Shawn Patton pointed me to recently published PRPP regulations. Here are the sections on permitted inducements and low cost requirements:
PERMITTED INDUCEMENTSSuppose that the costs incurred by defined contribution plans to groups of 500 or more members is 1.5% of participant assets each year, but that a PRPP could be run profitably at 1% per year. Suppose further that a PRPP administrator sets its “standard” costs at 1.5%, but then offers a special deal to all potential employers: we’ll kick back 0.25% to the employer and reduce the employees’ costs by 0.25%. This seems to meet the conditions in the regulations, but diverts half the cost reductions to employers rather than having plan members enjoy the full savings.
19. An administrator may give, offer or agree to give or offer to an employer and an employer may demand, accept or offer or agree to accept from an administrator, as an inducement to enter into a contract with the administrator in respect of a PRPP
(a) a product or a service on more favourable terms or conditions than the administrator would otherwise offer if the inducement is for the equal benefit of the employees of that employer who are eligible to be members of the PRPP; or
(b) in relation to a transfer of assets into the PRPP administered by the administrator, an amount no greater than the employer’s costs associated with the transfer of assets into that PRPP.
LOW COST PLAN
20. The following criteria shall be used to determine whether a PRPP is being provided to its members at low cost:
(a) that costs are to be at or below those incurred by members of defined contribution plans that provide investment options to groups of 500 or more members; and
(b) that costs are to be the same for all members of a PRPP.
It’s not clear that the savings even need to be split. If the “standard” costs are set at 2%, could the PRPP administrator offer 0.5% to the employer and a 0.5% discount to employees? The actual costs to the employees would then be 1.5% per year even though the never-used standard cost level is set at 2%.
Note that if a low-cost PRPP administrator offered a competing plan at a cost of 0.75% per year, this would be the best deal for employees, but employers would have a strong incentive to choose a PRPP that offers a kickback.
Potential objections to this kickback scheme:
1. PRPP administrators and employers would never do such a thing.
2. What’s the big deal if a measly 0.5% goes to employers?
That 0.5% compounds year after year. Over the course of 40 years of saving, 0.5% per year drag would reduce total plan member savings by about 9%.
3. PRPP Administrators and employers couldn’t get away with this for legal or other reasons.
I want this to be true. Please explain why they can’t get away with this.