Defined contribution (DC) pension plan sponsors in Canada face evolving regulatory demands and emerging risks. In response to CAPSA Guideline No. 10: Guideline for Risk Management for Plan Administrators sponsors are focusing on three key actions to address DC-specific risks. They conduct detailed due diligence on target date funds with reviews that go beyond just performance and fees. They expand monitoring to cover operational aspects of the plan alongside investment oversight, tackling governance and member engagement issues. They also delegate certain tasks to external experts, freeing up time to concentrate on strategic oversight and assessments. Together, these approaches contribute to a pragmatic framework that strengthens DC plan governance and risk management amid changing regulations and market conditions.

Target Date Due Diligence: A look at new opportunities to manage investment related risks

Sponsors of large DC pension plans have been generally well-positioned to respond quickly to the new CAPSA guidance - with many already having risk frameworks in place. As they revisit these documents, it has become evident that investment risks in DC plans are generally well-defined and often well-managed, in comparison to many other DC risks - yet there is opportunity to do more. 

Large plan sponsors manage investment risks by implementing robust investment monitoring processes and policies. But recent risk discussions have further highlighted the need for additional due diligence on target date funds. DC investors in these funds are particularly vulnerable – being minimally engaged and generally lacking understanding of the asset exposures in these funds. 

As fiduciaries, plan sponsors must go beyond performance and fees when evaluating target date funds. It is prudent to also understand portfolio construction – asset mix, risk exposures and use of alternatives – and to assess whether, given the demographics of their DC plan membership, the fund supports intended member objectives better than other target date funds available in Canada. As target date funds delve further into allocations into private markets, asking questions relating to liquidity, valuation and other impacts is essential. This also goes beyond a point in time assessment. The reality is that most plan sponsors do not want to change their target date fund too often, so it is essential that the target date fund selected is not just suitable for today but one that is expected to remain suitable in the future. 

In the U.S., this type of governance is prescribed and conducted periodically by plan sponsors. These target date suitability reviews are outlined by the US Department of Labour, which states that  DC sponsors should periodically examine whether there have been any significant changes in the information fiduciaries considered when the option was selected or last reviewed¹. In Canada, in many DC plans target date funds are the most significant investment, and target date funds in Canada are evolving, hence there is growing recognition for the need to engage in a comparable level of due diligence.

Monitoring operational risks - A staple in DC governance

Small to mid-sized organizations face governance challenges that differ sharply from the largest DC plan sponsors. While many large sponsors focus on closing specific governance gaps to enhance already robust programs, smaller sponsors must carefully prioritize their efforts.

Investment committees or decision-makers for smaller plans, are often required to make decisions across a wide range of highly technical issues, while meeting infrequently and balancing fiduciary duties alongside full-time corporate roles. In this environment, delays in decision-making or gaps in documentation could potentially increase fiduciary exposure over time. Furthermore, often the time and effort being spent on governance activities isn’t always getting to the heart of helping them to address pressing risks relating to member communication and lack of engagement.

Facing competing demands, the pragmatic response from many of these sponsors is to focus on actions that are quicker hits to improving plan member outcomes. This means that they are actively monitoring engagement, fee competitiveness and communication effectiveness. These types of ongoing monitoring efforts are essential for these sponsors, in part due to their dependence on their service providers to deliver communications to plan members. Prioritizing this work leads to more thoughtful engagement with their service providers to deliver better communication touchpoints and improved outcomes. 

With investment oversight and operational monitoring already demanding attention, governance framework documentation and risk assessments often become second priority for smaller sponsors. They seek pragmatic approaches to address this.

Using delegation as a pathway to improve governance

CAPSA’s Guideline No. 3 for Capital Accumulation Plans sets clear expectations that all capital accumulation plans have documented governance framework. Early work with sponsors to create these frameworks reveal how much these sponsors benefit from clearly documenting roles and responsibilities. These frameworks reduce ambiguity, establish an audit trail for decisions and preserve institutional memory – ultimately reducing risk. Yet, many sponsors struggle to find time and resources for this work amid existing investment and operational oversight demands. 

As plans grow, fiduciary expectations rise and plan sponsors face increasingly complex responsibilities with limited capacity. CAPSA recognizes that applying CAP Guideline No. 3 and No. 10 will vary depending on the nature (size, complexity, and other characteristics) of the CAP but nevertheless CAP No. 3 applies universally to all capital accumulation plans and CAP No. 10 applies to all registered pension plans.²

For some, this means they must map additional governance activities on a journey plan. Others are consider delegating more tasks to external providers so that they can focus on strategic oversight and grow in their governance activities. In the US, ERISA clearly defines delegation levels. For example, 3(21) fiduciaries provide “point in time” advice to sponsors on investments or plan management while sponsors retain ultimate control and the ongoing responsibility; while 3(38) fiduciaries hold full discretionary authority to manage and control plan assets on an ongoing basis, largely removing sponsor liability. In Canada, even though fiduciary responsibilities cannot be delegated away, the trend towards delegating activities is rising. Here, effective delegation is less about relinquishing control and more about paving the way to strengthen oversight and a pathway to improve governance over the plan without adding strain on internal resources. For many sponsors, the challenge is not whether to build a governance framework and conduct a risk assessment, but how and when to implement them pragmatically to meaningfully improve governance processes and reduce risks. 

Risk remains central in sponsor conversations, and this will persist. While fiduciary risk can not be eliminated, governance models that emphasize expertise, transparency, and disciplined decision-making can play a meaningful role in managing DC risks more effectively. As regulators increasingly turn their attention to Capital Accumulation Plans, it is crucial for sponsors to keep pace by deepening their governance and risk dialogues to navigate evolving challenges and fulfill their fiduciary duties effectively. Maybe more importantly DC assets are becoming very significant for many Canadians, irrespective of regulation Canadians need help with managing their DC retirement provisions and sponsors have a key role to play to assist Canadians in their quest to retire comfortably. * Guideline No.3 applies to all capital accumulation plans (CAPs). While CAPSA Guidelines No. 10 is directed to registered pension plans, all CAPs stand to benefit from conducting a risk assessment using a similar framework. These guidelines capture existing best practice that has been adopted in the industry. 

Important notices

¹Source: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/target-date-retirement-funds-tips-for-erisa-plan-fiduciaries#:~:text=Establish%20a%20process%20for%20the,to%20consider%20replacing%20the%20fund.

²For more information : https://www.mercer.com/en-ca/insights/retirement/defined-contribution/capsa-guideline-capital-accumulation-plans/

Bernadette Chik

Leader of Defined Contribution Advisory Business, Canada

Bernadette Chik is the Leader of the Defined Contribution (DC) Advisory Business for Mercer in Canada and is a senior DC consultant based out of Toronto. As a consultant, Bernadette partners with organizations of all sizes, tackling complex challenges. She leverages analytics, research and industry best practice to empower plan sponsors in making informed decisions about their retirement and savings plans. Her expertise spans DC plan design, retirement readiness, investment structure, governance and sustainable investing. 

In her previous roles, Bernadette drove innovation as the lead for DC & Financial Wellness Research. She focused on improving financial outcomes for Canadian workers and bringing efficiency to the DC landscape in Canada. Her efforts include building and managing the delegated DC business for Mercer, a market leading solution in Canada.

A CFA charterholder, Bernadette graduated with honours from the University of British Columbia with a B.Comm in Finance.