Pension plan members seeking independent advice, says expert

(May 13, 2004) The trend toward pension plan sponsors teaming up with third-party advisory firms to provide financial education and advice to employees is taking off, says securities lawyer Glorianne Stromberg, partly due to the inherent weaknesses of the defined contribution (DC) model.

Stromberg, a well-known investor advocate, points to a strategic alliance established last year between T.E. Financial Consultants and Health Lambert Benefits Consulting to deliver independent education and planning services as a group employee benefit. Earlier this month, Great-West Life announced it had teamed up with Acquaint Financial to offer third-party financial education services for members of its group savings plans.

“The emphasis of these programs is on independence, not tied to any investment products and not sharing in revenue from the sale of investment products,” Stromberg said in a speech earlier this month at a pension conference in Toronto. “These are key matters and they matter very much to plan members. Too often, product sales have been wrapped in a financial education folder.”

Simply telling employees to seek out the assistance of a financial advisor is not enough, Stromberg said. “Employers should focus their efforts on helping employees gain a better understanding of the economic and financial issues that will help them make better decisions.”

Tax efficiency is another advantage in offering independent financial education and planning services as a group employee benefit, Stromberg notes. Because the services are oriented to retirement counselling, the amount paid by the employer for these services is not a taxable benefit to employees, yet the costs are fully deductible by the employers as a business expense. Stromberg calls that a “win-win situation” for employees and employers.

There’s nothing in current pension legislation, including the proposed guidelines for capital accumulation plans (CAP), that compels employers to offer independent advice.

But Stromberg notes that one of the purposes of the CAP guidelines — expected to be released later this month guidelines by the Canadian Association of Pension Supervisory Authorities — is to ensure that pension plan members are provided with the information and assistance they need to make investment decisions.

“I would argue strongly that without the measures I’ve described, employees will be hard pressed to demonstrate that it has provided members with that information and assistance.”

That’s particularly true when it comes to DC pension plans, says Stromberg, noting that there has been little consideration of the appropriateness of encouraging employees to rely solely on DC plans to provide an employment-based stream of retirement income.

“People who think deeply about these plans voice concerns about the employee’s ability to comprehend and prudently manage the investment risk that DC plans place on the employees.”

That leaves DC pension plan sponsors both accountable and vulnerable, she adds. Beyond the risks employers face by not offering advice is a more compelling and altruistic reason to take action, says Stromberg. “This is what plan members want. People want to save money, [and learn] how to budget and how to generally manage their financial affairs. They want help and advice and a source.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com