What’s the best way to deal with plan members who won’t (or can’t) make investment decisions for their RSP? As a plan sponsor, it’s your responsibility under the Capital Accumulation Plan (CAP) guidelines to establish a policy around this situation.
Many sponsors simply choose a “default” investment selection that they hope will meet most of the needs of most investors most of the time. At RBC Group Financial Services, we have a better solution — one that enables you to fulfill your CAP obligations and also meet the needs of your employees.
But first, let’s consider why just providing a default investment fund may not be the best policy.
The drawbacks to default funds
Although selecting a default fund may simplify investing for members, it has a number of drawbacks:
- One size may not fit all. No single fund or investing option is likely to meet the diverse needs of your individual plan members. Successful investing depends on choosing the right funds to meet individual goals and time horizons. Some people need to invest in riskier, more volatile funds, while others need a more conservative approach.
- The perception of endorsement. When members are presented with a default fund, they may think that you are recommending that fund as the best choice for them.
- Lack of knowledge. Providing a default fund and self-service education typically does not help members become more knowledgeable or confident about investing.
- Too much time in the wrong fund. Plan members who select a default as a short-term investment solution may stay invested much longer than they intended. This could affect their returns over an extended period and potentially increase sponsor liability.
How advice can help
At RBC Group Financial Services, we believe the best policy is to help participants make good choices right from the start. That means providing them with advice as part of the investment process right from day one.
How RBC's Default Policy works
Each plan member is required to establish an individual account before contributions can be processed. The account-opening process requires that a “Know Your Client” (KYC) investment review be conducted by an RBC investment professional. This individual review helps new plan members identify their long-term financial objectives while a qualified investment professional provides advice as to the appropriate investments to meet them.
Some sponsors prefer not to conduct the investment reviews at the time of initial enrollment, choosing instead to use a simplified application. In this case, plan members invest directly into a savings deposit and the contributions are reallocated during the investment review conducted at a later date. If the investments are not reallocated, they are automatically converted to a GIC once they reach a minimum amount.
For plan sponsors who use the simplified application, RBC conducts contact programs to encourage members to complete the KYC process. Moreover, all plan participants are encouraged to meet regularly with an investment specialist whether or not they have gone through an initial investment review.
An approach that works
Guiding plan members to the proper investments is an important part of any plan. The numbers tell the story.
Benefits Canada has recently released a survey of five hundred 30-year-old Canadians about their employment, health and retirement aspirations. Sixty per cent of the respondents said that the most important feature their employer could provide in managing pension assets would be access to professional financial planning advice. Moreover, another recent market research study* shows that 90 per cent of the members are reluctant to make their own investment decisions within their group plans.
Out of 150,965 RBC group savings plan members, 116,866 (76%) are invested in products that they have chosen with the assistance of a qualified RBC professional.
*Pensions Institute at City University's Cass Business School
