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Five Trends To Watch In The CAP Landscape

Retirement planning coupleWe can expect to see continued progression and innovation in the capital accumulation plan (CAP) landscape. As focus escalates on Canadians’ future retirement prospects and the roles our governments, employers, solutions providers, investment managers, advisors, and we ourselves play in determining our outcomes, here are five key trends to watch.

  • Shifting Focus to Fee Efficiency & Disclosure

    There is growing concern both with the real level of fees being paid by members and the transparent disclosure thereof. Most fee reviews, which have become common as a governance exercise, focus on the sticker price of a few selected funds that are commonly available across multiple carrier platforms. This approach, which aims to provide an ‘apples to apples’ comparison, often fails to identify:

    • ‘Hidden’ fees embedded within unit values or applied as interest discounts in cash and guaranteed products, but not included in the ‘bundled’ sticker price

      In insurance environments, these often include segregated fund operating expenses to cover various internal operating and administrative costs. Though these fees tend to be typically quoted in the range of three to five bps for the largest segregated funds, they can reach as high as 35 bps for smaller segregated funds.

    • Tracking errors (in insurance environments) between the performance of the segregated fund and the advertised underlying pooled fund.

      Most insurance companies have policies permitting these errors which arise due to segregated fund operating costs mentioned previously, but also due to un-invested cash maintained for cash-flow management within the segregated fund. Discrepancies between the performance of the segregated fund and the underlying pooled fund, which can be significant especially for smaller segregated funds, are often overlooked and unmonitored.

    • What’s Coming Next

      More advanced fee reviews moving to a truer evaluation of performance net of all detractions and bringing focus to improving ‘fee efficiency’ by examining opportunities to ‘unbundle’ or price separately recordkeeping services from investment management services. As DC arrangements continue to grow in size of assets, the opportunities for plan sponsors to introduce more efficient fee structures may result not only in greater immediate return to the CAP member’s accumulating assets and to improved governance, but may also have the very desirable effect of facilitating fully transparent fee disclosures.

  • Plan design frameworks for accumulation of retirement assets will be tested

    A shifting legislative landscape has presented opportunities to review and improve upon plan design frameworks.

    • More options for accumulation vehicles

      The wide variety of vehicles that have become available in the last few years, including TFSAs, PRPPs, VRPPs, and in Ontario, the potential prospect of an ORPP, as well as, most recently, the federal government’s proposal for a voluntary CPP mechanism in which to accumulate assets for retirement has begun to raise questions about the optimal group plan design. This will spark discussion about original plan design objectives and the circumstances under which they were conceived and whether design frameworks need to be challenged in today’s evolving landscape.

    • Plan objectives to be defined and monitored.

      As design frameworks are challenged, the definition of plan objectives and the need to monitor the plan’s achievement of them are becoming more specific. Sponsors will consider whether and how to monitor their plan’s success and where needed to modify their arrangements to maximize the value of their programs, deliver the most efficient retirement outcomes for members, and maintain their competitive edge in the attraction and retention of employees.

    • What’s coming next

      Designs integrating the use of multiple vehicle types for optimal and tax effective delivery of retirement income and more advancement in decision support tools for members at enrolment are the next steps.

  • Introducing decumulation frameworks and solutions in group plan environments

    More attention will be paid to delivering decumulation benefits within group sponsored plans.

    • Increasing emphasis on education

      With CAPSA guidelines bringing attention to the need to inform and educate members on the options available at retirement for decumulation, more plan sponsors will begin to take a ‘hands-on’ role in helping members transition to retirement from their group sponsored plans.

    • Legislative provisions for variable benefits from DC plans being highlighted

      Plan sponsors are beginning to consider the merits of taking a more active role in the delivery of decumulation benefits. Preservation of the benefits of participation in a company sponsored CAP into retirement is a topic of growing concern as some studies have shown that as much as 30 per cent of the value of accumulated assets can be lost to an increase in fees as members move out of the plan and into a retail decumulation product.

    • What’s coming next

      Decumulation dialogue will continue to gain volume as plan sponsors look to improve upon the delivery of retirement benefits and consider strategies to incorporate decumulation options to enable members to efficiently transition accumulating assets to a retirement income. The pace of innovation in payout solutions, administrative solutions, investment product, and member tools will increase in this area.

  • Increasing Investment strategy sophistication

    More ‘DB-Like’ investment sophistication will be used in portfolio management solutions for DC.

    • Continuing trend to consolidating investment structures

      A movement away from the offering of ‘variety’ in member choice frameworks and towards more packaged comprehensive portfolio solutions. The employment of a broadening investment opportunity set to capture additional sources of value and risk diversification in asset classes not traditionally employed in the DC investment menu will gain momentum.

    • Advancing development of Target Date strategies

      We expect to see increasing sophistication in these products to address the asset-liability risk management equation for DC members with greater rigor, recognizing the importance of considerations beyond ‘target retirement date’ in constructing optimal plan defaults.

    • What’s coming next

      Streamlining of investment lineups and a migration to a more portfolio based solution approach aligned more with lifetime retirement income objectives will continue.

  • Integration of employee support for group benefits, wellness and retirement programs

    There will be greater integration in the delivery and continued management of programs that contribute to wellness strategies.

    • Retirement programs impacting financial wellness

      Formal wellness initiatives will continue to evolve and integrate financial wellness objectives in the effort to promote employee engagement and deliver positive impact on productivity and financial results. Delivery of retirement programs within a financial wellness framework will gain momentum and more focused attention.

    • Holistic enrolment and delivery

      Member decision-making, enrolment and re-enrolment, and ongoing monitoring of their program choices will be broadened to expand beyond traditional group health and wellness initiatives and reposition their participation in retirement and savings arrangements in the promotion of financial wellness.

    • What’s coming next

      Financial wellness initiatives will be built around retirement and savings programs and integrated with broader wellness initiatives.

Michelle Loder is a partner at Morneau Shepell.

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