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retirement and rrsps

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Canadians are one step closer to having the option of saving for retirement through a pooled registered pension plan (PRPP). But after nearly five years in the making, just how successful will the new program be?

PRPPs were conceived by the federal government in 2010 to provide employees of companies that do not currently offer retirement savings programs, as well as self-employed Canadians, access to a workplace pension plan. In total, that's an estimated potential of 3.5 million people.

The theory is that with many potential subscribers, retirement savings for these workers would achieve the same economies of scale enjoyed by pension plans found in large companies.

While the framework for this optional savings program was approved by Ottawa in 2012, it wasn't until last week that the first five PRPP providers completed the licensing process with the Office of the Superintendent of Financial Institutions (OFSI) and the Canada Revenue Agency (CRA).

But as far as I can see, there are few advantages to self-employed Canadians opening a PRPP. The various types of accounts and service providers already out there, such as self-directed registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), provide them with more options and flexibility.

For those working for a small business, many group RRSPs can be opened with as little as three members. Not much new for this group either.

After searching on various government websites, the only discernible difference between group RRSPs and PRPPs is that PRPP contributions by the employer do not count as taxable income to the employee. That means the employer contributions wouldn't be subject to Canada Pension Plan (CPP) or Employment Insurance premiums.

While the websites state repeatedly that "there are many differences between a group RRSP and a PRPP," I don't see any others. And I'm not sure that alone is enough to motivate an employer to set up a retirement savings plan if they have previously decided not to have one.

So that leaves the promise of low costs as the last potential differentiator.

The regulations provided the following guidelines with respect to costs for PRPPs:

  • 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
  • Costs are to be the same for all members of a PRPP

A 2009 study by Deloitte for the Investment Company Institute looked at defined contribution plans in the United States. The median account balance for members of all size plans was $48,522. Multiply that by 500 members and you're looking at total assets of just under $25-million. The study defined "mid-sized" plans as those with assets between $10-million and $100-million. In the United States, plans in this tier had all-in fees of 0.78 per cent.

Great-West Life published a report in 2012 using plan size definitions from the Deloitte study. It suggests that a mid-size defined contribution plan in Canada would have costs of approximately 0.90 per cent. Therefore, 0.90 per cent becomes a reasonably good proxy for what would meet the PRPP regulatory requirements of being low cost.

I'm sure the first push-back would be recognition that a brand-new 500-member plan would take a few years to reach even the lower threshold of $10-million, which defines a mid-size plan. That might give OFSI, which is in charge of supervising the plans, a few years before they start feeling any serious pressure to enforce the cost mandate.

But does 0.90 per cent even qualify as low cost in today's individual retail environment, without the use of a financial adviser? That seems a bit of a stretch when discount brokerages offer commission-free ETF purchases that new investors can set up for half that cost.

Som Seif, president and chief executive officer of Purpose Investments, made a name for himself in the industry by steering billions of dollars into Claymore Investments. He's no stranger to product costs.

"I would hope that a broad-based program can be run for 0.60 per cent or less. Over time, this could be even lower as the program is adopted and benefits of scale are realized," Mr. Seif says.

With lower-cost options already available to individuals without the need for scale, and an apparent lack of distinguishing features over existing solutions, it's hard to see PRPPs making a dent into its target market.

Preet Banerjee, a personal finance expert, is the author of the book, Stop Over-Thinking Your Money!