The federal government is on its way to eliminating half the agony of saving for retirement.
Sorry, finding money to save for retirement remains strictly your problem. But choosing the right investments for your retirement savings would be radically simplified under the government's proposal to allow people to voluntarily contribute additional money to the Canada Pension Plan beyond the required amounts.
Baffled by the choice of mutual funds, exchange-traded funds, closed-end funds, hedge funds, structured products, term deposits and individual stocks and bonds? Put some extra money into the CPP instead.
"If someone is looking for a place to invest their money and they're not sophisticated enough to be putting money into low-cost ETFs, for example, this would make sense for them," said Fred Vettese, chief actuary at the benefits consulting firm Morneau Shepell.
Mr. Vettese said voluntary extra payments would especially look good in comparison to investing in mainstream mutual funds, where the cost of ownership can run between 2 and 3 per cent. "My estimate would be that over a lifetime, the additional pension that people would be able to earn [through the voluntary CPP option] would be an extra 25 to 30 per cent on the same level of contributions."
Finance Minister Joe Oliver said the government will consult over the summer on how to go ahead with the new CPP option. The measure would also be contingent on the Conservatives winning the federal election coming this fall. Keeping extra CPP contributions voluntary should grease the way for wide acceptance, even though there's a strong case for automatically enrolling people to contribute more to the CPP and letting them opt out if they insist. Left to save for retirement on their own, some people never get around to it.
Still, a voluntary program would be a big win for investors because they'd have the $265-billion CPP Investment Board managing their money. The board just announced its best fiscal year ever – a gain of 18.3 per cent. The 10-year annualized return after inflation was 6.2 per cent, which compares to the 4 per cent return that is required to keep the plan sustainable.
Mr. Vettese noted that the CPPIB isn't a notably cheap option in terms of fees. He pegged these costs at about 0.9 per cent to 1 per cent, which compares to less than 0.1 per cent for the cheapest ETFs. But the CPPIB has some advantages over ETFs in that it invests in areas that are tough for small investors to access, including infrastructure like bridges and private equity (companies not listed on stock exchanges). These types of investments can be more aggressive and risky than a basic stocks-and-bonds portfolio, but they're a staple for pension funds seeking a higher level of diversification to meet their funding obligations over the long term
Details on how the voluntary extra CPP payments would work are scarce right now, but Mr. Vettese said his impression is that they would function like a defined contribution pension plan. That's where you invest your money and the amount of your retirement benefits is determined by how well your account performs.
The CPP in its current form is more like a defined benefit plan, where you receive benefits for life that are set according to how long you contributed to the plan and how much salary you made.
In no way does putting extra money in the CPP guarantee you the best possible retirement savings outcome. If you invest for yourself or through an adviser, then there's certainly a chance of ending up with more money. But for many people, this is potential that will never be realized because of procrastination or bad investing results. While stock and bond markets have produced excellent returns over the decades, investors too often buy high and sell low.
And then there's the paralysis issue – the ever-expanding choice of investment products is confusing not only for individual investors, but advisers as well. Ironically, almost nothing new in the investment realm is worthy of your attention. All the necessary stuff for retirement investing has already been invented, including the CPP.