Law Times

Law Times • augusT 20, 2012 DC conversions not always smooth Lawyer warns of risks in switching from defined-benefit plans FOCUS BY MICHAEL McKIERNAN Law Times D ers, according to some pension lawyers. Conventional wisdom dic- tates that employers conversion to defined-contri- bution from defined-benefit plans because it shiſts the risks associated with the pension scheme to the employees from the business. But that' favour a essarily the case, says Jana Steele, a partner at the Toronto office of Goodmans LLP. "There are different risks as- sociated with a defined-contri- bution plan than there are with a defined-benefit plan, so you may or may not be attaining what you set out to attain when you convert," says Steele. Whether or not they're do- ing it for the right reasons, more and more employers are making a switch. James Fera spends a large portion of his time at Osler Hoskin & Harcourt LLP amend- ing pension plans to provide for some form of a conversion. He says employers like the certainty that defined contributions bring to their liabilities. "In the DB environment, in- terest rates and volatile invest- ment returns can drastically alter a company' gations," he says. "In a DC envi- ronment, the employer' bution obligations are fixed as a percentage of payroll. ployers' investment risks, Steele says they bring a whole host of legal issues that some businesses haven't always thought through. "The reality is employers to While conversions cut em- " always have fully whether or not a conver- sion meets their needs," she says. "There' assess care- around that whole process and it' s ongoing risk, not just on the conversion." ployees is key during the con- version, according to Fera. Communication with em- s a lot of legal risks s funding obli- s contri- s not nec- efined-contribution plans aren't always all they're cracked up to be for employ- While designing plan changes, employers are wearing their hat as plan sponsor, but when the time comes to pass on the details to employees, they're acting as administrators, a role that brings with it added fidu- ciary responsibilities. "If communications are found to be deficient, members could make claims based on al- leged negligent misrepresenta- tion, breach of fiduciary duty or breach of contract," says Fera. That' employees have the option of sticking with their existing plan or switching over to the new one, says Karen Shaver, counsel at Norton Rose Canada LLP. "Employees may not un- s particularly true when derstand that they're assuming the risks they're assuming, and there seems to be a risk that the employer may be breaching some kind of a duty depend- ing on how they characterize it," she says. "We've seen a couple of cases focused on plaintiffs saying they didn't understand when they were converting." talked into says important as plan sponsors communicate much more fre- quently with members in de- fined-contribution plans. "With a DC plan, you have Even aſter conversion, Steele communication remains members oſtentimes selecting where their investments will be made, so there' communication there," she says. s the risk of mis- "You have to think about who your agent is and whether you've properly selected them." Shaver says the case law is what isn't. In the United States, where s acceptable and they're fund managers. "In many cases, the fees paying to pension charged by fund manag- ers are buried in the rate of return you get in the fund, which means sometimes no- body even knows what the fees are, manding disclosure and they're finding out the fees in some cases are extraordinary. If the employer hasn't done its due diligence and met its fiduciary duty by checking to make sure the service pro- viders are actually charging reasonable fees, the members are actually now looking to the employer to make good on that. It' "In the U.S., they're de- " says Shaver. shiſting bution plans is whether the conversion will be a hard one that moves over all cur- rent and new employees to the new model or a soſt one that involves grandfathering existing plan members in the defined-benefit plan. Shaver says the adminis- to defined-contri- trative price of a soſt conver- sion can quickly eat up the cost savings from a switch. "You actually end up run- ning two different kinds of pension plans where you used to have one, so there' in the U.S. and we're not that many years behind them, especially as we have many more DC plans in place. s a burgeoning area savvier about management fees charged on their RRSPs and notes employers may have to take greater precautions to make sure they can defend their fund managers' charges as reasonable and necessary. The major choice employers have to make when Shaver says individual investors are becoming " Communication with employees is key during pen- sion-plan conversions, says James Fera. according to Shaver. And with interest rates as low as they currently are, that can be an extremely ex- pensive proposition. "It gets the DB sponsor off the hook for future li- only really possible by annui- tizing defined benefit plans, administrative cost and com- plexity that doesn't necessar- ily get factored in," she says. But a hard conversion is abilities but it costs a lot to buy out the whole plan," she says. "Those people who think that going from DB to DC means they're going from complexity to non- complexity are simply not right." LT s an PAGE 9 TRUST you're putting your reputation on the line. It's all about trust well placed. thin on the ground around con- versions, meaning employers have little guidance from the courts on what' a form of defined-contribution pension plan, the 401K, has a much longer history, she says new concerns are emerging and it' they arrive in Canada. One U.S. client of hers is worried about a recent trend of plan members suing employers over the fees s only a matter of time before LEONARD KUNKA | CRAIG BROWN | DARCY MERKUR Since 1936 Thomson, Rogers has built a strong, trusting, and collegial relationship with hundreds of lawyers across the province. As a law firm specializing in civil litigation, we have a record of accomplishment second to none. With a group of 30 litigators and a support staff of over 100 people, we have the resources to achieve the best possible result for your client. Moreover, we are exceptionally fair when it comes to referral fees. We welcome the chance to speak or meet with you about any potential referral. We look forward to creating a solid relationship with you that will benefit the clients we serve. YOUR ADVANTAGE, in and out of the courtroom. TF: 1.888.223.0448 T: 416.868.3100 W: www.thomsonrogers.com ThomsonRogers_LT_Feb13_12.indd 1 www.lawtimesnews.com 12-02-07 2:07 PM

• Cover