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Governance is a requirement in most organizations: pension governance is a specific and detailed subset of the organization's governance process. Corporate governance is usually established and monitored by the Board of Directors.  

The topic of governance has gained prominence recently because of the number of high-profile corporate and organization failures attributed to poor governance, a lack of governance or, most often, failure to follow the governance in place. Governance is often treated as a binder that sits on a shelf and is ignored: senior executives often find it awkward, and that it can interfere with their personal career-enhancing agendas.

Governance must reflect and ensure compliance with legislation and regulations. See 'Legislation" menu for details 

Governance - a two-edged sword: A lack of pension governance is a potential legal risk and not following it is equally risky! 

Legal actions are time-consuming, costly, and counter-productive in terms of maintaining good employee relations.



#1    KISS - CAP investment choices need to be appropriate and easy to understand 

#2    Governance is the key to minimizing risk in CAPS

#3    Decumulation - ready (like it ) or not  is risky for sponsors

#4    Keeping fees low - Understanding the mechanics of setting fees 

#5    Conflicts of Interest – Myths and other Sponsor Rabbit Holes  

#6    Sponsors could avoid financial and legal risks inherent in a CAP

#7    An Advisor is an essential aspect of a governance process 

#8    DB to DC conversions - a fee Pandora's Box for sponsors 

#9    CAPSA Guidelines - Important for sponsors and CAP members

#10  What is good pension governance?

#11  Target Date Funds - potential legal mine field for CAP sponsors 

#12  Trouble on the horizon for US DC and 401k pension plan sponsors?

#13  Should a TFSA be part of an employers pension program? 

#1  KISS - CAP investments need to be appropriate and easy to understand 

Communications with members during a crisis must be appropriate and easy to understand 

In the 1970’s and early 1980s, defined benefit (DB) plan members clamored for the purported free lunch and portability provided by converting their DB plans to defined contribution (DC) plans. Cagey CEOs and CFO’s could not believe their good fortune in being able to offload financial risk, funding issues, and costs associated with DB plans while not having to fully compensate members for the risks they appeared willing to assume.


Unfortunately, this enthusiasm has waned over the years: the majority of capital accumulation plans (CAP) members are not up to the challenge of managing investments and sponsors realize CAP members will likely fall short in terms of adequate pension incomes. The administrative and fiduciary challenges of CAPs and the potential financial and legal risks are also a concern for sponsors. Part of the problem lies in the fact that CAP programs are overly complex so a simpler approach benefits all stakeholders.


CAP members need to have a basic understanding of investment and risk concepts usually reserved for investment professionals. Coming to grips with styles, asset classes, diversification, risk (in various forms), benchmarking, risk profiling, retirement funding, and time vs. timing, requires far more time and effort than most CAP members can handle. In addition, CAP members must often contend with 15-25+ investment choices, which may include life cycle and balanced funds; large and small Canadian, US and foreign equity funds; bond, mortgage, and real estate funds; daily interest and money market funds; and, GICs. Whew!


While record keepers provide education, decision-making tools, and communications, it is not surprising that CAP members struggle, and are often overwhelmed, with this mass of concepts and information. This situation begs simplification.


The majority of CAP members are unsophisticated and inexperienced investors. Forcing them to choose from multiple options is akin to giving a teenager a bottle of vodka and the keys to the family car. Sponsors providing a large number of investment options likely do this under the misconception that it improves diversification and/or returns. Under the CAP Guidelines, however, a sponsor is only required to provide sufficient options to ensure an adequate degree of diversification.


The Pooled Registered Pension Plan (PRPP) regulations also offer some insight on the issue: only six investment options are allowed in a PRPP, including a default Fund. There are knowledgeable investors who argue that a “one fund” approach using a balanced fund, or a series of asset allocation funds, would provide a sufficient choice. Catering to a very limited number of CAP members who think they need a lot of investment choices should not drive the selection of investment options: the sponsor should focus on the needs of the vast majority of the CAP members. Reducing the number of investment options is, therefore, an obvious way to make a CAP simpler and less costly but still effective.


Taking simplification a step further, a sponsor could also consider using passive investment options in combination with fewer investment choices. There are several advantages in using a passive approach from both a fiduciary and CAP member perspective. A limited number of passive investment options, covering the major asset classes, would likely provide an effective CAP investment framework for most organizations.


Simplifying the CAP investment platform has many advantages from a fiduciary perspective as well from a pension committee and CAP member perspective. Having fewer and simpler investment options:

  • Reduces the education and communication requirements in terms of time and costs;

  • Simplifies communication and education processes;

  • Simplifies performance monitoring;

  • Lowers administrative costs; and,

  • Simplifies manager searches and reduces the time required and costs.


In addition, if a passive approach is also used

  • Volatility of returns vs. the benchmark is minimized; and,

  • Investment management fees will be significantly lower.

Given the range of demographics and circumstances in most CAPs it would be difficult to argue that the sponsor had not acted prudently if a suite of passive asset allocation funds plus five stand-alone investment options covering the major asset classes were available to CAP members. Using a simpler approach will not eliminate the issue of CAPs generating insufficient pension incomes but it will make a CAP program more “friendly”, effective and less costly for all stakeholders.


Gerry Wahl, Managing Director, The PensionAdvisor

#2 Governance is the key to minimizing risk in CAPS  

Keeping it simple is an effective and efficient approach for all stakeholders.


CAPs have turned out to be more complex and challenging for sponsors and CAP members than expected. In the 1970s and early 1980s, DB plan members clamored for the purported free lunch and portability provided by converting their DB plans to DC plans. Cagey CFO’s, encouraged by the financial institutions, could not believe their good fortune in being able to load financial risk associated with DB plans while not having to fully recognize and compensate members for the numerous risk they appeared to be willing to assume. Unfortunately, this enthusiasm has waned over the years: the majority of CAP members are simply not up to the challenge of managing investments and pensions. Sponsors realize that many CAP members will likely fall short in terms of adequate pension incomes.


The administrative and fiduciary challenges of CAPs and the potential financial and legal risks are also a concern for sponsors. Providing accurate effective communication and education to program members, however, is one of the most difficult and costly challenges of CAP programs.

Part of the problem is that CAP programs are often overly complex: a simpler approach (KISS) benefits all stakeholders.


Governance - the key to minimizing risk

The key for employers and sponsors to minimize the financial and legal risk inherent in pension programs is a comprehensive governance process. Most sponsors claim to have a governance process in place. Many DC plans many sponsors assume their recordkeeper or platform administrator is responsible for overseeing the plans. However, it is a sponsor who ultimately is accountable and responsible for overseeing the plans and the administrator(s).


The many cases the governance is piece-meal at best, poorly documented, and not followed. This combination is a worst-case scenario from a legal perspective. In many situations, the sponsor is not aware of what should be included in a governance process. The results of a governance audit tend to leave the organization's CFO feeling very uncomfortable and demanding immediate changes. Therein lies the value of a DB or DC plan governance audit.


Many areas need to be considered and documented as part of a governance program.


CAP Members - the challenge

CAP members need to have a basic understanding of investment and risk concepts usually reserved for investment professionals. Coming to grips with styles, asset classes, diversification, risk (in various forms), benchmarking, risk profiling, retirement funding, and time vs. timing, requires far more time and effort than most CAP members can handle. In addition, CAP members must often contend with 15-25+ investment choices, which may include life cycle and balanced funds; large and small Canadian, US, and foreign equity funds; bond, mortgage, and real estate funds; daily interest and money market funds; and, GICs. Whew!


While record keepers provide education, decision-making tools, and communications, it is not surprising that CAP members struggle, and are often overwhelmed, with this mass of concepts and information. This situation begs simplification.

The majority of CAP members are unsophisticated and inexperienced investors. Forcing them to choose from multiple options is akin to giving a teenager a bottle of vodka and the keys to the family car. Is there a “message” in the number of choices available? For example, if there are 12 options including a bond fund, a money market fund, and a CIA, and nine equity options is there a subliminal message about where to invest?


In addition, unlikely that members, nor the sponsors, get all the relevant performance information needed to manage in a long-term investment horizon.

How many options are too many

Sponsors providing a large number of investment options likely do this under the misconception that it improves diversification and/or returns. Under the CAP Guidelines, however, a sponsor is only required to provide sufficient options to ensure an adequate degree of diversification. The PRPP Regulations also offer some insight on the issue of diversification vs. the number of investment options: only six investment options are allowed in a PRPP, including a default Fund.


There are knowledgeable investors that argue that a “one fund” approach using a balanced fund, or a series of asset allocation funds, would provide a sufficient choice. Catering to a very limited number of CAP members who think they need a lot of investment choices should not drive the selection of investment options: the sponsor should focus on the needs of the vast majority of the CAP members. Reducing the number of investment options is, therefore, an obvious way to make a CAP simpler and less costly but still effective.

Taking simplification a step further, a sponsor could also consider using passive investment options in combination with fewer investment choices. There are  several advantages in using a passive approach from both a fiduciary and CAP member perspective. A limited number of passive investment options, covering the major asset classes, would likely provide an effective CAP investment framework for most organizations. Investment communications and education to members, a difficult task, is also much simpler.


Investment Options - KISS

Simplifying the CAP investment platform has many advantages from a fiduciary perspective as well as from a pension committee and CAP member perspective. Having fewer and simpler investment options:

· reduces the education and communication requirements in terms of time and costs;

· simplifies communication and education processes;

· simplifies performance monitoring;

· lowers administrative costs; and,

· simplifies manager searches and reduces the time required and costs.


In addition, if a passive approach is also used:

· volatility of returns vs. the benchmark is minimized; and,

· member management fees will be significantly lower.


CAPS are risky than DB plans: there are more things that can go wrong in a CAP. You have to question whether there is any significant benefit for sponsors or CAP members in having complex CAP investment platforms. Given the demographics and lack of member investment sophistication in most CAPs, it is easy to argue that the sponsor is acting prudently by simply providing a suite of passive asset allocation funds plus a few stand-alone passive investment options, covering the major asset classes.

Using a simpler approach will not eliminate the issue of CAPs generating insufficient pension incomes but it will make a CAP program more “friendly”, effective, easier to communicate, and less costly for all stakeholders.


Having a sound governance process in place is the key to minimizing financial and legal risks regardless of the type of plan.


Gerry Wahl

Managing director, The PensionAdvisor

#3 Decumulation - ready (like it ) or not  is risky for sponsors  

Decumulation poses many challenges and risks for Capital Accumulation Plan (CAPs)  sponsors and members.

Fuelled by the increasing number of retiring ‘boomers’, more attention is now being focused on the CAP decumulation cycle. The assumption that the decumulation cycle starts upon retirement is a mistake – it begins 10-15 years in advance of retirement when there is still an opportunity to make changes. The recent equity market collapse heightens the issues of drawing down retirement savings accounts i.e. decumulation phase.


(Statistics quoted in this article refer to the 2015 Benefits Canada CAP Member Survey -BC Survey)


Systemic Issues

CAPs are often referred to as pension plans. A Defined Contribution Pension Plan (DC) is not an employer pension plan it is a personal savings plan: “A pension plan is a retirement account that an employer maintains to give you a fixed payout when you retire i.e. a Defined Benefit type of plan.” DC or RRSP programs in fact are personal DB (Defined Benefit) pension plans. All the risk lies with the members! CAP sponsors usually emphasize that a DC is only intended to assist in saving for retirement however, the average member is not financially savvy or sufficiently engaged to appreciate this difference.

A DC (RRSP) plan should be managed as if it was a personal Defined Benefit plan or, an Individual Pension Plan (IPP). The decumulation cycle, or payout phase, is also the critical aspect of all pension plans i.e. asset accumulation sufficient to cover your underlying personal pension funding “liability”.

CAP Guideline # 8 highlights the key issues in the decumulation cycle:

· the payout phase and retirement products;

· the diminished role of the administrator in the ‘payout phase’;

· the investments in the payout phase; and,

· the need for retirement product information that facilitates informed decision making.


Retirement Products

The payout phase begins when DC members draw funds out of their DC accounts. At that point members must transfer their accounts to a retirement product offered by the fundholder (record keeper) or another financial institution. It is important to inform (and remind) members of their role and responsibilities, about the termination options and what happens to their account in the payout phase. Recently, 24% of the BC Survey respondents indicated they had a poor understanding of their plan. 41% of the respondents also believed the employer is responsible for providing them with adequate funds for retirement.

Only 10% of respondents in the BC Survey understood the options available in the payout phase and even fewer understood how much they needed to contribute to achieving their retirement income goals. Drawing down savings in the payout phase is also a challenge for members.


Disclosure regarding retirement products is a grey area. What kind information, if any, should be provided regarding the retirement products of other financial institutions? Should the pros and cons of annuities be clearly explained to members? If the sponsor delegates these tasks to the record keeper, disclosure expectations should be laid out and monitored because of the potential for conflicts of interest. As a fiduciary, the administrator must always act in the plan members’ best interests.


Education and Communication Education, communication, and member engagement are critical. They are also the most likely areas for legal disputes. Information and education in the decumulation phase are necessary to mitigate the risk of litigation but what should this include? CAP members must understand that once they leave their employment organization or are in the payout phase they are no longer plan members and, the sponsor is not responsible for communication and education (unless it is a Variable benefit Plan). A member will not get the same level of attention, education or communication from a financial institution as provided by an employer.

Up-to-date information about the differences between DC plans, RRSPs (and TFSAs if provided) in the payout phase, should be highlighted well in advance of retirement.


Fees reduce asset accumulation. Members need to be aware of fees in all stages of retirement savings. Fees differ for each investment option. In most cases, members see gross return data (before fees). They need to see the gross returns net fees for each investment option in order to effectively select investments, particularly in the payout phase. The issue of higher fees for retirement products is often conveniently ignored by CAP sponsors or, by members when developing a financial plan.

The CAP Guidelines recommend that CAP members consider using a financial advisor. While 79% of the BC Survey sponsor respondents agree that providing an advisor would be beneficial it is uncommon because of legal concerns. Having an advisor would benefit most members to develop a financial plan and to set realistic saving, return and retirement income goals however, it also results in additional fees.

Since the members pay the cost of the record keeper, fund manager, and advisor from their CAP accounts they should see what was actually taken out of their account and paid to each party in Investment Management Fee (IMF). Since members do not see the monthly or annual IMF paid it tends to be overlooked. Members should insist that the total amount taken out of their accounts for fees be disclosed, at least annually.

Longevity, Time and Timing

CAP members are encouraged to view their retirement savings with the long term in mind. For example, members are often told they are “in it for the long term”. This is misleading in the pay-out phase since it depends on how long you live. The CAP Guidelines recommend that sponsors offer a range of investment options that take into consideration the purpose of the plan and the diversity and demographics of the members. Sponsor investment options often do not address these basic requirements in the payout phase.

Longevity risk is increasing: 65-year-old males are now expected to live another 21 years and females 24 years. CAP members need to consider their spouse’s expected life spans and retirement income needs. The impact of a spouse outliving the member is often overlooked as well as potential tax and estate implications when a member dies. From a fiduciary perspective current actuarial mortality estimates, by location and industry when appropriate, should also be available to members regardless of whether or few members use this information.

Longer duration investments such as long bond funds that better match members’ funding (liability) requirements are common in DB plan investments but seldom available in CAPs. Service providers argue that the concept of a personal pension “liability” that must be matched by investments and funded, is too complex and confusing for members. Confusing or not, longer-duration investments should be part of the investment options to ensure they are providing appropriate investment opportunities for all members.



CAP members often have unrealistic return expectations. For example, in the BC Survey, the average CAP member expected annual returns of 15% or higher. The Economist recently reported that the median professionally managed pension fund return over the last 25 years was 8.5%. A recent article in the Globe and Mail suggested that the expectation for future equity returns should be in the 8% range. With 10-year Canadian government bonds trading around 1.5% and with a 60% fixed income and 40% equity asset mix future balanced fund type returns of 4-5% are likely. This is before fees, taxes, and inflation. A reality check is obviously needed: one would assume it is the sponsor's responsibility to ensure that current future return expectations would be provided rather than leaving it to a member’s “best guess”.


The impact of volatility and timing is a critical aspect of investing in the decumulation cycle, particularly in the payout phase. While volatility has a high profile in DB plans because of solvency funding requirements it is generally overlooked in CAPs. Only 31% responding to the BC Survey indicated they understood investment risk. At best most members have a superficial understanding of risk which is understandable given it is a challenging topic for professional investment managers. Members need to understand how difficult it is to recover from losses, particularly in the payout stage. From a fiduciary perspective risk information i.e. standard deviations, tracking error, and information ratios should be available to


CAP members.

The short vs. long term focus in CAPs is demonstrated by the fact record keepers provide performance data for ten or fewer years – a mid-term view at best. Longer-term risk and return information is appropriate for longer-term retirement saving objectives however it is often not provided.

Communication and education are particularly critical in the decumulation cycle and payout phase. Two critical questions to consider in the decumulation cycle: “Is sufficient performance information, and are appropriate investment options being provided to CAP members?”

Gerry Wahl, Managing Director, The Pensionadvisor

#4 Keeping fees low - Understanding the mechanics of setting fees 

Understanding how fees are set is an advantage and will help negotiate lower fees.


The most frequent type of pension class suits in US 401k plans are related to fees: currently, there are several thousand US class action suits in the courts. This is a huge problem for sponsors and recordkeepers will undoubtedly become an issue in Canada as well. This article reviews the way fund manager fees, advisor record keeping, and advisor fees are set recordkeepers (banks, insurance companies etc.,) holding pension investments accounts. Sponsors are responsible for fees and are at risk if they fail to negotiate fees in good faith on behalf of the plan members.

How Fund Manager fees are determined

It is important to understand how the fund manager portion of the Investment Management Fee (IMF) is determined. The IMF is not set by the fund manager: the record keeper establishes the fee for each fund manager based on specific factors related to their platform.

In defined benefit (DB) plans a fund manager’s fee depends on the amount of money managed: the more money invested in a fund the lower the fees. The fund manager only gets a small portion of the total IMF paid by members: the record keeper keeps the rest. These principles also apply to DC and RRSP recordkeeper fund managers: the more money in a specific investment fund the lower members' fees, The IMFs for each pension plan are not the same – it depends on the total amount of the investments in a sponsor’s plan. If possible, check with sponsors with similar-sized plans to get an idea of their IMF.  It is the sponsor's responsibility to monitor fund fees and the total amount fees paid by the members. 

The fund management fee is only one part of the overall investment Management Fee (IMF). A recordkeeper collects the fees and remits an amount to the fund manager monthly or, an advisor Despite the fact that members pay the fees they only get part of the fee information: the portion of the amount paid out of their account and paid to the fund manager is not disclosed. It's a ‘secret’ buried in the IMF.

A fee review should therefore compare record keepers’ IMFs for the funds that will continue to be used or, add as new options. Ask the record keeper for the breakdown of the IMF i.e. record keeping, fund manager, and advisor fees for each investment option. The difference in IMF’s between record-keepers is often significant.

Recordkeepers often make proprietary funds available to members. The fees for these proprietory funds are part of the overall corporate income objectives for recordkeeping, investment options or, subsidiary companies. Sponsors with larger CAP programs have considerable leverage to negotiate lower fees on proprietary funds and for third-party funds on the platform.

A sponsor's negotiating leverage is also greater if an employee health benefits program is provided via the same recordkeeper (insurance company): IMF reductions can be negotiated on the basis of the total business relationship.

If the plan offers guaranteed investment certificates such as CIAs or GIAs look at the interest rates and the premium paid above normal bank rates as part of the review. A premium should be paid because: a) the record keeper (financial institution) gets a guaranteed steady stream of low-cost deposits and, b) the credit rating for the record keeper is usually less than for a bank i.e. it is riskier and warrants a ‘credit risk’ premium. Most record keepers pay a premium of at least 0.25%.

Advisor Fee

Advisors usually receive a fee (trailing commission) based on the total plan asset values. In most cases, the advisor does not interact with the plan members nor provide them with investment advice but simply assists the Administrator (Sponsor) in overseeing the plan and investments. The Plan document will tell you who is responsible for administering the plan. The role of an advisor in a CAP is also quite different and less onerous than their role as an advisor to a client in a mutual fund.

The rate the advisor receives as part of the IMF is not set by the record keeper: it is a negotiation between the Plan Administrator, CAP Pension Committee, and the advisor. The fee is a single rate applied to all funds. It is communicated to the recordkeeper who collects the fee and remits monthly payments to the advisor. The advisors automatically get more money as the number of the member's assets increases regardless of whether or not any additional effort or services are provided.

If the advisor is primarily assisting the Sponsor in administering the Plan the sponsor should consider negotiating a flat fee and paying the member fees vs. collecting them from members. There is a potential legal risk if a sponsor is the primary beneficiary of an advisor's services while the members pay the cost. The way to avoid fee issues is for the employers to pay all fees. This also ensures the sponsor control over the costs and ensures the CFO will stay on top of fee costs. The overall cost to the sponsor for paying the fees is likely small. This approach also minimizes potential conflicts of interest and fiduciary risk and, it provides members with a significant additional benefit over time.

Recordkeeper Fees

The recordkeeping portion of the IMF is set by the record keeper based on a variety of factors: the amount of the Plan assets, the number of Plan members, level of service provided, etc. The number of proprietary funds used in the Plan can also be a factor in how much money the record keeper earns overall from the business and can be a negotiating factor in agreeing on the record keeper portion of an IMF. Large insurance companies for example also have the advantage of scale with regards to offering lower fees.

Recordkeepers are reluctant to disclose their portion of the IMF, despite the fact it is a large portion of the IMF; however, it can be estimated if you know the advisor and fund manager portions of the IMF. This allows you to compare it to other record keepers.


DC and RRSP members and sometimes pension committee members often incorrectly assume 100% of the IMF goes to the Fund Managers


Fiduciaries, administrators, and pension committee members must act in the pension plan members’ best interests: proper oversight of fees is an obvious part of their responsibilities.

Fees are a critical factor in saving both before and after a member retires and need to be considered in both situations. Communicating information about fees and their impact on members is critical.


A comprehensive formal fee review process should be part of a governance process to minimize the risk of litigation. It will satisfy many aspects of good governance ‘killing many birds with one stone".

To protect their legal position, plan members should be aware of the impact of fees and not be shy about questioning the amount they are forced to pay both before and after they retire. If fee information is provided it is up to Plan members to monitor it.

G. Wahl Managing Director, The PensionAdvisor


#5 Conflicts of Interest – Myths and other Sponsor Rabbit Holes  

Some CFOs and sponsors believe they can by-pass their fiduciary responsibilities 

Many sponsors and CFOs incorrectly believe that by offering a DC, RRSP, PRPP or, a TFSA as a pension program their fiduciary role and responsibilities, and the potential legal risks are minimal.


Common ‘myths’ about DC, RRSP, and PPRP  (CAP) pension programs.

  1.  “You can outsource (transfer) all your fiduciary responsibilities” to limit legal and financial risk. This is incorrect: a  sponsor is always responsible for overseeing the 3rd parties service providers used in the plan.  In other words, you cannot waive fiduciary responsibility for the plan.

  2. “The plan administrator can be a 3rd party ”. The company or financial institution that holds the members’ accounts and assets i.e., provides recordkeeping and the pension platform is not the plan administrator. The sponsor, by legislation, is deemed the plan administrator but can hire 3rd parties

       to assist in administering a plan.  

  1. “Fees matter most”- While fees are important there are other facets of administering a pension program that are equally important and potential sources of litigation: member education and communication, investment options, monitoring of 3rd party providers, fiduciary training, and education of oversight committee and the administrator, etc.

  2. “Regular formal fee reviews are not required.” Fees are only required to be reasonable, but the sponsor has to be able to demonstrate this.  Periodic formal fee reviews are the best way to do this.

  3. “The main difference between active and passive funds is cost.” The demographics of a plan’s membership are a factor in administering the plan and investment options. Age, education levels, location, investment sophistication, whether the member remains in the plan after retirement etc., are facets of a plan that cannot be ignored. Advice and education, and communications and service levels are also factors. Simply having a low-cost ‘passive platform” is not sufficient from a fiduciary perspective.

  4. “The CAP guidelines are a substitute for legislation and regulations.” The CAP Guidelines are only guidelines and would only be cited as indicators of best practices in legal actions. New guidelines are regularly issued or updated.

   “5. Potential  litigation risk and the cost of administering a DC or RRSP program is less than a defined benefit plan.” DB plans have been around a         long time. Significant DB legislation and regulations are in place and there is considerable jurisprudence on specific issues. Canadian DC,                  RRSP, and PRPP pension programs, on the other hand, are quite new. There is limited  CAP legislation and regulation in place and,                          jurisprudence in Canada.

From a legal perspective, DC and RRSP programs probably represent a greater legal risk to sponsors than DB plans. When the fiduciary aspects of overseeing and administrating a  CAP program and the potential financial and legal risks are considered the cost is likely similar to a DB plan.

Robust governance reduces the risk of litigation assuming the governance is followed.


                                   It's better to solve the right problem approximately than to solve the wrong problem exactly. - Author: John Tukey

G.Wahl, Managing Director, The PensionAdvisor

#6 Sponsors could avoid financial and legal risks inherent in a CAP

DC, RRSP, TFSA plans have financial and legal risks and admin costs

Many sponsors offer CAP pension programs believing they are 'cheaper' than DB plans, relatively inexpensive to administer, and have limited financial and legal risks. The belief is that employees can and are willing to take on the task of overseeing their pension accounts. Unfortunately, this is a myth. 


CAP pension programs can be counterproductive in that can lead to employee stress, dissatisfaction, and legal actions. CAPs can also be expensive to administer in terms of cost, time, and resources.  

An alternative providing a pension benefit for employees while avoiding the sponsor risks and costs is available. 

An Alternative!

In many respects an employer pension program is paternalistic: it assumes employees are not mature enough or can be trusted to save for retirement. 


Rather than offering a pension program, an employer, as part of the employment benefits package and employment contract could make contributions to an RRSP.  The employer, however, would have no part in selecting the RRSP account holder. The employee would be required to set up an RRSP if they didn't have one.

The employer could also facilitate the oversight of the RRSP by offering employees monetary incentives to use an advisor. The employer could simply require proof that the employer was paying an advisor. 

The RRSP is also 'portable' if the employee retires or terminates and, RRSP contributions would be made to a bank deposit along with regular wage or salary deposits


Using this alternate approach, employers do not incur the usual cost of administering a pension program nor would they be exposed to financial or legal risks. The employer could also afford to increase the RRSP contribution rate. For example, a common contribution rate of 10% of employment earnings could be increased by 2-5% because of the savings. A higher contribution could be quite attractive when hiring new employees.


An employer assumes that employees will actively participate in overseeing their CAP pension account(s). This alternative approach just takes it a step further!   

In summary, an organization could meet the objectives of helping employees save for retirement while eliminating the financial and legal risks and, the majority of the administrative costs of having a formal pension plan, at no significant additional cost! Why wouldn't you take this approach?  

The solution to our problems is not more paternalism, laws, decrees, and controls, but the restoration of liberty and free enterprise, the restoration of incentives, to let loose the tremendous constructive energies of 300 million Americans. - Henry Hazlitt

G.Wahl, Managing Director, The PensionAdvisor



#7 An Advisor is an essential aspect of a governance process 

An experienced and knowledgeable advisor must also have good communication skills

Most pension plan sponsors use an advisor to assist in overseeing a DB plan or CAP without bothering to regularly evaluate their performance as part of the governance process.

Sponsors also need to ensure that the advisor is doing only what has been authorized.

Advisors provide four basic areas of service:  member retirement planning, assisting with financial education,  investment advice, and sponsor governance assistance. Retirement planning support is provided by the record keeper in the form of information and tools that help members in understanding investment concepts, identifying their risk tolerance, and selecting an appropriate asset mix. However, sponsors recognize that some CAP members (Members) simply don’t have the time and prefer to use an advisor to ensure they have considered all the elements of retirement planning.


Are they offering advice?

Advisors however may also go a step further and provide advice in addition to asset mix recommendations such as which investment option to use and when. Investment advice may benefit some members but results in additional potential legal and financial risks for the sponsor.  In some cases, the sponsor may also rely on the advisor to assist in governance and selecting investment options or provide reporting to assist in administering the plan, all of which should also be considered in the evaluation.

Section 3.4 of the CAP Guidelines recommends that sponsors, in choosing or referring members to an investment advisor should ensure the advisor has an appropriate level of knowledge, expertise and should be independent of any other service providers. Section 6.2 of the CAP Guidelines also recommend that sponsors clearly establish the criteria used in selecting the advisor and periodically use it as information in reviewing an advisor’s performance.

In some cases, sponsors are not aware that the advisor is providing investment advice — a risk from a governance and fiduciary perspective. While offering investment advice may appear to be a good idea, plan sponsors tend to shy away from it because of the added fiduciary responsibilities and legal risks.

The objective in monitoring and assessing the advisor’s performance is important for a number of reasons and should be done formally and on a regular basis to ensure all (and only) the services agreed to are being satisfactorily delivered and at a reasonable cost.


Advisor Fees

The sponsor has a fiduciary obligation to know and monitor fee costs paid by CAP members and ensure they are reasonable!


The fees for the advisor’s services are applied to all investment options (excluding Guaranteed Investments (GIs) and daily interest investment options) as a part of total composite paid members. Advisor fees of 0.3% to 0.9%, depending on the size of the plan, are not uncommon and often represent a substantial portion of the total cost paid by the members. Members with investments of $100,000 -$400,000 may pay $300 -$3,600 annually for advisory service over their working life.

The advisor fees are paid regardless of whether or not a member uses the advisory service. The amount the advisor receives also automatically increases annually as the number of the member’s investments increases through contributions, earnings, or increases in the market value. The advisor may also earn fees from a group benefits plan if applicable.

Members who only or primarily invest in GIs or daily interest accounts but make use of the advisor services are getting these services at little or no cost. Conversely, members invested in equity and fixed income-type options may not use the services of the advisor but pay the cost.

Often the dollar amount of the advisor fee is not disclosed separately; only the fee rate - a percentage is provided - the members are expected to do the calculation. I most cases, neither the sponsor nor members know the actual amount of fees annually by the Members.

Potential Legal Risk for Sponsors 

In a CAP the Investment Management Fee (IMF) is paid by CAP Members has  3 components: the fund management fee, the recordkeeping fee, and the advisor fee.

While CAP members pay the entire IMF, the CAP sponsor is the primary user (beneficiary) and is the only party with direct involvement with the advisor. The CAP Members foot the bill for the services provided to the sponsor. The Members are seldom aware or told of this. 

The CAP plan document will state that Members are responsible for the IMFs but is usually silent about the portion of the IMF relating to services provided to the CAP sponsor. In the case where a DB plan is converted to a DC plan, this information is seldom if ever disclosed. The impact of fees over time is not highlighted in a DB to DC conversion - yet it is important information for employees when deciding to convert a DB account to a DC account. Both of these situations are a potential legal problem if the Members become aware of them!



Evaluating an advisor’s service performance can be a difficult qualitative exercise because information on member usage and the type of service provided is often limited or doesn’t exist. Direct feedback from members, the administrator or surveys can be useful in assessing performance but may be costly and difficult to interpret. Assessing the quality of actual investment advice is also a challenging task, which will require specific information and member feedback.

Therefore a good starting point in evaluating advisor performance is to request the dollar amount (not the rate) of fees the advisor actually receives each year and obtain information on the type and quality of services provided to the members. In other words, the sponsor should understand what services are being provided by the advisor and to whom as well as whether or not the costs are reasonable. Providing the advisor with a list of information needs and a reporting format is necessary in most cases. Increases in the amount the advisor actually receives year-over-year should also be explained and justified  (i.e., is there more or better service?).

Members pay the advisor and recordkeeping fees but they are not involved in evaluating the advisor or recordkeeper either directly or indirectly nor are they told if evaluations have been done.



While there is nothing wrong with providing CAP members investment advice through an advisor but it’s important to understand the additional fiduciary responsibilities, risks and to understand who is paying the cost. Sponsors should ensure that an advisor is not providing CAP members with investment advice unless this has specifically been authorized.

Because of the nature of the relationship with certain service providers, it is advisable to have an experienced and impartial consultant assist in evaluating the performance of the record keeper.

G.Wahl, Managing Director, The Pension Advisor 


#8  DB to DC conversions  - a fee pandora's box for sponsors
The rush by sponsors to convert DB to DC plans included many legal risks 

The issue of fee disclosure and the long-term impact of fees poses a significant legal problem in DB to DC conversions.  In most cases, the sponsor does not highlight  (conveniently) the impact of fees on a CAP account. However, it is important information for a CAP member (Member) to have in deciding to convert their DB account to a DC account.  

Fiduciary Responsibility – The Question of Equity and Fees 

The potential for legal problems regarding fees, or other matters about a conversion, result from the fact that members of the DB plan totally rely on the employer (sponsor) to disclose all information that is important in making the decision, and communicate it in an understandable way. The employees also expect the employer to be fair and reasonable with respect to determining the commuted value of their DB account and ensure it takes into account costs assumed in a DC account and the impact and timing and volatility on investment values at any point in time. An employer may be tempted to understate the risks and costs to encourage employees to convert their accounts. Intentional or unintentional omissions are grounds for legal action.

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 when converting DB o DC accounts:structures:

  • If a sponsor uses the record keeper or advisor to assist in administering the plan, is it appropriate that members essentially pay these administrative costs cost as opposed to the sponsor?
  • If balanced funds and/or life cycle funds are provided by the record keeper can the record keeper use their propriety funds in a fund? Are these funds provide the best fit in terms of risk and return versus cost? Is there a conflict of interest with respect to performance and fees if proprietary funds are used?

  • Have all significant direct and indirect fees and costs paid by members been disclosed?

  • Has the impact of fees on a DC account, over the long term, been clearly explained?

  • Do the employees understand they have no control over fees- and rely entirely on the sponsor to ensure they are reasonable?

  • What does the plan document say about who pays the fees and costs of the CAP account?

DB to DC Conversions Issues 

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 to 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 disclosure issues to consider regarding fees paid by members. 

  • Has the impact of fees on asset accumulation been clearly and simply explained to the members?

  • Have the members been made aware of the fact that they will be paying the fund manager, record keeper, advisor fees, and fund manager administration costs which they would not otherwise pay in the DB plan?

  • Have members been provided with an estimate of the total fees and costs they will pay in the DC plan over their working career?

  • Have the fees factored into the DB to DC conversion discount rate used in determining the DB to DC commuted value?

  • Are the members aware that they may be paying for all or a portion of the sponsor's governance costs (i.e., Are the members aware that they may be paying for the services of an advisor whether they use the services or not)?

  • Have members been informed that some CAP members may pay minimal or no direct fees or costs for record keeper and advisor services if invested primarily in a guaranteed investment?

  • Is the communication to potential DC plan members about fees and costs clear, concise, and understandable to less financially sophisticated members?



The issue of disclosure of fees in a DB to DC conversion is complex: it could have a significant impact on a Member's ability to save for retirement. If the impact is not appropriately disclosed, it is a potential legal risk for sponsors. The issue - 'Did the lack of disclosure of fee costs play a significant role in encouraging  Members to convert to a DC account'.

Sponsors must be diligent in communicating and disclosing the costs borne in by DC account Members when undertaking a DB to DC conversion.

G.Wahl, Managing Director, he PensionAdvisor



#9 CAPSA Guidelines - for Sponsor and CAP Members

Savings programs referred to as Capital Accumulation Plans (CAPs) include Defined Contribution ( DC) plans, RRSP's. RRIFs LIFs, LIRAs,TFSA, PPRPs, etc.

An employer saving ('pension') program that provides employees with tax-deferred savings accounts with 2 or more investments, and where the employee is required to make the investment decision falls under the CAPSA Guidelines. These types of programs are often referred to as "pension' programs. This is misleading and incorrect - they are simply retirement savings programs.  

CAPSA Guidelines are intended to support the continuous development and improvement of industry practices in Canada. Canadian pension regulators generally expect that registered pension plans will operate in accordance with CAPSA Guidelines. However, individual provincial pension regulators may communicate their own specific expectations and registered pension plans in those jurisdictions should operate accordingly.

An advisor should ensure the sponsor is aware of the CAPSA Guidelines and included them as part of the CAP governence process.

Sponsors and administrators who are not aware and/or do not follow the CAP Guidelines are subjecting the employer to potential legal risks. 

The CAPSA Guidelines are summarized below with links to the Guidelines.

Guideline No.     Guideline Name     Publication Date     Purpose

#1  Flexible Pension Plans  April 30, 1999

Summarizes the recommendations of the Task Force on Flexible Pension Plans in order to address various issues related to flexible pension plans.


#2  Electronic Communication in the Pension Industry   May 8, 2019
Provides a framework to apply the provisions of e-commerce legislation and applicable pension legislation to pension communications sent electronically from a pension plan administrator and/or pension plan sponsor that is required under pension legislation.

#3  Capital Accumulation Plans  May 28, 2004

Reflects the expectations of regulators regarding the operation of a capital accumulation plan, regardless of the regulatory regime applicable to the plan.

#4 elf Assessment Questionnaire Self-Assessment Questionnaire  -FAQs  - January 17, 2018  and December 2016
To assist pension plan administrators in fulfilling their governance responsibilities by achieving and maintaining good governance practices.


#5  Fund Holder Arrangements  Letter to Stakeholders March 1, 2011

Highlights good governance practices related to fund holder arrangements of the pension plan and pension fund.


#6  Prudence Standard  Letter to Stakeholders - Self-Assessment Questionnaire
November, 2011Provides guidance to plan administrators on how to demonstrate the application of prudence to the investment of pension plan assets.

#7  Pension Plan Funding Policy  Letter to Stakeholders   May 7, 2021

This Guideline is intended to provide guidance on the development and adoption of funding policies for pension plans that provide defined benefits or target benefits.

#8  Defined Contribution Pension Plans Guideline - Reference Document February 7, 2019 + March 28, 2014

Developed as part of CAPSA's strategic initiative to review current approaches to regulating and supervising defined contribution (DC) pension plans.

#9  Searching for Un-locatable Members of a Pension Plan   February 7, 2019
Outlines best practices and options with respect to searching for un-locatable members.

Communique - Review of Leverage Use within Pension Plans  February 2019

Key findings regarding leverage use within pension plans.


Recommendations: Funding of Benefits for Plans Other than Defined Contribution Plans February 14, 2019

Recommends options that policymakers and governments should consider in order to promote new, consistent funding rules, to the extent possible.


Guidance: Solvency or hypothetical wind-up liabilities based on actual life insurance company annuity quotation      May 8, 2019
Outlines expectations regarding situations where an actuary wants to use an insurance company quotation to determine the solvency liabilities of the portion of the pension plan that is assumed to be settled by the purchase of annuities.

#10 What is good pension governance?

Good governance is essential to effectively manage a pension plan and risks

Most corporations and organizations have a governance process in place to ensure the rules and expectations of the Board of Directors and shareholders are met. Pension governance is a subset of the overall corporate governance process focusing on the expectations, requirements in pension documents, and legislation.

Governance helps minimize legal risks only if it is followed. Having governance and not adhering to it is a potential legal risk. It is not uncommon for organization failures to be attributed to a lack of adherence to their governance and governance processes.

Elements of Good Governance

Good governance is recognized as the bedrock of a well-run pension plan. It is an essential part of pension management and there is a clear link between good governance and good fund performance (both liability and investment-wise).


Pension programs may involve significant liabilities (DB Plans) or large amounts of employee money (DC,   RRSP, TFSA, PRPPs, etc.) and may represent significant potential financial and legal risks. It is therefore important to have a solid pension governance framework in place.   


A pension governance framework should include the following (Key features)

  1. Pension Committee Charter

  2. Terms of Reference 

  3. Plan document  (Plan)

  4. Statement of Investment Beliefs (SIB)

  5. Statement of Investment Processes and Procedures (SIPP)

  6. Reporting & meetings

    1. Pension Committee Report

    2. Minutes and resolutions

    3. Demographic information

    4. Performance monitoring  vs. the Statement of Investment Policies and Procedure

    5. Administrator issues and plan changes 

    6. Legislative Requirements and changes

    7. Education and communication issues re: pension committee and Plan members.

    8. Member concerns and complaints  

One of the objectives of pension governance is to ensure the Board of Directors is separate from the day-to-day administration and oversight of the pension i.e., the Board’s role in ensuring that pension governance in place and working. A pension committee charter and terms of reference are therefore essential.

Reporting and pension committee meetings represent the backbone of pension governance. A comprehensive formal report to the pension committee and minutes provides a history and record of issues addressed, decisions, the monitoring of the investments and liabilities, and actions taken.


Even the seemingly simplest pension program is in fact complex and requires significant time, expertise, and resources to administer. Normally, an  organization will hire knowledgeable advisors to assist in:

  • monitoring and administration

  • investments and funding

  • communications with members

  • organizing and conducting effective pension committee meetings.

  • Assisting in getting the basic legal duties right


It Is not unusual for governance to be a binder that sits on a shelf and is ignored. Governance can also be awkward for and get in the way of personal agendas – a good reason for governance. 

Pension programs are not ‘cheap’ in any sense, and governance requirements are an overlooked cost of offering a pension program.

                             Good governance needs self-discipline. Only discipline within can ensure discipline without. Narendra Modi, Prime Minister, India  

G.Wahl, Managing Director, The PensionAdvisor

#11 Target Date Funds - potential legal mine field for CAP sponsors 

Target Date Funds are common in CAPs and often used as the default fund.

Many Canadians depend on defined contribution (DC)  and or other tax assisted savings Plans (Capital Accumulation plans – CAPS) and personal investments for their retirement income. The emphasis in CAPs has always been on accumulating saving rather than what happens when you retire (the decumulation phase). Target Date Funds (TDFs) were promoted on the basis they would address this and provide an expected retirement income, however they come with risks  for a plan sponsor.   


Background – A TDF Primer

TDFs are structured around an anticipated retirement date hence the name – Target Date.[1] TDFs are very popular with mutual fund investors and often used in employer CAPs[2] as an investment option and, as the plan default fund[3].  84% CAPs on the Sun Life platform, for example, include TDFs which  represent 80% of monthly cash inflows into these plans.


TDFs are a mix of equities, fixed income, and other investments selected by the TDF provider. The objective is  lowering the level of investment risk[4] as you age: higher equity exposure in the early years shifts to less risky more fixed income investments over time. TDFs are a one-size-fits-all solution and intended to be long-term investment.

TDF structuring

A TDF portfolio manager follows a specific asset mix regime, a “glidepath[5]”: there is a specific investment mix for each of the target date funds. The glidepath  is selected by each TDF provider and establishes the level of investment risk for each TDF fund. The glidepath is the critical feature of a TDF.


TDF glidepaths vary from supplier to supplier and can be based on a ‘to’ or ‘through’ approach. The objective of a “to” approach is to invest up to the date of retirement. ‘Through’ TDFs focus on creating income throughout retirement.  


A passive vs. active investment approach is used TDFs because of lower fees and to minimize volatility and investment risk.


The investment ‘time horizon’ shortens with age and is potentially riskier from an investment perspective. “Market ‘timing’ issues are particularly critical  and contentious aspect of a TDF and can be risky when exiting a TDF.


TDF Investment Mix

The following table shows the glidepath of a large US passive TDF provider and is representative of glidepaths used in many TDFs. Note that the level of investment risk, in the form of equity investments, decreases the closer you get to the retirement date.



Is the level of risk in a TDF fund is appropriate i.e., will  ‘one size fit all approach’ provide sufficient retirement income? In individual cases,  the level of investment risk may not be sufficient to create the expected retirement income, or it may be too risky. In addition, the asset allocations may not line up with a personal investment risk tolerance. Demographics should be considered to ensure the TDF funds offered to at least accommodate likely employee retirement periods e.g., 2055-2060 -2065


TDF Performance

TDFs are usually evaluated based on return performance rather than on the level of funding at a point in time.[6] The success in the ‘funded’ aspect of a TDF is critical factor.  While TDFs are intended as long-term investments long-term return performance history is simply not available. When selecting a TDF provider, return performance is necessary information but it is not sufficient information to evaluate TDF fund performance, from a member’s perspective: ‘funding’ performance is a critical feature.


TDF Fees

TDFs fees have a significant negative impact on member savings and are paid by CAP members. Fees include administration fees, recordkeeping fees, and investment management fees. In many cases an advisor will be hired to primarily to assist the employer in overseeing CAP administration and governance. The advisor’s  cost is included in the  fees paid by the members.


According to Morning Star[7] the average 2020 TDF fees in the US in were approximately 0.52% and ranged from 1%-1.5%. This does not include the underlying cost of approximately 1.37 %. for fund manager fees. Combined, fees are in the 2% range. In Canada, the fees are even higher – 2-3%. Over a period of 45 years (working years) an annual fee of 2%  represents about 37% of the account value[8].


Claims of excessive fees are the most common reason for litigation in the US, particularly in smaller plans. Since 2015 there have been over 200 lawsuits in the US  concerning excessive fees,  resulting in more than $1 billion in settlements. Fees in excess of 1% are considered indefensible.

TDFs – Advantages and Disadvantages   

TDFs are differ between suppliers - they are not all the same. Understanding the advantages, disadvantages, and differences between TDFs is important when selecting a TDF for a CAP. Sponsors need  to be aware of the advantages and disadvantages of TDFs, and the potential legal risks.


  • No minimum investment requirements in a CAP.

  • Automatic diversification of asset classes (equities, bonds, etc.).

  • Asset allocations and diversification are updated with age.

  • Lower fees (vs. retail or other providers).

  • Professionally managed investments.

  • Minimal employee involvement, knowledge and time is needed  (“set it and forget it”)   

  • Sponsor communications and education are minimized, less onerous, and less costly.


Member perspective

  • Possible suboptimal use by a TDF provider’s proprietary investments (conflict of interest?).

  • Level of risk may not be appropriate (‘one size’ is not necessarily a good fit for individuals).

  • No choice or influence over investment management fees (IMFs – fees are significant over time).

  • Flat IMF applies regardless of the amount invested (no additional value added or help).

  • Exiting a TDF can be very risky  re: timing  (a major risk factor).

  • Lack of involvement in investing and saving (total dependency on sponsor).

  • Benchmarks are based on returns vs. funded position of savings (don’t know how you are doing).

  • Longevity risk  (you or your spouse may live longer than expected -TDF fund will not reflect this risk).

  • Higher fee costs when you exit a CAP TDF.    

  • Retirement income is not guaranteed  (common misconception - a guaranteed income).

Sponsors perspective

  • Potential for litigation related to the sponsors’ fiduciary role and responsibilities.

  • Communication and education can be more of a challenge with younger and older members.

  • The level of risk in a TDF may not be appropriate for individual (a member is not aware of this).      

  • Regular formal fee reviews are critical  (seldom done).

  • Changing TDF suppliers is risky (members may be  exposed to losses re: timing)

  • Dependence on sponsor to provide adequate retirement income (expectation of  guaranteed income)  

  • Limited employee involvement in the investing and saving processes (“set it and forget it”).

  • Fiduciary responsibilities do not end when a CAP member retires (CAPSA Guideline #8)

Also see -

A sponsor has a fiduciary role and responsibility to act in the members best interests as long as they or their spouses remain in a CAP.

Also see:

The tendency for CAP members to rely on the sponsor to generate an adequate (guaranteed level) of retirement income, the lack of employee involvement and understanding of their investment, fees, and timing issues, are potential areas for litigation by CAP members.


Litigation concerns

Despite the fact there are few if any legal actions regarding TDFs in Canada. However, employers should be aware of the types of issues resulting in US. Class action suits related to TDFs (smaller US DC plans are also ending in court). Class actions suits are common in the US,  and there  are concerns about TDFs by US regulators and the government.

See Table A – List of ERISA cases

The US Congress had concerns about TDF returns, that go back to the ‘Great Recession’ of 2011. More recently, the leading retirement plan oversight committees in Congress requested a review of target-date funds “The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised ..”

The committee asked the GAO to investigate:

  • what steps have TDF providers taken to mitigate the volatility of TDF assets?

  • how does the asset allocation and fee structure vary across those TDFs used as default options in 401(k) plans, and

  • how do fees compare with other investment products?


The most common issues in class actions suits are 1) fund manager and administrative fees, 2) improper investment selection 3) lack of investment performance history, 4) poor investment performance, and number of investment choices.


A recent US Supreme Court case, Hughes vs. Northwestern University [9], explained that a pension fiduciary has a duty of prudence, and must monitor investments and remove imprudent ones.  In 2015 the US Supreme Court ruled that fiduciaries are at fault if high priced funds are used when materially identical but lower priced funds are available. Given the unique long-term nature of TDFs and the reliance members place on TFDs are fertile grounds for  legal actions.




Although there are no class actions suits regarding TDFs in Canada at this time, it is a matter of time before TDFs become a legal issue in Canada.


Minimizing Fiduciary and legal Risk

While there are potential legal and financial risks in TDFs (and CAPs) there are things that can be considered to mitigate the risks.

  • Do not allow retirees, spouses or terminated employees to remain in the CAP

  • Only offer one investment option in a CAP  (avoiding the CASPSA guidelines)

  • Only use passive investments as investments (minimizes Investment risk)

  • Limit the number of savings plans to a DC or RRSP  

  • Make contributions to an employee’s personal RRSP vs offering a n employer savings program  

  • Offer an incentive e.g., subsidy for employees to use an independent advisor of their choice

  • Pay the investment management fees as part of the employee benefit package

  • Undertake regular formal fee reviews

  • Have a solid  governance process  (and follow it)    


Documentation of all decisions and actions regarding a TDF other investment options, is essential.  



CAPs transfer all longevity, volatility, stock market, interest rate, and timing  risk to the CAP members vs. a DB plan. CAPs have fallen short of their promise to deliver DB type benefits to CAP members. This can be a potential concern particularly in the case of DB to DC conversions.


The intent in adding TDFs as investment options, or as the default fund, was to make investing and saving easier but this is not necessarily a good fit.   

Dependency on the stock markets in CAP retirement saving portfolios is a god send: It can add significant value to savings over time. However, stock markets fluctuations can also undermine retirement savings and income due to short term price or interest rate fluctuation and timing.


While TDFs are appropriate in certain situations, it is debatable whether they are appropriate in the decumulation (retirement) phase, when funds are being withdrawn and the investment time horizon is limited by expected lifespan. TDFs may be appropriate for younger employees, but with age the ‘one size fits all approach’ may not be effective.  


While legal challenges related to TDFs and CAPs are not a major issue in Canada sponsors using TDFs as an investment option or, as the default fund should be aware of issues that may lead to TDF litigation rather than waiting for it happen – “forewarned is for armed.”   



G. Wahl, Managing Director, The PensionAdvisor -


[1] TDFs consist of a series of 5-year funds. Each of these funds has a specific glidepath (asset mix) which becomes more conservative over remaining target time period.(Investors select the TDF closest to their retirement date).  

[2] Capital Accumulation Plans are tax-assisted savings plans registered under the Income Tax Act. They include DC plans, RRSPs, RRIFs LIRAs TFSAs, PRPPs  etc. CAPs fall under the CAPSA Guidelines.  

[3] Employee contributions are made to the default fund if an employee elects not to make investment decisions. The sponsor selects the default fund.

[4] ‘Investment risk’ is defined as the statistical deviation of a fund from specific (return) bench for any type of fund.

[5] A TDF glidepath is the allocation of equities and fixed-income investments at a point in time. The glidepath changes over time increasing the exposure to fixed income while reducing equity investments. CAP sponsors are responsible for monitoring glidepaths.

[6] TDF may offer a ‘guaranteed value’ if the TDF fund is held to maturity. The guarantee is based on the greater of  the unit issue price or the highest unit price achieved price until maturity. This however does not guarantee a specific level of retirement income.

[7] WWW.The  - Christopher Sahl Nov 2007

[8]Estimate using contributions of $1000/year plus returns of 5% for 45 years – then no contributions to age 65. Total Fees37% or  $35,000 vs account balance ~$93,000.


#12 Trouble on the horizon for US DC and 401k pension plan sponsors?

Legal cracks DC and other CAPS are becoming obvious resulting in Legal challenges 


Employers, as sponsors of employee DC, 401k, and other types of pension programs, have a fiduciary role and responsibilities to plan members and must act in the member's best interests. A recent Supreme Court decision (Hughes vs. Northwestern University) in the US will have a major impact on the level of care required of sponsors and will likely result in an increase in pension-related class action suits in the USA.

The plaintiffs, in this case, alleged poor management of the university pension plan including:

1) fees for record-keeping were not properly controlled,

2) the investment options in the plan were not appropriate, and

3) too many investment options were available to the plan members.


A previous Supreme Court decision (Tibble vs. Edison International) also addressed the question of what constituted ‘prudence’ regarding ” … the continuing duty to remove imprudent one (investment options)” and ruled that the sponsor (fiduciary) had failed with respect to certain funds.


The key issues in question were related to the sponsor's “continuing duty … which includes monitoring investments and improving imprudent ones “.  In addition, fiduciaries  are derelict if “ they fail to remove an imprudent investment from a plan within a reasonable  time”


In Hughes vs. Northwest University the Court addressed the prudence issue and the duties of fiduciaries:  

  1. A broad choice of investment options does not insulate the sponsor from fiduciary liability.

  2. Imprudent investments must be removed within a reasonable time period.

  3. There is a duty to monitor and update plan (investment) options.  

  4. Monitoring fees is part of the fiduciary responsibilities.

  5. Adherence to a plan document and a governance process

  6. Use and monitoring of recordkeeper proprietary investment products


CAPs were initially promoted as being less costly and risky however, sponsors will be forced to incur higher administration costs and devote more resources to overseeing the plans to avoid legal problems.   


Smaller plans are often at risk because they are not aware of their fiduciary role and responsibilities nor do they have the resources and time needed to oversee a plan. Simply following industry ‘best practices’ may not be sufficient or appropraite to avoid legal problems.  

In addition to increasing sponsors' fiduciary risks, the demands on and risks for advisors, who are hired to assist sponsors in overseeing plan governance and investments, will also be greater.


G.Wahl, Managing Director, The PensionAdvisor

#13  Should a TFSA be part of an employers pension program? 

Employers often offer a TFSA in A CAP without think it through 

Tax Free Savings accounts were introduced in Canada in 2009 and are available to Canadian residents who are at least 18 years old. TFSA are extremely popular. According to CRA in 2021 15 million Canadians invested $298 billion in TFSAs. TFSA are flexible: a specified amount can be contributed annually, there are no income requirements for contributions, and withdrawals can be made at any time and are tax free. Given the popularity and flexibility of TFSA, many employers have decided to include them as part of their pension programs.  


Before considering adding a TFSA as part of a CAP however, there are two things to consider:  potential legal and risk management issues, and Employee Relations considerations.  

Legal and Risk Perspective

The  objective in having a TFSA is often different than saving for retirement. A TFSA enables you save for major future expenditures such as a home, wedding, education, vacation, a recreational home, etc.   

The shorter time frame when saving for something, other than retirement, requires different strategies and investments. In the least case, an TFSA investor has to be aware and understand the differences between short and long-term investing and investments. Investments options available in a CAP usually focus on long-term saving and may not be appropriate for a shorter-term investment horizon.


The CAP sponsor has a fiduciary responsibility to the members and must always act in their best interests. Therefore, a CAP sponsor should understand the reason CAP members are using the TFSA and provide the appropriate level of education, information, communications, and  investment options appropriate for short term investing. The sponsor also has a non-going  fiduciary responsibility to the members as long as they are in the CAP i.e., terminated employees, retirees and spouses. A TFSA increases a sponsor’s role and responsibilities and becomes more onerous and costly. Most sponsors are not aware of this!      

The more CAP accounts available the greater the potential legal risk! The fewer the types of accounts available in a CAP the less potential legal risk and cost for the employer.

Rather tan offering a CAP some employers avoid potential legal and financial risks, administrative costs, and having to comply with legislation and the CAPSA Guidelines, by simply making contributions directly to a RRSP or a TFSA an employee must set up with an independently with a financial institution or other third-party service provider. The employer could also provide an annual incentive for the employees to use  an advisor.    


Human Resource Perspective

Competitive pressure to attract and keep employees, is often the reason employers offer pension programs, such as defined benefit (DB) or defined contribution (DC), or RRSPs, 401ks (US) etc., as part of their employee remuneration and benefit packages.


In today’s employment market, attracting and keeping employees can be difficult. Many potential employees want more than just a good work environment. They expect benefits that are comparable or better than what they’re receiving in their current role. This includes many things like health, life and disability insurance, retirement plans, paid time-off, childcare, etc.  Another key factor is that employees are more likely to change employers now than in the past.  

In the USA for example, in January 2020 the median employee tenure in a job for men was 4.3 years, unchanged from the median in January 2018. For women, median tenure was 3.9 years in January 2020, which was little different from the median of 4.0 years in January 2018. Only 29 % of male workers 27% of  women had 10 years or more of tenure with their current employer.

Canadian companies have an average employee turnover rate of 21 per cent, according to a Mercer study. A high turnover rate can cause problems within an organization, from lack of stability, low morale and engagement, and the cost of frequently having to recruit and hire new people.

Based on the current turnover trends, employees probably prefer the flexibility and portability CAPs, 401ks etc. given that DB plans are harder to understand and usually less generous when an employee leaves a DB plan. In most cases employees already have other retirement saving accounts  tax assisted saving accounts they have selected which they are comfortable with.  

While having a TFSA account as part of a CAP pension program may seem like a good idea it probably does not represent a significant benefit for employees and, it represents an additional level of  potential  legal and financial risks for the employer.   

Benefit programs are important in attracting and keeping employees as well as the type of pension program offered. The pension benefit can take many forms and does not have to be complicated.       



A KISS approach is probably effective when it comes to pensions. Offering DB plans or tax assisted savings programs  like a DC, RRSP or TFSA are not necessarily in the best interests of either the employer or employee: there are other ways to attract employees and help them  save for retirement. CAPs also represent a significant time and resource commitment on the part of both the employer and employee.


Adding a TFSA to the mix does not necessarily improve a benefits package and can make pension administration and governance ore  awkward and expensive.    


G. Wahl, managing Director, The PensionAccountant 

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