Plan growth and improved member outcomes: The updated Guideline for Capital Accumulation Plans

Special Notice – October 9, 2024

On September 9, 2024, the Canadian Association of Pension Supervisory Authorities (CAPSA) released the much-anticipated updated Guideline for Capital Accumulation Plans (CAP Guideline). This comes after more than two years of input from industry stakeholders.

Significant changes in the CAP industry over the past two decades, such as the introduction and broad adoption of target date funds, the advent of financial wellness and advice, and the maturing of CAPs, prompted CAPSA to update the Guideline. The 2024 Guideline reflects current expectations for CAP sponsors, administrators, and service providers and offers clarity on the information that should be communicated to CAP members, including member responsibilities.

The refreshed Guideline is designed to support continued plan growth and better member outcomes. It strives to balance the need for direction on responsibilities, conflicts of interest and member education with pragmatic application. It also incorporates the latest best practices in capital accumulation plan (CAP) management and will ensure CAP sponsors, providers and members are engaged to reach plan objectives.

The 2024 CAP Guideline encourages CAP sponsors and administrators to tailor its recommendations to fit their specific needs and organizational context. Steps taken to integrate the governance and risk management framework outlined by the Guideline should also align with expectations from Guideline No. 10 – Guideline for Risk Management for Plan Administrators (Risk Management Guideline). Necessary IT system or process changes to support these guidelines are expected to be implemented by January 1, 2026.

Below are the key updates in the new version of the Guideline, highlighting both new additions and enhanced existing elements:

Plan Governance

The Guideline expands the responsibilities of the CAP sponsor to include establishing, documenting and reviewing a governance framework for the administration of their program. It is meant to be proportional based on the size, complexity, and nature of the CAP and emphasizes that CAP sponsors hold the ultimate responsibility for overseeing their CAP. This includes defining roles, setting plan features (including automatic features), selecting service providers, and ensuring ongoing member education. The governance framework should include:

• Key stakeholder roles and responsibilities;
• Communication processes;
• A code of conduct;
• A risk management framework; and
• Performance review criteria for service providers.

CAPSA acknowledges that in many CAP arrangements, the CAP sponsor relies heavily on the knowledge and capabilities of one or more service providers. In those circumstances, the CAP sponsor’s primary activities would lean towards communication with its members and supervision of the performance of its service providers and investments.

Service Provider and Member Responsibilities

The Guideline includes new responsibilities between the CAP sponsor and service providers that should be clarified, defined, and documented. When establishing a contract with service providers, both parties should clearly define and document the tasks or functions each will perform. CAP sponsors must also consider potential conflicts of interest and carefully select and monitor providers, considering evolving requirements and data security. Service providers interacting with CAP members should clearly disclose whether they are offering investment advice. Additionally, service providers should inform the CAP sponsor, and where appropriate the CAP members, if they will receive financial benefits beyond the disclosed fees from decisions made by the CAP sponsor or members.

CAP members need to understand their responsibilities, make informed decisions about contributions, investments, and withdrawals, and utilize available education and decision-making tools effectively. CAP members’ responsibilities have expanded to include evaluating automatic features, determining withdrawal amounts for retirement income and understanding the impact of their investment choices. They must also ensure ongoing accuracy of their personal and contact information and beneficiary designations with the CAP sponsor and/or service provider.

CAP members are encouraged to read and retain their statements, and other records and communications provided or made available to them and understand fees, expenses, penalties and related restrictions.

Investment Options and Management

The Guideline clarifies and enhances the CAP sponsor responsibilities with selecting and reviewing investment options, managing transfers among options, and having a policy regarding CAP member failure to make investment choices.

CAP sponsors are responsible for overseeing the investment line-up, including the appropriateness of the default fund option, ensuring that it is suitable as the core of members’ investments. Reasonable transfer opportunities amongst investment options should also be allowed. The updated Guideline now recognizes exchange-traded funds (ETFs) and non-redeemable investment funds as potential investment funds.

Additionally, the Guideline emphasizes ongoing review of investment options by assessing whether their fees are reasonable, competitive, provide value to CAP members and align with expectations of investment risks, returns and characteristics. The review should also consider material updates on the investment manager, member behaviour and usage of the funds.

Member Education and Communication

Compared to the 2004 version, which primarily focused on investment information and decision-making tools, the new Guideline emphasizes a stronger focus on member education, communication and ultimately member outcomes. It encourages CAP sponsors to engage members through an ongoing education strategy tailored to the CAP’s purpose, aiming to enhance member decisions and outcomes. This includes clear communication about CAP features, investment options, fees, and responsibilities, and helping members understand how their projected account balance translates into retirement income.

The Guideline is more prescriptive about what is deemed essential enrolment information for CAP members, such as the enrolment process, benefits of timely enrolment, options for opting out, rules for re-enrollment, and other plan design elements. CAP members should also be provided with information on asset allocation, building and rebalancing portfolios, and the importance of compounding returns and time horizon. CAP sponsors should also consider using internal communication channels or CAP sponsor branded materials to improve engagement and should periodically review the effectiveness of their education strategies and tools.

The Guideline further articulates that member statements should include detailed projections on retirement income, fees, and contributions. They should also include a notice of upcoming requirement or ability to use retirement savings for income and the maximum permitted withdrawal amounts, especially for a CAP with a retirement focus.

Unless detailed in the member statement, additional information on fees and expenses should be clearly explained, illustrating their impact on returns, savings and retirement income, including the assumptions behind projections. Disclosures should address how varying assumptions affect outcomes and acknowledge that actual results may differ from estimates, with a range of possible results to highlight associated risks and variability. CAP sponsors should periodically review the assumptions in the income projections for reasonability.

Investment Advice and Financial Planning

When offering investment or financial planning advice, CAP sponsors should ensure that advisors are properly qualified, clearly disclose their compensation, including any commissions received by the advisor, and manage any potential conflicts of interest. This ensures that the advisors are not only qualified but also align with the CAP sponsor’s commitment to transparency and member protection.

If the CAP sponsor does not provide access to advice, they may consider offering resources to help members find qualified financial advisors, such as the guide on Choosing a Financial Advisor from a reputable source like the Financial Consumer Agency of Canada.

Member Termination

The Guideline emphasizes that CAP sponsors retain responsibility for former members if assets remain in their individual accounts after termination. Upon ending active participation, CAP sponsors should disclose essential details to the member or their beneficiary, including:

• Whether they can stay in the plan;
• Any required moves to alternative plans;
• Options for receiving income;
• Procedures for transferring funds;
• Any associated fees if the funds stay within the CAP, and more.

Additionally, if retirement income can be directly received from the CAP, sponsors should provide information on available income options, the investments linked to each option, the type of ongoing communication members will receive, and the fees and expenses related to each retirement income choice. This ensures transparency and supports informed decision-making for members.

Decumulation

The Guideline now explicitly includes retirement income vehicles in the definition of a CAP that is subject to the recommendations. This reflects the growing number of CAP sponsors that have chosen to provide a decumulation vehicle to their members, whether that be directly from the plan or through a separate vehicle. Regardless as to whether a CAP sponsor provides a decumulation vehicle, additional requirements for the CAP sponsor to communicate when and how an income can be drawn from plans further enhances the communications provided to members to help them understand this phase of the CAP lifecycle and to make informed decisions.

Maintenance of Records

CAP sponsors should consider controls to protect members’ personal data and establish a record retention policy detailing how records will be stored and secured. The Guideline emphasizes the need to review these controls, processes, and systems for their effectiveness. The record retention policy should adhere to all relevant legislation regarding the protection of personal information. As part of ensuring accuracy of member records, it should also include procedures for locating missing members or for whom they do not have the current contact information.

IMPACT:

The 2024 Guideline for Capital Accumulation Plans underscores the critical importance of clear communication, member education, and the responsibilities of all parties involved with the goal of providing better member outcomes. CAP sponsors are encouraged to adopt best practices in governance, select and monitor service providers, and offer continuous education to CAP members to improve their decision-making and outcomes.

CAP sponsors should:

1. Enhance their governance structure: Clearly document roles and responsibilities to facilitate effective decision-making. This framework should encompass key stakeholder roles, communication processes, a code of conduct, a risk management framework, and performance evaluation criteria for service providers.
2. Focus on education and communication: Develop clear education and communication strategies to keep CAP members informed about their responsibilities, how the plan works and changes as they occur. This may include CAP sponsor branded materials to improve engagement, providing notice to CAP members about their responsibilities, providing information on how to access qualified financial advisors, and illustrating the impact of fees on returns, savings and retirement income.
3. Review all service providers: Schedule regular (at least annual) reviews of service provider performance, including investment managers (with articulated performance criteria).
4. Decumulation planning: CAP sponsors should provide guidance and resources to help CAP members transition through termination or retirement, with an explanation of different withdrawal strategies.

The updated Guideline reflects the maturing of the CAP industry, the expansion of the types of investment solutions available to CAP sponsors and members, and the evolution of the types of supports needed by CAP members to achieve plan objectives. By implementing the recommendations in the Guideline, CAP sponsors can enhance the effectiveness of their CAPs to achieve better outcomes for their members.

The new Guideline is designed to enhance and highlight to CAP members the value of the plans they are offered. We encourage CAP sponsors to review and align their current governance structures and processes, oversight processes for service providers and communications practices with the updated Guideline in a way that fits with their organizations’ size and resources.