What are the key economic and legal risks facing Canadian defined contribution pension plans today? It’s a key question and one that will be addressed on the agenda of the CLC’s upcoming DC Plan Experience Forum taking place from April 17-18, 2024, at the Shangri-La Hotel in Toronto. Speaking about the top legal risks will be Jeff Sommers, a Partner with the law firm, Blakes. In advance of his discussion, we had the opportunity to ask a few questions about what he sees ahead for DC plan sponsors in 2024.
CLC: What are the key risks DC plan sponsors face when it comes to communicating with members?
Jeff Sommers: Plan member communications are a very important obligation of plan administrators and an area fraught with legal risk. There has been much litigation over the years relating to plan members receiving inaccurate or incomplete information from the plan administrator or its service providers. Part of a plan administrator’s fiduciary duties is to provide accurate and sufficient information in order to allow the member to make a fully informed decision (to the extent the member needs to make a decision). Some examples of errors that are sometimes made by plan administrators include providing inaccurate calculations of the member’s account balance (due, for example, to the administrator’s systems not accurately calculating the member’s pensionable earnings), improperly explaining the options available to the member and failing to provide statutorily required notices or statements in a timely manner.
To summarize the key risks to a plan administrator regarding plan member communications, I would say, first, providing inaccurate or incomplete information to members and, second, failing to comply with the administrator’s statutory requirements – for example, providing required communications late or not at all.
CLC: What legal risk facing DC plan sponsors keeps you up at night right now?
JS: We are seeing a considerable amount of DC plan related litigation in the U.S. and the fear is that those types of claims will make their way to Canada eventually. More specifically, there has been significant litigation in the U.S. relating to issues like excessive investment management fees, selection of an inappropriate default fund, and maintaining underperforming funds in the plan for too long. While we have yet to see any such trends in Canada yet, their time may come.
The other longer-term risk that DC sponsors could face is possible claims relating to DC plans that provide inadequate retirement income (at least inadequate as compared to the employees’ expectations). Depending on how plans have been promoted and described by plan sponsors and administrators, as the current generation of employees who have mostly participated in the DC plans (for those lucky enough to have any employer-provided plan) begin to retire, they may in some cases be surprised at the adequacy of the lifetime pension that can be provided by their employer’s plan. This may be particularly applicable to members who participated in a defined benefit plan that was, part way through their career, converted into a DC plan. This risk obviously depends on many factors including the contribution rates under the DC plan and the employees’ expectations about the benefits to be provided under the plan.
CLC: What is your top piece of advice right now for Canadian DC plan sponsors heading into 2024?
JS: My advice is to ensure that you have a good plan governance structure in place. In the case of many DC plans, the plan administrator (which is normally the employer) relies to a great extent on its service providers (e.g., an insurance company) to run the plan. However, it is important to understand that the employer or administrator is ultimately responsible as a fiduciary for the administration of the plan. As such, the employer should be aware of its legal obligations with respect to the plan and understand what services it is expecting its service providers to provide. It should then ensure that such services are properly provided. Employers should also be asking their service providers for quarterly or annual certifications confirming that they have performed all of their delegated duties in compliance with applicable statutory requirements and consistent with applicable regulatory guidance.
I would also recommend ensuring that careful consideration is given to plan member communication regarding the plan as this is an area where we see considerable litigation.
Finally, I would strongly encourage plan administrators to ensure that employees’ pensionable earnings are being correctly calculated under the plan. This is a source of frequent errors by plan administrators and correcting such errors can be very complicated, expensive and frustrating for plan members. This often results where the definition of pensionable earnings in the plan text does not match the calculation of pensionable earnings that is programmed into the systems of the administrator or its service provider.
Interested in learning more about the Canadian Leadership Congress and attending the DC Plan Experience Forum? Contact Joanne Boccia – jboccia@leadershipcongress.ca