For DC plans, risk management starts with defining the responsibilities and reporting requirements for the various stakeholder levels. Typically, these levels include the board who hold ultimate responsibility for the program; the pension committee who are delegated with operational oversight responsibility; and, of course, plan members who are the beneficiary of the plan.

Further Defined

Responsibilities are further defined for sub-advised or delegated functions such as record-keepers, consultants, custodians, and investment managers. In short, define the levels of responsibility and the expectations for those within the board, operational, or plan membership role – keep in mind that ultimate responsibility falls on the highest level of stakeholder.

The next process, after identifying the requirements for various stakeholder levels, is delegation of responsibilities in managing risks associated with the plan. This includes having documentation and a structured process for monitoring items such as investments, suppliers, communications, funding, and compliance. While many organizations have the best intentions at heart for oversight, a lack of documented structure can undermine the best efforts of those charged with plan responsibilities. Develop, monitor, and follow the governance documents for your program – these documents are not static and should be updated at least annually. This ritual forms the process for annual oversight and documentation of this internal oversight process and is what forms the governance history for the plan.

The documents that are used by all levels of stakeholders must be relevant, understandable, and provide direction. Plan member communication that does not appropriately describe the actions required by employees to join a plan, select an investment mix, or elect a contribution level is not altogether uncommon. Review of employee communication for new members and communication for those who have been in the plan for years is an important process which should be conducted regularly to manage the risks of not just what you say, but how you say it.

Helpful Document

The same document requirement elements of relevance, understandability, and direction hold true for pension committee documents such as the investment policy. It is likely that the investment policy is not written by the user, but it most definitely should be a helpful document in the conduct of investment oversight by the pension committee member. There is no question that not having a document poses a risk – having one that is not followed or reviewed periodically to see if it is still applicable is clearly a larger risk. Plan sponsors that do not have extensive resources dedicated to pension oversight structure and document needs would be well advised to find a consultant to assist in a holistic overview of the process and elements in place and items that require attention.

The three levels of stakeholders noted above (board, pension committee, and plan members) require feedback on delegated responsibilities. For the board, this can be in the form of a report summarizing the plan and its funding for the current and coming year as well as material changes for suppliers, legislation which could impact the pension plan, and confirmation compliance and governance documents have been followed and reviewed. For plan members, there should be an annual statement to members outlining the activities of the pension committee. This flow through of communication helps in the transparency needs of good governance and provides better value for the activities conducted. As pension committees are looking after the interests of plan members, it is indeed logical to report on these activities.

Sound Governance

So, are there risks associated with sponsoring a DC plan? Absolutely, but one could argue that almost all of these risks can be managed through a sound governance structure. Some outcomes are not absolutely in control of the plan sponsor. For example, there is no requirement or expectation for a DC plan sponsor with a voluntary plan to ensure all employees join the plan – the expectation is that all employees have received the appropriate communication regarding the ability and benefits of joining the plan. Likewise, a volatile and protracted period of market volatility and declining asset values cannot be controlled by the plan sponsor – there is an expectation that members have received adequate resources to manage their accounts despite market volatility. The most significant risks for plan sponsors generally stem from lack of oversight or poor documentation of the oversight process.

Clearly, organizations that sponsor a pension program feel the risks of not sponsoring a pension plan (for example, the inability to attract and retain valuable employees) are likely greater than the risks above if managed correctly.  I agree with this completely.

Jeff Gray is a vice-president at Proteus Performance Management Inc.

Organizations can best benefit from selecting a governance consultant that can work with them to build, manage, and regularly review their pension governance framework. This results in an overall framework that is facilitated by an expert in the various areas of required fiduciary responsibility. Periodic and fragmented use of professional support is generally less effective in terms of results and for the time required by pension committee members who are charged with responsibility for core operation activities. In short, plan sponsors should find a pension governance partner and work with them on a regular basis for all areas of plan governance to achieve the best results. We are strong proponents of this “governance partner” approach – 100% of our business is related to pension governance and investment consulting support and over 90% of our business is for “governance partner” relationships.

Another tip to effectively manage the governance process is managing plan governance documents and governance activity information.  Pension committees often have an information oracle – while having someone who manages the plan documents and history of governance activities seems logical it does have shortfalls.  Plan information is not always readily available to other committee members in this format and the plan documentation is not always stored in a logical format to serve for historical reference. To address the need to store and provide information access to multi-member / multi-location committees – Proteus builds a custom portal for client programs. We have had unanimous agreement from our clients that this is an improvement for information availability to committee members – it is indeed a wonder why this is not universally used by all plan sponsors

Jeff Gray, Vice President

Proteus Performance Management Inc.

With the changes we have seen in the last year we can pretty much conclude that most people had an emotional and perhaps even a financial heart-attack with so much change.

First, let’s look at pension committees. Are they ready for a change and should they adopt change?

Pension committees are considerably more open to change than individuals. This is fueled by the standard of care required by a fiduciary which under the Pension Benefits Act requires care, diligence, and skill in dealing with the property of another person.

The greatest area for pension committee improvement is additional external resources dedicated to meet their plan oversight objectives. This brings outside perspective to the committee as well as specialized resources that are not available or not practical in terms of use by plan sponsors. Evaluation of investment funds goes well beyond a historic look at performance and established benchmarks set by the fund manager. The specialized tools and databases that provide modeling, attribution, and performance characteristics are not used by plan sponsors as they require significant investment and operational knowledge. In addition the outputs of multiple database sources require interpretation of results. The demands and expectations of fiduciaries to use specialized and expert knowledge to meet their responsibility is sometimes conflicted with concern about resource costs. This cost concern is less of an issue for more established and informed pension committees who view these costs much like a business investing in its own future.

What about plan members. Are they ready for a change—do they need one?

Our bet is that plan members will follow human nature and resist change. This resistance to change will ironically be the savior for most as those who cashed out when the days looked darkest are already regretting their decision to cash out while markets recover – even if it is a rocky road. In short, status quo for plan members if they have already adopted appropriate investment direction is likely just fine provided they continue to make an effort to better understand the investment aspects of planning for retirement.