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CAP Fees -a sponsors responsibility and a litigation risk

A sponsor’s role in overseeing fees is the area most susceptible to future litigation. Sponsors need to understand the depth of their role and responsibilities to minimize potential litigation.

Sponsors of US 401(k) and 403(b) plans (defined contribution plans) are seeing a wave of ERISA law suites targeting plan fees. Since 2006 there have been hundreds of lawsuits in the USA related to fees and breaches of fiduciary duty: in 2016 and 2017 about 60 fee related cases were filed. The cases mostly involve plans with $100 million or more in assets which represent just 1% of US plans but, resulted in settlements of over $300 million. Litigation against smaller US DC plans however is steadily increasing.

While there is limited legislation and few cases regarding CAP fees in Canada the fiduciary issues and concerns are comparable to those in the USA. An increase in fee related law suites is expected as CAP members become older and more aware of the negative impact fees have had on retirement savings and income.

Both CAP sponsors and members need to be aware of fiduciary requirements with respect to fees. This is discussed in more detail in ‘The Impact of Fee on Members’, ‘Converting from DB to DC’ and “The Trouble with Fee Disclosure in CAPs”.

Fiduciary Role and Responsibilities – Fees

CAPSA Guidelines

In Canada the CAP Guideline recommendations provide very limited guidance regarding fees. They do not highlight the impact of fees or the impact in financial planning models nor do they recommend appropriate governance processes specifically for fees (even though the recommendations are ‘best practices’ and likely to be cited in litigation).

Guideline #4 – Principle #9 states that a sponsor (administrator) should have transparent communication in place that outline the fiduciary responsibilities under legislation. Principle #11 simply recommends a regular review of the governance processes in place with no specific mention of fees.

Guideline #3 - Section 4.4 simply recommends that members should be provided with the description and amount of all fees including record keeping, fund management and other service provider fees. Section 5.3 states that return performance should reported net of fees.

Another CAPSA document, the Self Assessment on Prudent Practices, says nothing specific with respect to governance and monitoring fees.

Provincial Regulations

Juris prudence, provincial legislation and regulations regarding DC plan fees vary by province and are also very limited. For example, the requirement for a Statement of Investment Policies and Procedures (SIP) which often includes a section on fees, is no longer required in BC and Alberta. In addition, while a sponsor is required under the regulations to disclose any administration expenses deducted, and any other payments, transfers or withdrawals made, from member accounts the BC and Alberta Regulators, for some inexplicable reason, do not enforce this regulation.

Resistance to requiring fee disclosure by the Regulators is likely related to the mutual fund industry and some CAP record keepers’ reluctance to disclose the actual cost of CAP and mutual fund fees.

Good Governance and Understanding fees

From a governance perspective a regular review of the Investment Management Fee (IMF) structure is warranted. Competitors are willing to participate in a formal fee review and will offer competitive pricing: it is an opportunity to attract a new client.

A comprehensive and fully documented fee review should take place every 3-5 years. It should include the Record keeping, fund manger and, if applicable, the advisor portion of the fees. As a starting point there should also be a clear understanding of the costs the members pay vs. the sponsor per the plan document. Keep in mind the following as in undertaking a fee review:

1) The quality of record keeping, and advisory service is a key factor not just the fees paid.

2) Ensure you understand who and to what extent each party is responsible for fees in the plan.

3) IMF’s consist of Record keeping, fund manager and advisor fees – consider all three components.

4) Specific fund manager fees vary significantly amongst record keepers (explained below) so consider the competition’s fees on your existing investment options you want to keep or any new funds you want to add.

5) Large record keepers should have lower costa and fund manager fees. If you know the fund manager fee and the advisor’s cost, you can estimate and compare record keeping costs.

6) Large record keepers have the advantage of scale re: service, communication, education and fees.

7) A record keeper always has room to lower propriety fund fees.

8) Consider the performance vs the fees of a record keepers’ proprietary funds.

9) Be aware of getting into ‘locked in’ situations such as TDFs where it may be difficult to extricate your self from a record keeper’s proprietary funds in the future.

10) Target date funds are not all the same. There are often subtle but significantly differences that include how fees are set. (If TDFs include many proprietary funds the fees should be lower.)

11) Send an RFQ to at least 3 platform providers including specific information and issues you would like included. The record keeper and advisor should be advised a formal fee review is being undertaken.

12) Document the fee review and the resulting decision.

Record keepers, fund managers and advisors automatically get more money as the amount of the members assets increase i.e. without providing any additional service. Sponsors should be prepared to insist on lower IMFs as the plan total assets grow.

Active vs Other Members - Fees

Fee reviews focus on the IMFs paid by active members. When a member retires or leaves the organization however they are often transferred into a record keeper’s plan i.e. they are no longer members of the organizations CAP program(s). The record keeper does not provide the same level of service, education and communication and it is more difficult to hold them accountable legally. More importantly members, are often shocked to find out their fees increase! In the case of DB to DC conversions, members are seldom told they will no longer continue as part of the employer’s plan upon retiring nor about the fee increase. This could have legal consequences since it negatively impacts retirement planning and retirement income.

In hiring a record keeper and as part of a fee review and if members are moved into a record keepers CAP program(s)a sponsor upon retirement or termination the sponsor should consider the level of IMFs paid by members upon retirement.


The mechanics of undertaking a fee review are not difficult but they require planning and time. A fee review also gives the record keeper and advisor an opportunity to review the fees and levels of service as well as initiating discussions on a variety of issues. A fee review should be part of your CAP governance: it satisfies a variety of governance and fiduciary issues and affects all Plan members.

G.Wahl, Managing Director, The PensionAdvisor

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