Lesson 12 Flashcards
12.1.1 Outline the steps in the CAP investment cycle (5)
1) Develop investment policy
2) select service providers
3) Determine specific investments
4) provide investment information to members
5) Monitor performance on an ongoing basis
12.1.2 In general terms describe the plan sponsor responsibilities that relate to CAP members and plan investments (3)
1) Clearly communicate the risks inherent in CAPS to members
2) Ensure each member has sufficient education and tools to make an informed decision on the investment of their funds
3) Decide whether to retain a service provider for the purpose of providing plan members with investment advise
12.1.3 Explain how CAP investment cycle differs from the DB investment cycle
The major difference is int he responsibility for investment risk.
DB plan returns contribute to funding levels and impact required contributions and/or (for MEPPs) benefit levels.
In a CAP the sponsor has no investment risk and so CAP sponsors need to educate members on the risks. This education isn’t needed in DB plans.
12.1.4 Identify the primary considerations that a CAP sponsor should undertake in Step 1 of the investment cycle: Developing an investment policy (3)
The investment objectives and constraints are developed by considering:
1) The purpose of the CAP (long term savings, tax efficient compensation, profit sharing, short term savings)
2) CAP sponsor’s ability to periodically review the investment options
3) Diversity and demographics of CAP members
12.1.5 Describe the various types of investment objectives and constraints that may be developed Step 1 of the investment cycle: Developing an investment policy (8)
1) Number of investment options to be made available
2) Degree if diversification among options
3) Level of risk associated with the various investment options
4) Styles of investment management to be included
among investment options (passive, active, equity, etc.)
5) Need to accommodate difference member
investment approaches
6) Criteria for assessing investment options and their managers and a description of the assessment process
7) Approach to payment of plan expenses and fees and confirmation of fees paid by each CAP stakeholder
8) Roles and responsibilities of all CAP stakeholders as they relate to plan investments
12.1.6 Describe some pros and cons of some investment options used by CAPS as default investment options (4 different options)
1) Money market fund - offers low risk , low return investment. Given member tendencies to hold the default fund this may not be desirable
2) Balanced fund - offers diversified portfolio managed by a professional with static asset mix, which may not be as appropriate for members over different ages. Likely to achieve reasonable returns over time
3) Target risk fund - offers a diversified portfolio managed by a portfolio. Same drawback as balanced
4) Target retirement date fund. Diversified dynamic portfolio that becomes more conservative with age. Drawback is the fund maturity date may not match the member’s retirement date
12.1.7 Explain how the CAPSA Guideline No 3 addresses default options
The CAP Guidelines are silent on appropriate default options.
The requirement for prudence and fiduciary duty guides the decision. Annual communication with members and documentation of rationale are critical to mitigating risk. An effective default policy addresses the reasons members use the default fund and reiterates that member bear responsibility for investment selection
12.1.8 Describe the first consideration that influence the service provider structure of a CAP
The sponsor’s decision regarding whether to use of build a bundled or unbundled approach to their CAP is he first consideration when selecting a service provider for the CAP
12.1.9 Describe the considerations that CAP sponsors make in Step 2 of the CAP investment Cycle: select a service provider when a bundled approach is selected (3)
1) Whether the service provider can offer investment managers that offer all the types of investments required in accordance with those chosen in Step 1. Some CAP investment policies identify specific required options be made available. If all providers have all the required options other considerations may take precedence in the selection
2) Administration requirements. Plan Sponsors need to satisfy themselves that the package services:
a) comply with all legislative requirements
b) Meet the needs of the plan sponsor and employee group given the purpose of the CAP, investment objectives and constraints from step 1
3) Fee structure available through providers that offer bundled CAP arrangements
12.1.10 Outline factors CAP sponsors consider when establishing criteria for selecting service providers according to the CAP guidelines (6)
1) Level of professional training and experience
2) Specialization in the type of service to be provided
3) Cost of Service
4) An understanding of employee benefits, pension legislation, and related rules
5) Consistency of service offered in all geographical areas where members reside
6) Quality, level and continuity of services offered
12.1.11 Describe factors CAP sponsors consider when establishing criteria for selecting service providers to provide investment advice to embers according to the CAP guidelines (4)
1) Criteria used to select service providers (see 12.1.10)
2) Any real or perceived lack of independence of the service provider relative to the other service providers, the CAP sponsor or its members
3) Any legal requirements that individuals must meet before they can provide investment advice
4) Any complaints filed against the advisor or their firm and any disciplinary action taken (if known)
12.1.12 Describe the fees associated with a CAP that has used a bundled approach
Fees are usually bundled and include:
1) fund management
2) Investment transactions
3) Custody
4) other investment or plan administration fees
In CAPS these are all commonly bundled under Investment Management Fees
In addition there is GST/HST, segregating fund expenses and fund manager operating expenses which are normally charged
12.1.13.a Describe how investment management fees are assessed for CAP investment managers
Typically % of assets. The fees reflect the fee arrangement between the service provider and the investment manager. As a result it is common for those investment options that are proprietary to the service provider to be lower than those of an outside manager.
Sometimes fees for active management scale down as asset levels increase.
12.1.13.b Describe how segregated fund operating expenses and fund manager operating expenses are assessed for CAP investment managers
These fees apply to service providers investment products. They include:
i) trading expenses,
ii) custody fees,
iii) accounting fees,
iv) consulting fees,
v) legal fees
vi) other related fees
They are charged separately and expressed by the service provider as the percentage of fund assets that they represented in the previous calendar year
12.1.13.C Describe how administrative fees for a plan with a bundled approach are assessed for CAP investment managers
For a bundled CAP, administrative fees are associated with the maintenance of the plan member records and reporting to plan sponsors and members. Sometimes there is a separate fee for those services. It is common for certain transactional expenses to be charged directly to the member making the transaction.
