Individual financial plan should be the core benefit

Employers offer company-sponsored savings plans because they want to reward loyal employees and encourage their people to save for retirement. During the last few years, the media has had a field day reporting the financial woes of older Canadian workers who are now having to delay their retirement.

At a recent financial education workshop that my firm was hired to present, a 62-year-old executive vice-president shared his story with me. He was placing his retirement on hold because the value of his corporate-sponsored retirement plans (in which most of his retirement savings were invested) had drastically dropped in value as a result of the meltdown in stock market.

The Canadian Council of Insurance Regulators, The Canadian Association of Pension Supervisory Authorities and the Canadian Securities Administrators created what is know as the Joint Forum of Financial Market Regulators in 1999. It is a national organization that addresses issues concerning the growing integration of the financial services sector and the harmonization of financial services regulation across the country.

One of the issues the Joint Forum is addressing is the regulation of capital accumulation plans (CAPs).

“In addressing this issue, the joint forum's main aim is to strengthen consumer protection, and outline corporate responsibility for their employment benefit plans” says Nurez Jiwani, Co-chair of the Joint Forum Committee on Capital Accumulation Plans.

There are over $60 billion in CAPs. Over three million Canadians are members of them. CAPs include all group RRSPs, defined contribution pension plans (DCPPs), deferred profit sharing plans (DPSPs), employee profit sharing plans (EPSPs), and all other types of employee non-registered savings plans, in which employees make investment decisions.

Potential risk for employers As employees learn their legal rights, a company's fiduciary obligations could perhaps be the most worrying of all for employers. In Canada, employers have been found liable for failure to bring the terms of benefit policies to the attention of employees.

Several years ago Bell Canada was caught off guard, as many other Canadian companies in the coming years will be as the baby boomers begin to retire en masse. Many of its retirees received a large cash settlement from Bell Canada as a result of allegations that this company had not communicated to its employees the inherent risk of the group RRSP that it had set up and was promoting to its employees. Even though Bell Canada was not making contributions on behalf of its employees, it still chose to settle the dispute rather than fight it out in court.

Canadians have a newfound interest in class action litigation. Justice William O. Douglas, the longest-serving justice in the history of the U.S. Supreme Court, once wrote, “The class action is one of the few legal remedies the small claimant has against those that command the status quo.”

Class action lawsuits are seeing more success in the last three years than they have in the previous decade, and it appears that our Canadian courts are now prepared to certify class action suits for breach of employment-related obligations, says employment and labour lawyer Michael Sherrard, of Toronto-based Sherrard Kuzz LLP.

“It is not proposed that plan administrators and employers would be held harmless for investment losses of members,” says the Joint Forum's first report, released in April 2001. “Ultimately, if employees do not get what they expect from their company's retirement plans, there may be lawsuits relating to the product itself (CAPs)”, says Randy Bauslaugh of Blake, Cassels & Graydon LLP in Toronto, who specializes exclusively in pension, benefits, and executive compensation.

The most recent updated Joint Forum April 2003 Report strongly recommends that employers' responsibilities include providing access to investment decision-making tools and cautioning employees that they ought to obtain independent investment advice. Jiwani adds: “preferably a professional advisor, who follows a strict code of conduct.”

In essence, employers offering CAPs have reason to be very concerned. “The types of lawsuits we might expect are probably only limited by the imagination of the lawyers pursuing them,” says Bauslaugh.

Recently a homegrown website based in British Columbia has popped up on the World Wide Web called www.BigClass- Action.com . “This is a free service offered to the public, motivated to facilitate helping the Davids of this world receive protection and justice from corporate Goliaths,” says Scott Wurtele, CEO and Founder.

Each month there are over 100,000 visitors to this site, with over 4,000 potential claimants requesting to have their cases evaluated from across Canada and the United States. Information given to www.BigClassAction.com is then forwarded to one of the many law firms lining up to represent these claimants. If a lawsuit is brought against either a public or private corporation, says Ingrid Enhagen of The Institute of Chartered Accountants of Ontario, “there would most likely be disclosure in the notes of the company's financial statement in accordance with the generally accepted accounting principles.”

The New Frontier

Not long ago, I was presenting a workshop for an outplacement firm and afterwards, a former vice-president of Human Resources with 20 years experience, who had been let go due to corporate restructuring, approached me. She said that she had come to believe that in the New Economy “we have a better chance of getting a gold watch from a street vendor than we do from a corporation.”

After more than a decade in which millions of people's lives have been disrupted from outsourcing, downsizing and reengineering corporations, employees are coming to realize that Canadian companies can no longer offer them job security. They can no longer rely on big government or big business to provide them with an education, a job or benefits for life. Employees in today's employment environment need to take responsibility for their careers and finances.

It is important that employees don't perceive their company pension plan, benefit plan or group RRSP to be their retirement plan, as it once used to be. Now employers are finding a need to help employees distinguish between the company's retirement plan and their employees' financial plans, and to help their employees to build contingency plans in case they lose their jobs through downsizing, get sick, die to soon or live to long.

In this new era, there is confusion over the distinctions between the meanings of “information,” “education” and “employee personal financial knowledge” by both employers and employees. The Joint Forum is trying to clarify these differences. A company that just provides information about its pension, RRSP and other benefit plans has most likely not met its fiduciary responsibilities or moral duties. Just providing benefit information only adds to their employees' confusion (information overload). Education is not enough without employees having the knowledge and wherewithal to take total responsibility and to be empowered to integrate their company's benefit plan with what they are doing outside their company.

The solution – rethinking corporate benefit plans The Joint Forum of Financial Market Regulators has initiated raising the fiduciary responsibility bar on all employer-sponsored savings plans. A wise solution to mitigating potential future liability/risk for all employer-sponsored CAPs would be for companies to set aside between one per cent and five per cent of the total compensation for their people and to hire an independent financial planning solutions provider. Thus, their employees would then individually create and maintain a comprehensive financial plan custom-tailored for them alone.

“When Sears Roebuck proved that they earned $200 million dollars extra in 1997 as a result of improving employee satisfaction by four per cent, they paved the way for us to capture the true cost of poor well-being. Sears not only found a correlation between employee satisfaction, customer loyalty, and the bottom line, they found a causal link!” says Danielle Pratt author of The Healthy Scorecard – Delivering Breakthrough Results that Employees and Investors Will Love!

Canadian employers need to rethink corporate benefit plans. In the 21st century, the individual financial plan should be the modern company's core employee benefit. The financial plan makes the distinction between the financial planning process and the old world's focus on financial products. Afinancial planning benefit solution is the one tool that will help employers to surpass regulatory benchmarks in a cost-effective way.

A financial plan helps employees understand how their employee benefit program forms a part of their financial foundation, but at the same time understanding that their employee benefit programs are not the total foundation for them to get the life they want, while they plan their future and retirement.

Written by Peter Merrick

Peter Merrick, FMA, CFP, FCSI, Instructor at George Brown and Seneca Colleges, President of Merrick Wealth Management, a boutique financial planning, employee and executive benefit consulting firm.

2 Responses to Individual financial plan should be the core benefit

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