Question e-mailed in by Globe reader: How can I tell if my company’s group RRSP is any good?
Answer from Benjamin Felix, an associate portfolio manager with PWL Capital in Ottawa:
Few people have a private pension these days. If anything, you are far more likely to have a group RRSP than a defined contribution or defined benefit pension plan. This is mostly because group RRSPs are easier to administer and less complex for the employer, while also being more flexible for the employee.
A group RRSP is like a regular RRSP. You can use the Home Buyers’ Plan, for example, which is something that you can’t do with a defined contribution pension plan. The biggest difference between a group RRSP and a regular RRSP is that your employer is able to make contributions directly from payroll into your account.
A group RRSP can be a helpful tool, but there are a few things to be aware of when you’re considering enrolling in your company’s plan.
A Group RRSP will often, but not always, come with a matching contribution from the employer. An example might be 3 per cent of your salary; you contribute 3 per cent and your employer will match that contribution with their own contribution. If your group RRSP contributions are matched by your employer, there aren’t many good arguments against making at least enough contributions to maximize the match. Not doing so is leaving money on the table.
One of the selling points of a group RRSP is that the annual fees on the funds in the plan are relatively low. This is true, but it doesn’t tell the whole story. You might be able to buy an actively managed fund inside of your group RRSP for say, 1.80 per cent, while outside of the plan you would pay 2.20 per cent for the same fund. The cost savings come from scale – many group members pooling their money together. There is a relative fee savings there but 1.80 per cent is still expensive. On the other hand, index funds inside of group plans tend to have relatively high fees compared with what you could get outside of the plan. You might pay 0.50 per cent for an index fund in a group RRSP while an exchange-traded fund tracking the same index might only cost 0.10 per cent.
The reason for higher fees on index funds within group RRSPs is that the costs of the plan are covered by the investment management fees (IMF) built into the plan. All of the administration, customer service and fund management costs are funded through the IMF. (It’s easier to hide an IMF in a 1.8-per-cent active fund than in a low cost index fund.) The larger the plan is, the lower the IMF should be. If your company just launched a new group RRSP, it may well have relatively high fees for some time. This doesn’t mean you shouldn’t participate, especially if there is a matching contribution from your employer, but it is a consideration.
Group RRSP investment options will vary from employer to employer even if the plans are administered by the same financial institution. Part of setting up the plan is selecting the investments. The people involved with making those selections are often not investment professionals; investment options will often be selected by a group benefits representative who may not have portfolio management expertise, along with someone from the company. If your options seem limited or unappealing it might be worth bringing it up with your employer.
In most cases you will find a mix of actively managed asset class funds such as Canadian or U.S. equity mutual funds and target-date funds, which are structured to become more conservative the closer you get to retirement, and in some cases you will find index funds. Similar to investing outside of a group RRSP, your best bet is tracking down index fund options and using them to build a portfolio that matches your risk profile. Ideally, your group RRSP portfolio’s asset allocation will be similar to your other investments. The group RRSP platform should allow you to select a mix of investments that will be automatically rebalanced to your target allocations. This gives you the flexibility to get as close as you can to your ideal portfolio using the investment options available.
Making the best of a bad plan
In a lot of cases, group RRSPs will not have the investment options available to build a diversified portfolio of low-cost index funds. This can be frustrating, but there is a simple workaround. If you are receiving matching contributions throughout the year, you can wait until they have been fully captured, and then transfer your group RRSP to another institution with more investment options. The main things to look out for here are transfer-out fees and disincentives.
In some cases a group plan provider will charge a fee to transfer your account. If you have contributed $6,000 in total during the year, and it is going to cost $100 to transfer the asset, that is a cost of 1.67 per cent. If you are transferring from a group plan with investments charging 1.8 per cent annually into ETFs charging only 0.10 per cent then the advantage of paying the one-time cost can be obvious. If the transfer fees are higher, then it might make sense to transfer once every couple of years.
Some group plans will put in place some disincentive for transferring. An example would be a one-year pause on matching contributions once a transfer has been executed. For obvious reasons, this makes transferring much less attractive.
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