After more than two years since the concept of a Pooled Registered Pension Plan was initially raised we still don't know the final details. Other than it isn't actually a pension plan at all. But The Department of Finance did state on its website that one benefit will be lower costs. And that is an issue worth dissecting.
There's a can of worms at risk of being opened depending on how this lower cost manifests.
If the government stipulates a threshold below the costs of mutual funds with similar investment mandates, many would believe they would be signalling that mutual funds cost too much. But note that the majority of mutual funds in Canada include the cost of financial advice, not just professional management of an investment portfolio.
So, will financial planning advice take a hit? Presumably, a number of people who enroll, or rather choose not to opt out of being automatically enrolled, will assume their personal finances are now being taken care of. Many people still equate investment management with comprehensive financial planning.
Beyond that, what constitutes low cost? Isn't that the promise of mutual funds today? Picking a random mutual fund prospectus and looking at the definition of mutual fund yields the following:
“A mutual fund is an investment structure that enables investors to pool their money with other investors, and to have the pool professionally managed. Each investor in the pool (mutual fund) generally shares in its investment gains and losses, expenses, and tax liabilities in proportion to their interest in the pool.”
For the benefit of the doubt let's take a typical F-Class equity mutual fund (stripped of the cost of advice) and start there. We might be looking at 1 per cent for an investment vehicle already designed for pooling and therefore, benefiting from bulk investment buying.
If we look at a true pension plan we see much cheaper costs. The B.C. Government And Service Employees' Union has maintained an MER between 0.55-0.70 per cent for over 10 years. The total expense ratio of a larger pension plan is estimated as being closer to 0.40 per cent. The Canada Pension Plan is right around that mark but manages about a fifth of the assets (roughly $150-billion) compared to those invested in mutual funds (roughly $750-billion). Granted, there are many different fund manufacturers so costs aren't shared across all $750-billion, but the gap is large.
DIY index investors can create a globally diversified portfolio on their own for as little as 0.15 per cent (plus trading commissions) such as The Canadian Couch Potato's Cheapskate Couch Potato Portfolio.
There are a lot of people interested to see what the proposed costs of a PRPP would be, and I'm sure the wording is being crafted carefully. Will it have teeth? Or will it just be a glorified group RRSP?