the key components of an overall plan review. Prior to doing that however, it is important that a plan sponsor establish a set of criteria with which they will evaluate the provider. These can include things such as:
Availability of a dedicated account manager
Willingness to come on-site
Retirement planning tools
If there are deficiencies in any of those areas, they should be brought to the attention of the provider. During a plan review, these criteria should be revisited and the plan sponsor can then determine whether the provider is fulfilling the requirements and has taken action to address any concerns that may arise.
Assessing the investment options available to the plan members is perhaps the centerpiece of a plan review. As mentioned above, this is an absolutely critical function as it ensures that the plan members are invested in funds that are suitable for them. And just as the case with the service offering, it is important that a criteria be established against which the investment options would be measured.
The most obvious criterion is investment performance that is comparable or superior to a benchmark. In this, plan sponsors should be careful to look beyond just short-term performance but also focus on long-term performance. And so by comparing the returns produced by the various investment options against their benchmark, sponsors can objectively determine whether or not those investments are competitive. During a review, it’s always good practice to also compare performance against the investments offered by other providers. What’s important here is to ensure that the comparison is done on an apples-to-apples basis (i.e. compare investments with comparable asset mixes).
Yet looking only at the returns without examining the risk taken to achieve them is ill-advised. Some fund managers are prone to boast of the strong 1 year returns they were able to produce. But often those returns are made possible due to a high level of risk taken that may be unappealing to plan sponsors upon closer inspection. Therefore, as part of the review process, it would be prudent to compare the standard deviation (measure of risk) of the investments against a benchmark in the same way returns are compared against the benchmark.
Performing fee comparisons is another good practice that should be a part of an annual plan review. Canadians currently pay some of the highest mutual fund fees in the world, and this is in part due to the poor disclosure of fees that is prevalent in the industry. With that in mind, plan sponsors would do well to pay attention to the breakdown of the fees for the investments and utilize comparisons with other providers as a way of validating that the fees are in line with the market. The clarity of how fees are disclosed to plan members should also be assessed.
In addition to reviewing service providers and investments, the CAP Guidelines state that a plan sponsor should also review how records are being maintained. For sponsors that maintain the records internally, it’s a good idea to conduct periodic audits of the documentation and record-keeping system in place or have them reviewed by a service provider. Sponsors may also want to go over any record-related complaints members have submitted since the last review to identify areas for improvement.
For sponsors that use their provider as the record keeper, it is also important that the system in place be audited by an independent third party. As part of the overall plan review process, sponsors may want to ask their provider for confirmation that their record keeping system is being audited annually for effectiveness and control and that a compliance audit is also being completed annually to ensure that appropriate disaster recovery processes are in force.
Decision Making Tools
Last but not least, an assessment of the decision making tools available to plan members should also be incorporated into the review. According to the CAP guidelines, these tools can include asset allocation models, retirement planning tools, calculators, and investment profile questionnaires. When reviewing the effectiveness of those tools, a sponsor should consider several factors such as the purpose of offering the plan, the types of decisions plan members make, cost (if applicable), plan member locations and demographics, and internet access.
The point behind this component of a review is to ensure that the tools in place are helping plan members make sound decisions that will improve their retirement outcomes. When it comes to investment decisions however, plan sponsors may want to place limits on the number of investment options available to members. One of the common challenges often cited by members in more choice-centric plans is not knowing which option to pick from a wide selection of funds. This often leads to plan members selecting investments that are not suited for their particular circumstances. And so when conducting a review, plan sponsors might want to ensure that the options made available to their employees are kept to a minimum.
As a fiduciary provider, Open Access addresses this issue by offering discretionary investment management whereby plan members are assigned into actively managed portfolios based on the results of their investor profile. This approach essentially frees plan members from the burden of making buy and sell investment decisions.
Evaluating all the items listed above may appear to be a daunting endeavor at the onset, but once a process is established and codified by plan sponsors, it can become a much more efficient exercise. That being said, conducting an analysis of the investments used by plan members can be a challenge for sponsors. Open Access can help by offering a complimentary health check which includes an assessment of the funds being used and an apples-to-apples comparison of performance and fees against industry standards.
As a group retirement plan provider, Open Access is changing the way retirement plans are run by unburdening employees from the need to make investment decisions on their own and instead managing portfolios on their behalf. We do this as a fiduciary, meaning no proprietary products, zero conflicts of interest, and no hidden fees.