Ontario's financial services regulator sets out guidance on default features used to improve retirement outcomes
The Financial Services Regulatory Authority of Ontario (FSRA) has affirmed that automatic features in defined contribution plans, which are meant to promote financially beneficial outcomes among plan members, are not prohibited by law.
“The Guidance affirms that the Pension Benefits Act and its Regulations do not prohibit the use of automatic features,” the regulator said in a statement Monday. “Features including auto-enrollment, auto-escalation and default funds may enhance retirement outcomes for plan members.”
In its guidance, FSRA said research done in the U.S., the U.K, and Australia has shown that automatic features could potentially enhance retirement savings outcomes for members of defined contribution plans.
With default options, the regulator said, plan sponsors often hope to produce positive retirement outcomes for the typical plan member, as well as “address general inertia often seen in DC plans.” Such “automatic” features are also distinguished from “mandatory” options, it added, by the fact that members still have the right to “opt out” of the default.
Based on research in other jurisdictions, FSRA said that automatically enrolling employees into a plan and automatically raising their contribution rates over time helps members build up their retirement savings during retirement, and helps ensure employees are maximizing the benefit of employer matching contributions. Default funds and their associated fees, the regulator added, have important ramifications in helping workers get financially ready for retirement.
“FSRA encourages plan administrators to review leading practices in selecting a default fund,” it said, referring to Guideline No. 3 and Guideline No. 8 from the Canadian Association of Pension Supervisory Authorities (CAPSA) on considerations when selecting defaults.
Plan administrators and sponsors, it added, have a fiduciary obligation in selecting and monitoring default funds and fees as the standard prescribed by the Pension Benefits Act (PBA) and common law calls for assets in plans to be “invested with the care, diligence and skill required of a fiduciary.”
In response to stakeholders who’ve raised concerns about possible legal impediments, FSRA said there’s nothing in the PBA that prohibits the use of automatic features in Ontario DC plans. And while the adoption of automatic features may have implications for matters outside of the PBA – with respect to employee contracts, for example – the regulator said many stakeholders have “satisfied themselves with respect to such concerns.”
But even as the provincial regulator touted the potential benefits of automatic features, it emphasized that automatic features may be a poor fit, depending on the unique aspects of each plan.
“Plan member demographics are important factors when considering automatic features,” FSRA said, citing areas such as age, earnings, and financial literacy as some areas that must be taken into account.