So far I have more questions than answers about the new Pooled Registered Pension Plans (PRPPs) and a big question is what the costs will be like for participants. The Department of Finance has a framework document that lays out the basic idea of PRPPs, but it is the details that will determine if this approach is beneficial for Canadians or not.
PRPPs will be administered by “regulated financial institutions that are capable of taking on a fiduciary role in order to act in the best interests of plan members.” The investment choices will allow participants to create portfolios consistent with their “investment objectives and risk preferences including a low cost option.” This seems to imply that high-cost options may be offered as well.
Because it will be employers who will decide which financial institution to choose as a PRPP administrator, and we can reasonably believe that employers can evaluate costs better than the typical Canadian, there is some hope that PRPP administrators will compete on costs, but this is not guaranteed.
If the PRPP legislation doesn’t prevent administrators from “refunding” part of the investing costs back to employers, then competition on costs could be undermined. (See the update below that explains why this is not permitted.) If one administrator’s costs are 0.5% of plan assets and a second administrator’s are 1.5% with a 0.5% “refund” back to the employer, which one do you think the employer will choose? Note that both the administrator and the employer are better off with the second plan as long as employees don’t revolt.
I have (had) no idea whether the PRPP legislation or the required fiduciary role of administrators is likely to prevent such a scheme to give incentive payments to employers. However, if PRPPs take off, there will be huge amounts of money at stake. I’d be interested to hear from anyone with an expert opinion on whether any type of direct or indirect “refund” scheme is likely to be possible with PRPPs.
Update: That was quick. Thanks to Shawn Patton who commented below on finding a section of Bill C-25 that prohibits an administrator from giving kickbacks to employers:
"24. Subject to the regulations, an administrator must not give, offer or agree to give or offer to an employer an inducement to enter into a contract with the administrator in respect of a pooled registered pension plan."