The Office of the Superintendent of Financial Institutions (OSFI) issued guidance on Monday on the default investment options that firms offering pooled registered pension plans (PRPPs) can provide to investors that don’t make their own investment decisions when they are first enrolled in the plan.
Under the PRPP rules, plan administrators can provide plan members with a default investment if an investor doesn’t make a choice among the options presented to him or her within at least 60 days. The rules require that the default option must be a balanced fund or a portfolio of investments that takes into account the age of the investor (such as a target-date fund). Yet, the rules don’t define the required characteristics of these investments.
OSFI’s new guidance sets out the regulator’s expectations for these default investments, which aims to provide firms with OSFI’s views on their basic design requirements.
For example, the guidance indicates that a balanced fund would typically invest between 40% and 60% of its assets in equities and the rest in fixed-income. The guidance adds that this mix wouldn’t be altered simply in response to market conditions, but that it would be rebalanced automatically to maintain its target asset allocation.
OSFI’s guidance also sets out the regulator’s expectations for the characteristics of target-date funds, including the basic expectation that the fund’s asset mix would shift toward lower equities exposure as the investor ages; and that these funds are not expected to consider the individual risk tolerance of particular investors.
The guidance also includes OSFI’s views on the cost of these default investments and the disclosure that should be provided to investors about the characteristics of the default option that their plan provides.
“Costs are important for PRPPs as they reduce investment returns and, therefore the amount of funds that a member can accumulate in their PRPP account,” the guidance notes, adding that the costs should be “at or below” the costs incurred by defined contribution (DC) plans that cover groups of 500 or more members.
In addition, the guidance indicates that PRPP providers are expected to review, “the design, performance and continued suitability of the default investment option on an ongoing basis.”
These reviews are particularly important if events occur that could impact the appropriateness of the default investment option, OSFI says, including consistent over, or under, performance by the underlying funds; changes to the cost of the default investments; or a change in the manager of the fund; among other things.
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