The deadline is looming for capital accumulation plan sponsors to meet new guidelines issued by the Joint Forum of Financial Market Regulators last spring. The guidelines for employers who offer CAPs, including defined contribution pension plans, group RRSPs, RESPs and deferred profit-sharing plans, should be implemented by the end of the year.

There are more than 40,000 CAP plans in Canada and plan sponsors may need help implementing the guidelines.

CAP guidelines set out: how to set up a CAP; investment information and decision-making tools that CAP members should receive; statements and reports that must be provided to employees; how to choose service providers and investment options; investment rules that must be met; and how to keep records and communicate with members.

The hiring of service providers is a key theme throughout the guidelines. The documents even state that, if the CAP sponsor doesn’t have the knowledge and skills to carry out the responsibilities in the guidelines, “service providers should be used.”

With three million CAP members and $60 billion under management, this is a huge market. Many larger CAP sponsors are already working with large plan administrators with extensive resources to help them meet the guidelines. But what about smaller firms?

Research shows that the vast majority of the plans are offered by small and medium-sized businesses, which may not have the resources to meet the guidelines on their own.
Benefits Canada says 87% of small companies (less than 500 members) had their assets in defined-contribution plans.

A key area in which small companies may have challenges is offering investors decision-making tools. Many small business operators have many roles in their companies, including a part-time role as pension administrator. How does someone juggling so many responsibilities become expert enough to educate their plan’s members on how to make wise investment choices?

A study conducted by the Investor Education Fund in 2002 found employees of smaller firms are less likely to hear from their employers about matters relating to a pension plan.
The study also found that plan participants at small companies are less likely to have access to educational resources.

What kind of investment information and decision-making tools should be made available to members? The guidelines lists:

> a glossary explaining the terms used in the investment industry;

> explanations about how investment funds work and what’s involved in investing in different types of securities, including the risk and return levels related to the securities;

> performance reports for investment funds;

> asset allocation models;

> retirement-planning tools, calculators;

> and, investor-profile questionnaires.

Pension plan members need help to understand their plans and investment choices. Two thirds of Ontario’s pension plan members consider their pension plans crucial to their overall investment strategy, according to a survey conducted on behalf of the Investor
Education Fund last year.

The poll also showed, however, that almost half of pension plan members don’t understand investment phrases or terminology and information that could be crucial to their ability to make properly informed decisions.

Our Web site (www.investorED.ca) has a feature that lets people ask us a general investor education question. Because our Web site offers an objective resource on pensions, and complementary investor education resources, it isn’t surprising that a large number of the questions we receive are about pensions. This activity shows that people want and need information, but does it make a difference in their investing decisions and habits?

Canadian research is hard to find, but U.S. studies show that employees who received some form of financial education made changes to their retirement savings plans. In one study, 91% of the 633 people who attended financial seminars offered by their employers either changed the amount they invested or re-allocated the money they were investing.
In a 2003 survey of 1,000 people, 18% of employees made changes to their retirement plans after they received educational material. If this is the case in Canada, increased investor education efforts may lead to increased pension investments.

The guidelines are not enforceable rules or regulations, but they are the basis for good governance of CAPs and will be looked at as a standard in the event of legal action.

Legal liability to pension plan members is a huge concern for employers. More than half of DC-plan sponsors cited educational deficiency as a key area of concern, according to an SEI Investments Co. survey released last winter. In fact, 53% said that educating their plan members is the most important and effective way to protect against litigation. In reality, however, only one in 10 respondents thought they were performing extremely well in the area.

@page_break@Advisors can help fill a real need here. You can advise the plan sponsors who need help meeting the guidelines and, even more important, help plan members who need to ensure they are making wise investment decisions with their retirement savings. IE

Terri Williams is president of the Investor Education Fund, a not-for-profit group established by the Ontario Securities Commission to develop and fund effective investor education resources. Visit www.investorED.ca for pension education resources to use with clients.