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Employer liability relating to fees in employer-sponsored retirement and savings plans

Employers who sponsor retirement and savings plans for their employees should ensure that the fees paid by their employees within the plans are reasonable and adequately disclosed.  Lawsuits in the U.S., and a recent regulatory undercover investigation in Canada, serve as a reminder of the risk of employer liability regarding fees.  This article will describe the risks for Canadian employers, and suggest a few simple things that can be done to reduce those risks.

What kinds of plans expose employers to the risk of claims over fees?

The kinds of employer-sponsored plans at issue here are workplace plans known as “CAPs”, meaning “capital accumulation plans”.  These are plans that do not promise a defined benefit pension.  Instead, they provide an individual account for each employee, where contributions are made by the employees, the employer, or both.  CAPs sponsored by employers include defined contribution registered pension plans, Group RRSPs (group registered retirement savings plans), deferred profit sharing plans, non-registered savings plans and tax-free savings accounts.

The employer selects a service provider and the line-up of investment funds to be offered in the CAP.  Employees decide which investment funds they want their account balances to be invested in.

It is common for the costs of the plan to be paid by way of fees charged to the investment funds and accounts of the employee members.  It is also common for employers to rely on the service-providers they have hired to describe to their employees what the fees are.

Exactly what are the legal requirements?

The legal obligation of employers regarding fees is not set out in detail in legislation.  For registered pension plans, generally speaking, there are broadly-worded legislative requirements that employers who sponsor defined contribution registered plans act prudently.  There is little detail in pension legislation as to exactly what that means, with respect to fees paid by plan members.

Eleven years ago a significant document was issued by three Canadian regulators who have jurisdiction over various aspects of CAPs.  The 2004 document, known as the “CAP Guidelines,” says that employers should ensure that employees are provided with a description and amount of all fees and expenses that are borne by the members, including investment fund management and operating fees, record keeping fees and fees for services provided by service providers.

The regulators stated in the CAP Guidelines that fees can be disclosed to plan members on an aggregate basis, “provided the nature of the fees, expenses and penalties is disclosed”.  This means that it is not sufficient to refer in broad terms to an approximate amount of total fees that members will be charged for a vague summary of services.  Rather, there should be a description of what kinds of services are being provided for a fee, what kind of a fee is being charged (a flat fee per participant? a percentage of assets?), who is providing the service, and how much those services cost.

Regulators have not stood still on the issue of fees since the 2004 CAP Guidelines were released.  A few weeks ago the Ontario pension benefits regulator issued a draft guidance note for public comment.  The draft states that statements of investment policies and procedures for registered pension plans should include a description of fees, including:  “which expenses and fees will be paid by the employer and which will be borne by plan members; expectations or limits on total plan expenses and fees; and guidelines for monitoring expenses and fees”.  It is likely that this draft guidance note will be issued in final form in the near future.

Secret regulatory probe into investment fees

In an undercover operation, three Canadian investment regulators sent 105 mystery shoppers to a variety of vendors of investment products such as mutual funds.  The operatives posed as potential individual investor clients, and reported their experiences to the Ontario Securities Commission, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.  The regulators released their findings on September 17th, 2015.

The results of the investigation were troubling.  Only 25% of the mystery shoppers were told how the vendor of the investment would be compensated.  And only 56% of them were told anything at all about the fees associated with the investment products they were offered.  Where fees were disclosed, more than one-third of the shoppers were given inadequate information about fees.

The investigation uncovered proof that many investment advisors are not properly disclosing fee information to individual investors.  The probe did not examine employer-sponsored retirement and savings group plans.  Nevertheless, the results of the investigation should prompt employers to confirm that their employees are getting appropriate information about the fees they are paying in their workplace retirement and savings plans.

Employers sued in the U.S. over fees

Dozens of lawsuits have been filed in the U.S. against employers in the past few years regarding fees charged to employees in workplace retirement plans.  Allegations included claims that service providers were receiving “revenue sharing” payments, fees were excessive because the plan sponsor had selected actively managed mutual funds as plan investment options when identical, less expensive institutional funds were available, fees were improperly allocated among participants, service providers should not be paid fees based on a percentage of assets, and fees were “hidden”.  Several high-profile cases were settled on the basis that employers agreed to pay amounts to plan members, and to change to the structure and disclosure of fees going forward.

What’s an employer to do?

Review the fees.  Benchmark them against fees charged in other employers’ plans; your service provider should have access to that industry information.  Are they equitably allocated among participants?  Are any service providers getting a percentage of assets when a less expensive, fixed fee is available in the marketplace?

Disclosure, disclosure, disclosure.  Ensure that information about the fees appears prominently in communications to your employees.  Can employees see who gets their money, and what services they receive for their fees?

Statement of Investment Policies and Procedures.  If you have a policy, or governance guideline of some kind relating to your CAP, include a description of the type and amount of fees charged, and how the fees are allocated among the various players (investment managers, record keepers, auditors, consultants, etc.).

Get it in writing.  Ask your service provider, or consultant, to confirm in writing that the fees are reasonable, and properly disclosed.  Ask for that comfort at least annually.

Employers rarely play a role in negotiating and disclosing fees charged to employees in their retirement and savings plans.  Employers usually rely on their service provider to do so.  Given the spate of lawsuits in the U.S., and the results of the recent regulatory undercover operation in Canada, it would be prudent for Canadian employers who sponsor CAPs to periodically review the information provided to members of their CAPS, in order to ensure that fees are reasonable, and that complete information about fees is being provided.

Employer liability relating to fees in employer-sponsored retirement and savings plans

Ontario pension plan sponsors: it’s time to look at your SIPPs

Employers that provide registered pension plans to their Ontario employees should review their Statement of Investment Policies and Procedures (“SIPPs”) within the next few months.  New Ontario SIPP requirements are coming into force:  SIPPs will have to be filed with the Ontario pension regulator, and they will have to address new issues described below.

Electronic filing of SIPPs with the Ontario regulator will be mandatory in 2016.  You shouldn’t  assume that your pension service provider will attend to the filing for you.  It’s the legal responsibility of the registered administrator of the plan – usually the employer – to ensure that the SIPP is adopted and filed on time.  For most plans, the filing deadline is March 1st, 2016.

There is no change to the requirement that SIPPs be reviewed and confirmed, or amended, at least annually.  If your company has not yet conducted its 2015 SIPP review, now is the time to become familiar with the new SIPP requirements and address them as part of your 2015 review.  Doing so will avoid having to do another review in early 2016.

Under the new rules SIPPs must state whether environmental, social and governance (“ESG”) factors have been incorporated into the pension plan’s investment policies and procedures and, if so, how those factors were incorporated.  There is no legal or standard definition of  “ESG factors”.  On June 30th the Ontario regulator released draft “Investment Guidance Notes” (here)  which provide background information on the new rules.  Notably, the regulator expects the administrator to “establish and document its own view or understanding on what is meant by ESG factors” and “consider whether or not it will incorporate ESG factors and document the basis for its decision.”  The regulator expects such documentation to appear in meeting minutes or in an “internal memorandum”.

SIPPs for defined contribution (“DC”) registered pension plans will have to contain a significant amount of new information.  The Ontario regulator released a separate draft “Investment Guidance Note” (here) for “Member Directed Defined Contribution Plans”.  It lists eight categories of information that should be included in SIPPs for DC plans, including the requirement to disclose how investments are selected, communicated and monitored.  Most interesting is the proposed requirement that the SIPP specify “the frequency and type of reporting” that the administrator will require from the plan’s service providers.  The regulator provides an example:  the SIPP may have a statement that quarterly reporting will be provided by the record keeper on fund performance, fund allocation, web-site usage, and other service-level statistics.  This level of disclosure regarding monitoring of service providers should cause administrators to take a fresh look at how they govern their DC plans.

The Ontario pension regulator has invited public submissions on both of its draft Investment Guidance Notes.  All feedback will be made public.  Click here for information about how to comment on the drafts.

Ontario pension plan sponsors: it’s time to look at your SIPPs

Fight over reduction of GM retiree benefits not over

General Motors of Canada suffered a blow this summer when an Ontario court held that GM was not entitled to reduce benefits it had promised to its retired workers. The decision can be found here.

GM informed non-union retirees in 2009 that as a cost-cutting measure, GM had to reduce benefits that it had promised to certain retirees while they were employed. The reductions included significantly lower amounts of life insurance, and the elimination of semi-private hospital coverage. The retirees responded with a class action claiming that they were “stunned” by GM’s actions, and that GM’s actions were illegal. GM’s position was that language in employee booklets allowed it to make such changes. GM’s employee booklets had typical language that purported to give GM the right to make changes to all benefits, “at any time”. The Ontario Superior Court of Justice disagreed with GM’s position. The language in GM’s employee booklets wasn’t sufficiently clear, said the Court, to allow GM to impose the unilateral changes on retirees following their retirement. The Court made very helpful comments about exactly what wording in employee booklets may be effective to give an employer the legal right to reduce retiree benefits.

It is common for employers to change employee benefits promised to current, non-union employees. The considerations for terminated or retired employees are very different. The recent GM case confirms the reality that Canadian courts will likely not allow employers to unilaterally change the benefits of non-union retirees, unless the employer has communicated that possibility very clearly to the employees while they were employed.

GM has not given up the fight. It has announced that it will appeal the Court’s decision. Meanwhile, employers would be well-advised to take a look at the wording in their employee booklets and other benefit communications that says benefits can be changed in future. Will that language withstand a court challenge that it isn’t sufficiently broad or clear to allow changes to be made? The answer may lie in the reasons for judgment in the GM case and pending appeal.


Fight over reduction of GM retiree benefits not over

Obligations to Pensioners in an Insolvency: Supreme Court Clarifies the Law

The Supreme Court of Canada overturned the Ontario Court of Appeal today in what is one of the most highly-anticipated cases for the pension and insolvency bars pending before the courts. In Indalex (Re) 2013 SCC 6, the court provided clarity regarding some key questions relating to the governance of an employer-administered pension plan during a proceeding under the Companies’ Creditors Arrangement Act (CCAA). The judges split on some of the issues, but here is our brief round-up:

  1. Priority. The full amount of a deficit in an Ontario pension plan will rank ahead of secured creditors (as a deemed trust), provided that the plan is wound up and the employer is not in bankruptcy. The SCC upheld the Court of Appeal on this issue.
  2. DIP Facilities Can Come First. A judge may order that court-approved debtor-in-possession financing in a CCAA proceeding ranks ahead of pension deficit deemed trusts. The SCC upheld the Court of Appeal on this issue.
  3. Fiduciary Duties Owed. Employers who administer pension plans owe a “fiduciary duty” to the members of the plans. This means that such employers must manage conflicts of interest. These conflicts will arise when there is a substantial risk that the employer-administrator’s representation of the plan members would be materially and adversely affected by the employer-administrator’s duties to the corporation. In these circumstances, separate representation (among other things) might be appropriate to protect plan members. The SCC narrowed the scope and content of the fiduciary duty that the Court of Appeal had imposed.
  4. Remedies. Any remedy for a breach of fiduciary duty must be tailored to the nature of the breach. The remedy of a “constructive trust”, which provides the plan members with a proprietary interest in specific assets of the employer corporation, will only be available if there is a direct link between the breach of fiduciary duty and the specific assets. The breach must have resulted in the assets being in the corporation’s hands. The SCC overturned the Court of Appeal on this issue.

Lawyers will be picking through the lengthy judgments in this decision for months to come. It has significant implications for Canadian corporate lending, insolvencies and restructurings.

Look for FMC Law’s in-depth analysis of this case in the coming days.

This post was co-authored by Jane Dietrich and Timothy Banks.


Obligations to Pensioners in an Insolvency: Supreme Court Clarifies the Law

Division of Pensions on Marriage Breakdown: New Rules

Significant changes came into effect on January 1, 2012, regarding the treatment of pension benefits of Ontario members who go through a breakdown of their spousal relationships. The new regime is a big improvement over the old regime. There are now detailed, clear rules as to exactly what has to happen when a plan member’s former spouse wants to receive the value of the pension he or she is entitled to.

Plan sponsors should consider whether they need to amend their pension plan texts to comply with the new regime in Ontario. The significant features of the new rules are:

  • the non-member former spouse can get a lump sum payout from the pension plan, even if the employee is continuing to accrue a pension;
  • the plan administrator is required by law to calculate the value of the non-member former spouse’s entitlement, in accordance with formulas set out in new regulations under Ontario pension law; and
  • specific request forms must be used by the plan member and former spouse, in order to request that the plan administrator calculate the value of the former spouse’s entitlement.


Division of Pensions on Marriage Breakdown: New Rules

Extension of Grow-in Benefits – The Rules have Changed

Plan sponsors with certain types of defined benefit pension (DB) plans must familiarize themselves with the new grow-in rules which came into effect on July 1, 2012. They may entitle terminating employees to surprisingly, valuable benefits from the pension plan.

The grow-in rules apply to DB pension plans that have “early retirement enhancements”. These are plans that say, for example, that employees who meet certain types of age and service criteria (such as a “rule of 80”) are entitled to start collecting their pensions prior to age 65, with little or no reduction in the amount of their monthly pension.

The new rules extend the pre-July 2012 grow-in rules. If a DB pension plan has never had to provide grow-in benefits on plant closures or other partial wind-up events, the new rules will have no effect.

The pre-July 2012 grow-in rules stated, generally, that if there was a partial wind-up event, such as a plant closure, a terminated plan member had the right to receive his early retirement pension under the same terms as if he had continued as an employee and plan member until reaching the early retirement eligibility age set out in the plan text (as long as the member’s age plus service as at the date he actually terminates employment is 55 or more – this is the “55 points” requirement). The grow-in rules are complicated, so plan sponsors should obtain expert advice on how they work.

The new extended grow-in rules will say that all terminating plan members get grow-in (if they have “55 points”), whenever they terminate employment, even if it’s not a plant closure or other partial wind-up event. The reason for this change is that partial wind-ups no longer exist under Ontario pension law, which is good news for plan sponsors. The bad news is that for some DB plan sponsors, the extension of grow-in to all employee terminations is potentially very expensive. It could result in a large increase in the value of a terminating employee’s benefit. Employers with DB plans should make sure they’re aware of this valuable benefit when they structure severance packages.

The new grow-in rules will apply to all employee terminations after June 30, 2012. Terminating employees will not be entitled to the grow-in benefit, however, if they:

• quit;
• were terminated due to willful misconduct, disobedience or willful neglect of duty that was not trivial and was not condoned by the employer;
• were hired for a defined period of time, or for the completion of a specific task;
• are a “construction employee” as defined under Ontario employment law; or
• are on a temporary lay-off as defined under Ontario employment law.

The grow-in rules will continue to apply to full plan wind-ups. It is possible for certain types of plans (multi-employer pension plans and jointly-sponsored pension plans) to opt out of the grow-in rules.

FMC Law recommends that plan sponsors affected by these new rules consider whether they can, and should, change the terms of their pension plans to remove the early retirement enhancement provisions. If that is done, the grow-in rules will not apply.


Extension of Grow-in Benefits – The Rules have Changed

Cashing-out of Small Pension Benefits: The Rules have Changed

The rules for cashing-out or “unlocking” small pension benefit amounts have been overhauled. Effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:

  • The threshold amount for cashing-out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee’s annual pension is less than 4% (rather than the previous 2%) of the year’s maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules.
  • DC plan administrators will no longer have to convert a departing employee’s individual DC account into an annual pension amount in order to determine if the cash-out threshold is met. Under the new rules, the benefit can be cashed-out if the DC account is less than 20% of the YMPE (in 2012, that’s $10,020).

Many defined benefit and defined contribution pension plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher thresholds. However, we recommend that plan sponsors amend their plan texts so that they can adopt these higher cash-out thresholds. Doing so will significantly lessen the administration costs of dealing with employees who terminate plan membership with small pension benefit amounts.


Cashing-out of Small Pension Benefits: The Rules have Changed

Immediate vesting and locking-in

Ontario pension rules prior to July 1st, 2012 allowed employers to require Ontario members of pension plans to wait two years after joining a pension plan, to “vest.” In other words, if an employee terminated employment within the first two years of joining a pension plan, it was permissible for plan texts to state that he is not entitled to receive anything (other than a refund of employee contributions, if any).

Commencing July 1, 2012, the two-year vesting rule will no longer be permitted. Ontario is adopting the approach that has long been in place in Quebec: as soon as an Ontario employee becomes a member of a pension plan, he is immediately vested and his benefit is locked-in. There will no longer be any forfeiture amounts in pension plans with respect to Ontario members.

In reaction to this change, plan sponsors may want to consider lengthening the eligibility period for joining the plan, if it is currently less than two years. Ontario pension law will continue to permit employers to impose a two-year waiting period to join a pension plan.


Immediate vesting and locking-in

Severance packages for employees in defined benefit pension plans are about to get a lot more expensive

Effective July 1, 2012 , the Ontario Pension Benefits Act will require employers to pay higher pension benefits to many terminated employees. In some cases, the change will double the value of the employees’ pension benefits.  This expensive benefit is called “grow in”, and while it used to apply only in cases of pension plan wind-ups, the benefit has now been expanded.   

The enhanced (“grow in”) benefit will now apply to any Ontario employee whose employment is terminated, if the employee:

  • has at least 55 age + service “points”; and
  • is a member of a defined benefit pension plan which contains “early retirement enhancements” (i.e. plans that say that the employees who meet certain age/service criteria get an enhanced early retirement pension).

The enhanced (“grow in”) benefit will not apply to employees who resign or employees whose employment is terminated for wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.

As a result, if an employer is seeking to terminate the employment of an Ontario employee, the employer should review the considerations set out above to determine if the enhanced “grow in” benefit is applicable to the particular employee.

It is also important to note that this new requirement can be avoided if employers amend their pension plan texts to remove any early retirement enhancement provisions. However, such amendments require careful drafting and employers should obtain advice from counsel in order to assist with any such amendments.


Severance packages for employees in defined benefit pension plans are about to get a lot more expensive