Trustees and Their Professional Advisors

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by Mark Zigler*

Who Are the Advisors?

Generally, employee benefit trust funds, and pension funds in particular, permit trustees to seek the opinion and advice of professional advisors. Such an ability is often specifically provided for in the trust agreement creating the fund, as trustees at common law cannot delegate any of their responsibilities. Given the complexity of modern-day trust funds, the large number of beneficiaries involved, and the legal framework under which trustees and trust funds must operate, professional advice becomes critical.

Specifically, we will be turning our attention to the role of the actuary, the auditor, consultants, legal counsel, investment counsel and custodians.

In particular, many plans now involve thousands of plan members and administration and investment of sizable assets. This has increased the dependence on professional advice.

The most common benefit plan advisors are actuaries, accountants or auditors, benefit consultants, legal counsel, investment counsel and custodians. As a group, these advisors have significant influence over benefit plan design and administration. This article provides a brief overview of the role of these advisors and the standards of conduct expected of them when providing services. Many third-party administrators, mentioned briefly in this article, also provide consulting advice and contractual arrangements with them and are subject to the same considerations.

Engaging With Professional Advisors

While every advisor and task is different, trustees are usually interested in whether an advisor has the proper experience, competencies and reputation; meets the appropriate standards of conduct; has professional insurance; and is cost-competitive. Of course, the advisor must also be willing to be engaged on reasonable terms acceptable to the plan, its trustees and, ultimately, plan beneficiaries. The key document setting out these expectations, terms and conditions is the contractual agreement between the plan and the advisor. Trustees must carefully consider this agreement before they sign it and periodically review it to ensure it remains appropriate. Many agreements are also for fixed terms but renew automatically if no further action is taken. Trustees should be vigilant in reviewing these agreements when a fixed term is about to expire to ensure that it is only renewed if the trustees find it in the fund’s best interest to do so.

The Legal Basis for Delegation

The trust agreements of trusteed benefit plans should include express terms that empower trustees to seek the advice of professional advisors. While it may seem obvious that trustees would seek help administering a benefit plan or investing plan assets, trust agreements contain this language because traditional trust law obligates trustees to perform duties personally—subject to limited exceptions. Without such terms in a trust agreement, trustee power to delegate may be questioned in the absence of statutory powers to retain agents and advisors.

Modern pension regulation recognizes the need to empower pension plan trustees and administrators to seek advice or delegate functions when appropriate. For example, Ontario’s Pension Benefits Act1 expressly provides that all administrators (whether or not they are trustees) may delegate to an agent:

"Where it is reasonable and prudent in the circumstances so to do, the administrator of a pension plan may employ one or more agents to carry out any act required to be done in the administration of the pension plan and in the administration and investment of the pension fund.” 2

Pension legislation in other jurisdictions typically contains similar provisions.

If a plan administrator does delegate a duty to an agent, the administrator must personally select the agent and supervise their performance. Again, this rule has been codified in Ontario’s pension legislation:

“An administrator of a pension plan who employs an agent shall personally select the agent and be satisfied of the agent’s suitability to perform the act for which the agent is employed, and the administrator shall carry out such supervision of the agent as is prudent and reasonable.” 3

Be aware that the statutory provisions permitting delegation noted above only apply to pension plans and not to employee life and health trusts (ELHTs) and other benefit plans. When the latter plans are trusteed, the trust agreement should enumerate the powers of the trustees and permit the delegation of certain trustee functions to professional advisors and other agents.

Trustees generally do not have the same skills and abilities as their advisors—This is often the reason for retaining an advisor. Fees and expenses charged to the plan must also be reasonable. However, trustees must (1) satisfy themselves that the advisors they select are suitable and (2) supervise the advisor to the extent it is prudent and reasonable to do so.

While trustees should and do have the power to seek advice from professionals, it is important to note a limitation on their ability to take advice; trustees cannot delegate most decision-making. However, trustees may often rely on the advice of professionals to mitigate potential liability in carrying out their duties as trustees, if such advice is reasonable. Ultimately, trustees must make the decisions required to administer a plan and are responsible for the actions of the trust—even when they are relying on professional advice in the decision-making process.

Agents or Advisors?

Though this article explores the appointment of advisors by benefit plan trustees and administrators, the Ontario Pension Benefits Act refers to advisors as “agents.” What is the importance of this distinction?

An agency relationship is a legal relationship in which one party (the agent) is given power by a second party (the principal) to perform certain acts on behalf of the principal such as enter contracts or purchase property. Agents owe a duty of loyalty—a fiduciary duty—to their principals.

Legislation like Ontario’s Pension Benefits Act imposes fiduciary duties on administrators of pension plans regardless of whether they are trustees. The same duty is imposed on agents. Under pension legislation, the duty is not only owed to the trustee-as-principal, but also owed to plan beneficiaries. This gives beneficiaries the right to enforce the fiduciary duty against advisors personally.

In contrast, if an advisor is not an agent, the advisor may not owe a duty to plan beneficiaries. Similarly, an advisor may resist recognizing a fiduciary relationship to trustees, which may permit a different (and lower) standard of conduct in the advisors’ agreement.

This is the reason advisors sometimes take the position that they are not agents and are merely advisors. We will return to this issue after considering the different types of advisors and the functions they perform for benefit plans.

Selection

The trustees’ first duty when engaging an advisor is to select the appropriate firm or individual to provide the desired service. It is most common for trustees to request and review proposals from a number of service providers in a competitive bidding process. Where appropriate, the trustees should, of course, interview candidates personally before making a selection.

It is also common practice to request references and require candidates to provide names of representative clients or examples of their services. Depending on the scope of services required, it may also be useful to request bidders to address problems or specific situations in their responses. Such scenarios may be hypothetical or actual.

There is no fail-safe method for selecting the best candidate for any position, but inquiries of other clients and the use of experienced consultants—particularly for large funds—are useful strategies.

Finally, if a potential advisor uses a standard form contract or engagement letter, it is important to review it upon interviewing them to ensure that the terms and conditions are acceptable. If not, it is necessary to confirm that there is room for negotiated changes.

Supervision

In addition to taking appropriate steps when selecting an advisor, it is important for trustees to monitor the performance of advisors that have been hired. Periodic review of an advisor’s performance and terms of engagement are essential.

Trustees should establish performance standards for professionals, then conduct performance reviews at regularly scheduled intervals. It is incumbent on trustees to question any area of performance where they have a concern or unanswered question. It is not always sufficient for trustees to follow advice and not challenge an advisor, particularly when a trustee has identified or is aware of a concern. In these situations, a trustee must be satisfied performance is being monitored and any necessary steps have been taken to ensure the continuing engagement of the advisor are prudent.

Standard of Conduct

All advisors must perform the services for which they are engaged to an adequate standard of care. There are three considerations in characterizing the standard of conduct expected of an advisor.

  • The first is any standard imposed by statute—such as the fiduciary standard imposed on agents under Ontario’s Pension Benefits Act in respect of advisors to pension funds. If such a standard applies, it is the required standard of conduct.
  • A second consideration is the terms of the service agreement with the advisor. If the contract stipulates a fiduciary standard of conduct, then this is the agreed-upon standard of conduct for the advisor.
  • The third consideration is the circumstances surrounding the engagement of the advisor. Even if the advisor does not contract for a fiduciary standard of conduct or have it imposed by statute, advisors may still owe fiduciary duties to the trustees in performing their services. For example, the Supreme Court of Canada has ruled that some types of advisors are in a fiduciary relationship with those whom they advise and, thus, are required to meet the standards of a fiduciary.4 The Supreme Court has stated:

 “[t]he relationship of the broker and client is elevated to a fiduciary level when the client reposes trust and confidence in the broker and relies on the broker’s advice in making business decisions. When the broker seeks or accepts the client’s trust and confidence to advise, the broker must do so fully, honestly and in good faith . . . It is the trust and reliance placed by the client that gives to the broker the power and in some cases, discretion, to make a business decision for the client. Because the client has reposed that trust and confidence and has given over that power to the broker, the law imposes a duty on the broker to honour that trust and respond accordingly.” 5

That courts may enforce fiduciary duties in professional advisory relationships is not surprising. The very nature of professional advisory relationships—particularly in specialized areas such as actuarial science, law, accounting, taxation and investments—is based upon an imbalance of information that often makes the client reliant upon or vulnerable to the advisor. These conditions justify imposing a high standard of conduct.6

As noted earlier, not all advisors agree that they are or should be either agents or fiduciaries. In taking this position, they may be trying to limit their liability or exposure to litigation brought against trustees or themselves. Even if advisors acknowledge an agency relationship or fiduciary duty, they may attempt to limit their liability through other contractual terms. Trustees should resist such limitations to the extent possible.

Investment Advisors

Perhaps the clearest case of trustee reliance on advisors is assistance with the investment of plan assets. A primary trustee function is to secure and properly maintain trust property for the benefit of plan beneficiaries. This typically means investing trust property, which requires the advice and assistance of investment advisors.

Pension funds are particularly dependent on investment counsel not only to preserve property but also to produce investment returns to increase fund assets and pay benefits. Given the broad discretion trustees have in making investments, it is important that trustees carefully choose investment advisors.

Pension legislation in Canada requires pension funds to adopt a statement of investment policies and procedures, sometimes abbreviated as SIP&P.7 Developing such a policy typically requires the advice of investment advisors as well as actuarial advisors.

There are two basic roles for investment advisors in most benefit plans: investment consultant and investment manager. Investment consultants advise trustees on trust fund investment policy and make recommendations regarding mandates. It is typically the role of investment managers to execute investment policy and mandates. Investment consultants assist in the selection and monitoring of investment managers. They may have access to large internal and proprietary databases of managers that can be used during the selection process. In addition, investment consultants assist trustees in monitoring investment manager performance. When necessary, investment consultants can assist with the termination and replacement of managers.

Selection

The market for investment managers in North America is large and mature. Trustees have access to advisors with expertise in most asset categories and investment products, at relatively competitive costs. The size and scale of a fund are important factors when accessing these markets on competitive terms, and these considerations have led large pension plans to internalize some of these functions.8 Management also may vary with respect to the asset classes in which the trustees have chosen to invest, there often being specialized managers for specific types of investments, both on a geographical and scope scale.

Public policy reform efforts have examined ways to make low-cost investment services available to all plans—large and small. For example, in 2012, the Ontario government commissioned a report on the desirability and procedures for consolidating public sector pension plan investment activities.9 This led to a major consolidation in the public pension plan sphere in Ontario.

Investment advisors are usually chosen through a formal bidding process. There is no single process or procedure for selecting investment counsel, but the Canadian Association of Pension Supervisory Authorities has published Guideline No. 6 and an accompanying self-assessment questionnaire to help pension trustees develop investment policy.10 In addition, the U.S. Department of Labor has identified several factors for trustees to consider when selecting investment advisors.11 These factors have been highlighted in a number of consent judgments and include:

  • The business structure and affiliations of the advisor
  • The financial condition and capitalization of the advisor
  • The investment style of the advisor and the advisor’s relation to the investment policy of the fund
  • The investment process to be followed by the advisor
  • The identity, experience and qualifications of the professionals who will be handling the fund’s portfolio
  • Whether any relevant litigation or enforcement actions have been initiated within a reasonably relevant time against the advisor, the advisor’s officers or directors or the advisor’s investment professionals who have responsibility for the fund portfolio
  • Over an appropriate time period, the experience and performance record of the advisor and the advisor’s investment professionals—including experience managing other tax-exempt and employee benefit plan assets
  • Whether the advisor uses the services of an affiliated broker or dealer and, if so, the types of transactions for which these affiliates are used and the financial arrangement with the broker or dealer.
Engagement and Conduct

Investment counsel and managers are typically engaged through an investment management agreement. The terms of this contract govern the investment advisor’s relationship with the trustees. Key terms of an agreement usually include the fees charged, warranties and representations of the advisor, standards of care and limits on liability, if any.

A key requirement of an investment advisor is compliance with securities regulations. To provide investment advice or manage fund investments, most advisors must register with a self-regulatory organization under the authority of provincial securities regulation, such as the Canadian Investment Regulatory Organization. Such organizations include the Mutual Fund Dealers Association, the Investment Dealers Association and the Investment Industry Regulatory Organization of Canada.12 All of these organizations are mandated to set standards of conduct for members and to enforce these standards. Courts have held that such registrations are required for those who advise the administrators of pension and benefit funds. For example, the Ontario court has stated investment counsel selected by an administrator must fulfill the qualifications established under provincial securities legislation.13

Many investment management agreements require the personal services of named officers of the management company, as it is the investment skill and expertise of these individuals that leads a fund to retain the services of the firm. Other common terms of investment management agreements include:

  • A confirmation that the advisor carries sufficient professional insurance
  • Bonding where an advisor has control over money receipts
  • The fiduciary standard of care and conduct expected of the advisor.

Most investment advisors acknowledge a fiduciary standard of care in their agreements. A fiduciary standard is appropriate given the significant influence or actual control an advisor has over plan investments. This influence was recognized in Hodgkinson v. Simms concerning the duty an investment advisor owes a client. The court stated that “the standards for choosing the people who invest the funds . . . are quite high.”14 Typically, investment management agreements provide for a short period of notice to terminate the agreement. In the event the trustees lose confidence in a particular investment manager, it would be inappropriate to have a lengthy period of time where the manager continues to invest while not having the confidence of the trustees. Typically, agreements provide for termination on thirty (30) or sixty (60) days’ notice, which would provide sufficient time for the trustees to at least engage a transition manager, if not a new manager, to manage the assets in question.

Actuaries

Actuaries are key advisors to pension plan trustees and are frequently consulted by health and welfare plan administrators—particularly when there is a group risk arrangement in areas such as life insurance and long-term disability.

Pension plan administrators usually seek the advice of an actuary when determining plan design, funding, and efficient reporting and administration. Pension legislation recognizes this role by requiring plans to file reports prepared by an actuary in compliance with professional standards. Such reports for defined benefit and target plans typically include triennial actuarial valuations, the calculation of commuted values for purposes of portability, marriage breakdown, pre- and postretirement death benefits, intervaluation cost certificates and various reports on plan wind-up. In the case of multi-employer pension plans, it can be argued the actuary is more important because actuarial input is key to ensuring the “pension promise” is kept.

Selection

At present, there are several large actuarial consulting firms in Canada—Many are subsidiaries of global firms. There are many other smaller and medium-sized firms providing actuarial services. Insurance providers, regulators and other industry stakeholders also employ actuaries.

When choosing an actuary, it is important to check that the individual is a member of the self-regulating Canadian Institute of Actuaries (CIA). Beyond this basic requirement, trustees should also consider:

  • What services will the actuary provide the plan?
  • What is the capability of the actuary and actuarial firm?
  • What experience does the actuary and the firm have in serving similar funds?
  • What is the reputation of the actuary and the firm?
  • Does the firm have the resources to provide the services needed by the plan?
  • Is there adequate professional insurance? Is the actuarial firm seeking to limit its liability in cases of errors or negligence?
  • Is the actuary or firm willing to acknowledge a fiduciary standard of care?
  • What are the fees? Are they competitive?
Engagement and Conduct

Actuaries are typically engaged using long-term service agreements. These contracts set out the scope of the services to be provided—usually dividing services between standard or included services and special or project-based services. Common agreement terms include fee schedules, a description of basic and extra services, the roles and responsibilities of the trustees and actuary, warranties and representations, and limits on liability, if any.

The standard of conduct for actuaries—particularly those advising pension funds—has been the subject of some debate. The issue is the distinction between advisors and agents discussed previously. The functions of the actuary are integral to pension funds, but many actuarial firms take the position that they are only advisors, not agents of the trustees, despite numerous court decisions to the contrary.

This is not to suggest actuaries are not subject to codes of conduct. The CIA—the professional regulatory body governing actuaries—is charged with ensuring members have the appropriate level of education, skill and expertise. To be recognized and practice as a member of the CIA, an actuary must comply with the organization’s qualification criteria and rules of professional conduct. CIA rules require actuaries to perform their duties with “integrity, skill and care” and prohibit these professionals from accepting work when they have a conflict of interest.

The role of the CIA has been formally recognized in pension benefits legislation that defines actuary in reference to the CIA.15 That CIA guidelines and rules of professional conduct are a primary source of the standards to be met by actuarial advisors has been recognized by Canadian courts:

“the rules set by the relevant professional body are of guiding importance in determining the nature of the duties flowing from a particular professional relationship. [I]t would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself.” 16

Courts typically hold actuaries who are providing advice to a high standard. An Ontario court has held that an actuary advising a client is an agent (but not, it seems, the firm employing the actuary).17 A British Columbia court has held actuaries responsible for all losses incurred by the trustees of a pension plan where the actuaries made an error in the valuation of the plan on which the trustees relied.18

In a 2021 decision, the New Brunswick Court of Appeal found that actuaries are agents under the applicable pension legislation. The court further upheld a tribunal finding in New Brunswick that the actuary and his firm were in a conflict of interest in a situation where they were advising both the employer (the city of Fredericton) and the pension plan board responsible for the plan, in a manner contrary to the interest of the pension plan board and its beneficiaries. The board had retained the services of the actuary.19,20

There is still, however, no consistent treatment of the duties and standard of care of actuaries across Canada, although most court decisions are leaning toward a fiduciary standard. As a result, trustees must carefully review the terms of engagement with an actuary to ensure they understand whether the actuary acknowledges an agency and fiduciary relationship or, in some manner, seeks to limit liability.

The limitation of liability provisions is also a matter of great concern in contracts with actuarial advisors. Often, actuaries seek to limit their liability for negligence to small amounts, such as one or two years of fees, while the nature of the error that they can make may be much more substantial. Given the size of potential losses for actuarial negligence and errors, trustees should avoid limitation of liability clauses with actuaries or at least ensure that the actuarial consulting firm and the actuary have sufficient errors and omissions insurance to cover any sizable loss.

Legal Counsel

Trustees engage legal counsel in a variety of circumstances. Legal counsel has two basic roles: solicitors and litigators. Among other services, solicitors typically provide advice to trustees on regulatory compliance, employment and service provider contracts, tax matters, corporate governance, and the drafting of various documents and policies. It is common for legal counsel to attend trustee meetings and provide ongoing advice regarding matters before the trustees. Litigators prosecute or defend claims on behalf of plans and plan trustees, or deal with litigation before courts or regulatory tribunals.

Selection

A diversity of firms provide legal counsel to benefit plans in Canada. These firms vary by region, industry segment and client group. Plans sometimes engage more than one firm, depending on the services required. Legal counsel must be qualified to practice in the appropriate jurisdiction. In other words, they must (1) be a member of a provincial law society in good standing and (2) if working outside their home jurisdiction, comply with the rules of the applicable law society. In selecting counsel, trustees should also consider the following criteria:

  • What is the lawyer and legal firm’s depth of experience with trusts and benefit plans?
  • Do the lawyer and firm have experience with similar funds?
  • What is the reputation of the firm and lawyer?
  • Does the counsel have sufficient professional liability insurance?
  • Does the firm have the required resources, and is it large enough to provide the depth of services needed by the plan?
  • What are the fees, and are they competitive?

Like investment advisors and actuaries, legal counsel should be engaged through a formal bidding process.

Retainers and Conduct

Rules of practice require legal counsel to meet certain “know your client” standards and have a retainer agreement with clients that sets out the terms and conditions of engagement. Agreements vary but typically contain terms governing fees, the scope of services, the identity of the person who provides directions on behalf of the client, and the scope of work or litigation.

Because of the nature of their work, courts have long recognized that lawyers owe their clients a fiduciary duty and standard of care. In addition to this standard of conduct, lawyers must meet professional rules of conduct, which govern matters such as handling conflicts or potential conflicts of interest, confidentiality, responsibilities to courts, and administration of justice and conduct toward clients and other lawyers. Like other professionals, lawyers are self-regulated professionals governed by bodies such as the Law Society of Ontario or other similar provincial law societies or regulatory bodies. Law societies set rules of professional conduct and are responsible for enforcing disciplinary matters against lawyers.

There is one issue common to the contracting and conduct of both lawyers and actuaries—the identity of the client. Trustees typically engage lawyers and actuaries in their capacity as plan trustees or administrators. However, the same legal counsel or actuarial firm may also be engaged to provide advice to a contributing employer or union stakeholder in the plan. While not necessarily legal conflicts of interest, such situations should be carefully monitored by counsel in the event of any potential conflicts arising.  If an actual conflict arises, it must be disclosed. Where appropriate, counsel may have to recuse themselves if there is a conflict. 

Accountants and Auditors

Accountants play a more limited role in the administration of employee benefit plans, but they play an important role in reporting to trustees, plan members, employers, shareholders and regulatory authorities. Auditors conduct the annual review of a fund’s financial statements and provide a report on financial controls. Financial statements are a primary source of information concerning plan funding and are often required by law.

Traditional trust law entitles trust beneficiaries to an accounting of how trust fund property is administered. When the terms of a trust require audited financial statements or otherwise require the services of an auditor, trustees are obligated to engage one.

In addition, both pension and labour relations regulations require benefit funds to file audited financial statements. Section 76 of the regulations under Ontario’s Pension Benefits Act requires any trust fund with $10 million or more in assets to annually file an auditor’s report on the fund’s financial statements. This report must be prepared by an accountant licensed under the Public Accounting Act and must be filed within six months of the fiscal year-end. The regulations provide a detailed checklist with which the audit report must comply.

Labour relations legislation typically requires funds maintained by unions to file audited financial statements and make them available to union members. For example, the Labour Relations Act (Ontario)21 requires the administrator of any vacation pay fund, welfare fund or pension fund for members of a trade union to file an annual audited financial statement with the Minister of Labour.

Finally, auditors typically handle applicable tax return filings with the Canada Revenue Agency for benefit trusts, including tax returns for ELHTs and other benefit trusts that are not pension plans. They also often advise pension plans and other plans with respect to necessary tax filings or the issuing of tax reporting forms to plan members.

Selection

Presently, there are four very large global accounting and consulting firms with Canadian operations, and a larger number of small and medium-sized accounting firms across Canada. Accountants and their firms are typically engaged through a formal bidding process.

When selecting these service providers, trustees should consider:

  • Does the accountant have the required professional designations?
  • What depth of experience does the accountant and the accounting firm have with trusts and benefit plans?
  • Does the firm have sufficient professional liability insurance? Are there any limitations on such liability?
  • Does the accounting firm have the resources to provide the services needed by the plan?
  • What are the fees, and are they competitive?
Engagement and Conduct

The employment of an accountant is typically through an “engagement letter” to which standard service terms are appended. The agreements of the “big four” global accounting firms are much the same including the scope of the audit, the roles and responsibilities of plan trustees (often termed management) and the auditor, and a description of the final audit report content. Other terms include a fee schedule, privacy and confidentiality terms, and limits on liability.

Much like the standards of actuarial practice, the rules established by the professional bodies for accountants are expressly approved and adopted by legislation. The self-governance of accountants is enabled by legislation in each province, which permits professional organizations such as the Chartered Professional Accountants of Canada (CPA Canada) to set standards, license and discipline members. For example, Subsection 76(8) of the regulations under the Ontario Pension Benefits Act requires the performance of pension fund audits according to the principles and standards set out in the Handbook of the CPA Canada, sometimes known as the CPA Handbook.

Subsection 76(15) of the regulations under Ontario’s Act requires an accountant to report to the plan administrator any irregularity that may indicate a violation of the audit requirements set out in the regulation. If the irregularity is significant and not corrected within 30 days of when first reported, the auditor has an obligation to notify the regulator.

As stated earlier, trust beneficiaries may compel a trustee to provide an accounting of the trust property. Hence, trustees are advised to maintain accurate and detailed financial statements and, where justified (e.g., when a trust is large or complex), to have financial statements audited on a regular basis.

Like other advisors, accountants may take the position that they are not agents, but the case law pertaining to other professionals does indicate otherwise in most cases. Further, accountants recognize that third parties rely on the financial statements they have audited.

Trustees must carefully review the terms of engaging an accountant to ensure they understand the roles and responsibilities specified and that the accountant acknowledges the appropriate standard of care or seeks to limit liability.

Benefit Consultants and Third-Party Administrators

Benefit consultants are industry professionals with diverse competencies, depending on the industry they serve. They may be group insurance consultants, third-party administrative service consultants, multi-employer plan consultants or another type of consultant. What they have in common is their role of advising plan trustees on a specific project or administrative task. Tasks for which benefit consultants are often employed include establishing a new plan or reviewing an existing plan, searching for advisors, and evaluating the performance of a plan or plan advisors. Consultants also often advise on various administrative procedures, processes and technology-related issues. As fund administration moves from a paper-based to a digital model, this has become an increasing area of concern. Benefit consultants may work with large firms, such as large actuarial or human resources firms, or be independent.

Selection

Benefit consultants are engaged in a variety of ways and increasingly through formal bidding processes. Unlike the other professionals discussed, benefit consultants are not required to maintain any professional designations—although many do have professional qualifications and designations.

In selecting consultants, trustees should consider:

  • What is the consultant’s experience in the field for which the consultant is being engaged?
  • Does the consultant understand the specific project or activity for which the consultant is being employed?
  • Does the consultant have the ability to communicate clearly and concisely?
  • What depth of support or resources does the consultant bring to the endeavor?
  • What references does the consultant have?
  • What is the reputation of the consultant among previous clients?
  • Does the consultant have knowledge of the benefit marketplace?
  • If applicable, does the consultant have the leverage/ability to negotiate with service providers on behalf of the plan?
  • What is the cost of service?
  • Is the consultant willing to be held accountable for results?
  • Are the fees reasonable?
  • Does the consultant have adequate errors and omissions insurance?
Engagement and Conduct of a Benefit Consultant

Consultants are typically engaged using a project-based service agreement. These agreements set out the scope of the project or services to be provided, associated timelines, milestones, deliverables and a fee schedule. In addition, there are standard contractual terms, including representations and warranties, standards of conduct, professional liability insurance (where applicable) and conditions for termination of the contract.

There is no statutory recognition of a “benefit plan consultant.” Under pension legislation, these consultants are likely considered agents of plan trustees or, depending on the terms of engagement and surrounding facts, fiduciaries. In the United States, benefit consultants have been found liable and in breach of fiduciary obligations where they advised trustees to enter into prohibited lease transactions. Liability was also found in a case where trustees had relied heavily upon the consultant to answer any and all questions regarding plan administration and management.22

Many benefit consultants also provide third-party administrative services to trustees, particularly for smaller plans, who lack the internal administrative infrastructure to administer their own plans. In many cases, a third-party administrator (TPA) represents the face of the plan to the members, as they are the frontline contact between the member and the plan. They also interact directly with the trustees. Accordingly, trustees of such plans must exercise particular diligence in the engagement and oversight of TPAs who also act as consultants.

Trustees should refer to duties generally covered by such third-party agreements. From a fiduciary point of view, trustees must protect themselves by contractual provisions to ensure adequate oversight of TPAs and be able to take appropriate action in the event of issues. If it is necessary to change administrators, the trustees must protect their assets and data and ensure that any data held by a TPA belongs to the trustees. In addition, other concerns with respect to limitations of liability, termination provisions and other standard contractual provisions outlined above apply to any contract with a TPA.

Custodians or Bare Trustees

Custodial services are provided by large financial institutions—usually banks. Custodians are not advisors in the same sense that actuaries, accountants, lawyers and benefit consultants are advisors. Custodians are generally used as service providers—They do not provide trustees with advice. The engagement of custodians and the terms governing their conduct, however, deserve a brief discussion here as they have similarities to advisors and perform a crucial function for many plans.

A custodian’s role is to:

  • Hold a fund’s financial assets (e.g., fund stock, bonds and other securities)
  • Execute any instructions of investment consultants or managers
  • Provide a regular accounting of the value of these assets
  • Furnish basic transactional services such as repatriating profits, remitting taxes and maintaining the account for cash flows in and out of the fund.

    • Since they hold trust fund assets for beneficiaries, custodians are considered trustees. They are often referred to as bare trustees because they hold fund assets and conduct certain transactions for the fund, but they are not generally empowered to provide advice or make decisions.

    Selection

    There are four or five financial institutions in Canada willing to act as custodians of benefit funds. There are more banks in the United States. Large funds usually require a custodian with international capacity and affiliates. Small and medium-sized funds may only require a Canadian-based custodian. Custodians are typically engaged through a competitive bidding process.

    Engagement

    Custodians are engaged through a custodial trust agreement. Because of the limited number of custodians and the standard suite of services provided, these agreements have become highly standardized over time. The agreements contain many terms typically seen in other trust agreements, including the role and responsibilities of the custodian, the powers and duties of the custodian, the fee schedule, the list of services provided and termination provisions. Trustees should regularly review their custodial arrangements to satisfy themselves that the terms are appropriate.

    Three standard terms bear further discussion. The first is the fee schedule. Fees for the suite of custodial services provided can be significant. For example, in large funds, fees paid on foreign exchange transactions may be millions of dollars or more per year. Litigation in the United States has alleged misconduct by custodians that were charging higher prices to clients than the actual cost of the foreign exchange transactions.23

    Many custodial agreements have been in place for lengthy periods. In these older agreements, fee schedules were often brief and did not specify service fees. Some agreements contained terms stating “all other services” would be subject to fees as disclosed by the custodian from time to time. Over time, both the services provided and the fees changed. As a matter of prudent governance, custodial agreement terms should be reviewed periodically to ensure they are consistent with current industry standards.

    Another issue is that of reducing taxation in other jurisdictions or obtaining tax refunds where possible.

    Additionally, there are limits on liability that custodians typically seek. Trust law permits a trust to limit the liability of trustees for trustee negligence. A trustee, however, may not excuse intentional wrongful conduct. Despite this restriction, most custodial trust agreements seek to include broad limits on liability. Some of these limits are reasonable; for example, a custodian is normally not liable for the poor performance of an investment. Arguably, however, a custodian should be liable for the failure to make a transaction in a timely manner when proper instructions were delivered and for other acts that were within their mandate and competence. Blanket liability limits and indemnities in custodial agreements should be avoided as much as possible. In recent years, the internationalization of the custodial trustee business has spurred custodians to introduce clauses that are more complex, which leads to a discussion of another set of terms now common in custodial engagement agreements. Many of these terms are not common in other trust agreements and seem to stretch the limit of trust law. For example, it is now common to find terms in agreements that acknowledge the custodial trustee has many different client groups and that this may result unintentionally in transactions that conflict with the interests of the benefit plan and plan trustees. The duty not to conflict is a core duty placed upon a trustee. Clauses excusing such behavior should be regarded with suspicion.24

    Other ancillary matters, such as securities lending arrangements and foreign tax refund services, are often provided by custodial trustees. Where these types of arrangements are entered into, they are often covered by separate agreements that should be scrutinized by fund legal counsel and the trustees in the same manner as custodial agreements and other service agreements.

    *Author's Note: Trustees are only one of several persons and entities permitted by pension legislation to be pension plan administrators. For convenience, such  administrators are referred to generally in this chapter as trustees. Where there are differences between trustees, administrators and others, it is noted.

    Additional information: This article was originally authored by: Simon Archer and Susan Philpott.

    Endnotes

    1. R.S.O. 1990, C. p. 8.
    2. Ontario Pension Benefits Act, s. 22(5).
    3. Ibid., s. 22(7).
    4. Hodgkinson v. Simms (1994), 117 D.L.R. (4th) 161 (S.C.C.) [Hodgkinson].
    5. Ibid., p. 184.
    6. Ibid., p. 188.
    7. Pension Benefits Standards Regulation, R.B.C. 1993, Reg. 443/93, amended as Reg. 337/94, s. 38(3); General Regulations; Pension Benefits Act, R.N.B. 1991, Reg. 91-195, as amended by N.B. Reg. 93-144 and N.B. Reg. 94-78; Pension Benefits Standards Regulations, R.R.C. 1985, SOR/87-19, as amended; Employment Pension Plans Regulation, Alta Reg. 35/2000, s. 51(1); Pension Benefits Regulation, Man Reg. 39/2010, s. 3.23(1); Supplemental Pension Plans Act, RSQ cR-15.1, s. 169, 170; Pension Benefits Regulations, NS Reg. 164/2002, Schedule I (3); Pension Benefits Act Regulations, NLR 114/96, s. 39(6). SIP&Ps must include certain information required by legislation, including objectives of the investment policy, the relationship to the requirements of the plan, the permitted categories of investment, minimum quantitative and qualitative criteria for investments, certain prohibited investments and criteria for the evaluation of investments, among other requirements.
    8. For example, some of the largest pension funds have developed internal investment groups for nontraditional asset categories such as infrastructure and private equity.
    9. William Morneau, Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions: A Report from the Pension Investment Advisor to the Deputy Premier and Minister of Finance (October, 2012) at www.fin.gov.on.ca/en/consultations/pension/recommendations-report.html.
    10. Canadian Association of Pension Supervisory Authorities, Guideline No. 6: Pension Plan Prudent Investment Practices Guideline (November 15, 2011) at www.capsa-acor.org/en/init/prudence/Pension_Plan_Prudent_Investment_Practices_Guideline.pdf.
    11. Eugene Burroughs, Trustees and Their Professional Advisors (Brookfield, Wisconsin: International Foundation of Employee Benefit Plans, 1996).
    12. See, for example, the Securities Act, R.S.O. 1990, c. 5, Part VIII.
    13. R. v. Blair (1993), 106 D.L.R. (4th) 1 at p. 64 (Ont. Prov. Ct.), rev’d on appeal (1995), 9 C.C.P.B. 1 (G.D.).
    14. See Varcoe v. Sterling (1992), 7 O.R. (3d) 204 (G.D.) p. 234 as quoted in supra note 6, Hodgkinson.
    15. See, for example, Regulation to the Ontario Act, S.1, which defines actuary as “a Fellow of the Canadian Institute of Actuaries.”
    16. Wynne v. William M. Mercer Ltd. (1993), 1 C.C.P.B. 301 (B.C.S.C.) aff ’d (1995), 11 C.C.P.B. 1 (B.C.C.A.). See also Morneau Sobeco Ltd. Partnership v. Aon Consulting Inc. (2008), 65 CCPB 293 (Ont. CA) [Morneau]; and McLaughlin v. Falconbridge Ltd. (1999), 21 C.C.P.B. 133 (O.S.C.J.), leave to appeal denied (unreported decision of MacFarland J., September 13, 1999).
    17. R. v. Norton (2006), O.J. No. 2631 [Norton].
    18. Supra note 20, Norton and Supra note 19, Morneau. See also Dawson v. Tolko Industries Ltd. (2010), B.C.S.C. 346, para. 15.
    19. Labour Relations Act, 1995, S.O. 1995, c. 1, s. 93.
    20. Brock v. Self (1986), 632 F.Supp. 1509 (U.S.D.C.L.A.).
    21. City of Fredericton v. Fredericton Police Association, et al., 2021 NBCA 30 (CanLii), at paras. 153-169.
    22. Ibid, at paras. 168 & 169.
    23. See Arkansas Teacher Retirement System v. State Street Corporation et al., Court File No 11-CV-10230 (MLW) (U.S.D.C.) and People of the State of    California ex rel Brown v. State Street Corp. Case No.34-2008-0008457-CA-MC-GDS (Cal. Sup. Ct., October 20, 2009).
    24. In fact, these duties grew out of the classic trust in which one person administers property on behalf of and for the benefit of another. Custodians and investment managers have this very relationship.

    Mark Zigler is a senior partner in the Pensions and Benefits Group at Koskie Minsky LLP and has over 40 years of experience.