It is conceivable that the federal Conservatives will unveil a sweeping reform of the Canada Pension Plan – just as it's conceivable you will see a unicorn on your way to work.
Finance Minister Joe Oliver's pledge on Tuesday to consult Canadians about a voluntary, expanded CPP constituted a precisely choreographed exercise in deliberate obscurity. His cloudy promise – consult whom? on what exactly? – was what you might expect of a party that wants to pay just enough attention to the idea to prevent the opposition from running away with it before the next election.
That's smart politics, because the allure of the notion is tough to deny. Canadians who want to save for their own retirement must now navigate a bewildering labyrinth of financial planners, banks and other service providers. Many customers wind up paying unnecessarily high fees for mediocre service. Many also sabotage themselves by rushing from one hot investment to another.
Replace that clumsy, expensive system with a simple alternative that would allow any Canadian to easily contribute additional money to CPP in exchange for enhanced benefits, and Canada's retirement system would take a giant leap forward in efficiency.
The problem, though, is who would suffer. Banks and financial planners would feel the bite as billions and billions of dollars every year streamed into an expanded CPP without generating fees for this country's usual wealth managers.
At the risk of sounding cynical, it's tough to imagine any political party facing down the unified opposition of Canada's financial services industry. Any proposal for substantial reform is likely to be met with a storm of resistance from both small town financial planners and the CEOs of the Big Five banks.
There is some good news here, though. Even if Ottawa doesn't move an inch on CPP expansion, you can bolt together your own alternative that goes a considerable way to achieving the same goals.
Institutional investors like the CPP Investment Board benefit from three key advantages – they stick to a well thought out asset allocation rather than chasing whatever happens to be popular, they diversify widely and they pay far less in fees than most mutual fund investors do. You can replicate all three of those features in your own portfolio.
Begin with asset allocation: A blend of 60 per cent stocks and 40 per cent fixed-income investments (bonds, GICs and cash) is a good starting point for most people. It offers a balance between the growth potential of stocks and the relative security of less profitable but more stable alternatives.
Diversification is next. It pays to hold a wide variety of sectors, in many different countries, so no single disaster can blow a hole in your portfolio.
One simple way to achieve this is by investing in exchange-traded funds (ETFs) that track broad market indexes. Choose your funds from low-cost providers such as Vanguard or iShares, and you also accomplish your final goal of investing on the cheap.
A simple portfolio composed of 40 per cent Canadian bonds and 60 per cent stocks (divided evenly between Canadian, U.S. and non-North American markets), can wind up costing you less than 0.25 per cent a year of your assets.
How would this mix perform? While history is a poor guide to future returns, a blend of iShares ETFs constructed on the outlines above would have produced a 6.1 per cent annual average return over the past decade.
That's not quite up to the standards achieved by the CPP Investment Board, which achieved an 8 per cent annualized return over that period, but it's not bad at all, especially when you compare it to alternatives.
Dalbar, a financial research firm in Boston, estimates that investors typically earn only about 3.8 per cent a year on their portfolios. The culprits are both high fees and people's habit of chasing performance by leaping into red hot sectors just as they cool.
This homemade alternative avoids both those dangers. It isn't quite as easy to employ as an enhanced CPP would be, but then again it enjoys the considerable advantage of not requiring a politician's approval.