Defined contribution pension plan study

In December 2018, OSFI requested information from nearly 900 federally regulated pension plans with defined contribution (DC) provisions and obtained a 55% response rate. Many of the questions related specifically to “member choice account” plans. In accordance with the Pension Benefits Standards Regulations, 1985 (PBSR) a member choice account is an account where the member is permitted to make investment choices. This type of arrangement would typically include a default option should the member not make an investment selection.

While we continue to analyze the data received and intend to share more observations in the future, some preliminary observations on the responses received can be found below:

Default investment option

Our study found that 55% of member choice account plans use a target-date fund as their default investment option, making this type of fund the most popular default option. Target-date funds generally provide a rebalancing feature of the asset allocation that is based on the age or retirement date of the plan member, thus gradually reducing the investment risk over time. 

The second most popular default investment option is a balanced fund, with 25% of plans using this type of fund as their default option. Balanced funds offer a mixture of safety, income and capital appreciation. The typical asset allocation is between 40% and 60% in equities and the remainder in fixed income investments. Unlike the target-date fund, the asset allocation of a balanced fund does not change over time, but rather is rebalanced periodically to maintain the same asset allocation.

The study also revealed that some administrators have chosen a money market fund as the default option for the pension plan. A money market fund would not normally be considered a suitable default option for most members. Plan administrators are reminded that subsections 8(4), 8(4.1) and 8(4.3) of the Pension Benefits Standards Act, 1985 impose a standard of care for administering a pension plan and establish expectations for administrators of member choice account plans. When providing investment options, the administrator must offer investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is adapted to their retirement needs.

When selecting a default option, plan administrators should consider the age and/or risk profile of the plan members, the suitability of the default option, and the costs associated with that option. Costs are an important consideration given that they reduce investment returns.

Number of investment options

Our study revealed that the average number of investment options offered in member choice account plans is 34, and the median number of investment options offered is 22. While the average number of investment options offered may appear high, it is explained by 10% of the plans offering more than 75 options.

As mentioned in the Canadian Association of Pension Supervisory Authorities (CAPSA) Guidelines No. 3 for Capital Accumulation Plans, a DC plan administrator should establish criteria for the periodic review of each of the investment options in the plan. Review of the investment options should be conducted at least annually.

In addition to establishing criteria for reviewing the investment options, we wish to remind DC plan administrators that, as plan fiduciaries, they are responsible for providing investment information and decision-making tools to plan members. Plan administrators should review the number and type of investment options offered to ensure that member education is an achievable goal.

Offering over 75 investment options would seem to be overwhelming for most pension plan members. It would also seem difficult for a plan administrator to conduct a fitting annual review of all of these options in accordance with CAPSA guidance. As part of the analysis behind this study, OSFI will consider what we expect an appropriate level of investment choice to be.  

Administrative fees

Plan administrators should be aware of all costs related to offering a DC plan. While it appears that there is an awareness of investment fund management fees among administrators, the responses and comments received suggest that the amount of administrative fees paid by the plan members and/or by the employer is not well known. 

Plan administrators are encouraged to gain awareness of all fees relating to the plan by inquiring about fees with their service providers.

Plan administrators are also reminded of subsection 7.3(1) of the PBSR, where there is an annual requirement to provide a written statement to member choice account holders which discloses the investment objectives and fees, among other things.

OSFI continues to analyze the responses received and will share more information in a future edition of InfoPensions. Based on the results of the study and risks identified, OSFI will make adjustments to supervisory procedures and changes to external guidance.