My employer didn’t get much uptake when it first brought in an insurance company to offer a group RRSP because there was no employer matching. However, this has just changed. The question is how valuable is the employer match balanced against the high MERs on the pooled funds offered in the plan.
My new group RRSP plan is fairly generous: they match half of my contribution up to a maximum of 5% of my base pay. So, if I contribute 10% of my base pay, my employer will kick in another 5%. That’s the good part.
The bad part is that when I poked around in the investment options, the cheapest fees were on an index fund of Canadian stocks. The fees were listed as 1.401% per year (very high for an index fund). However, fee reporting on pooled funds is not the same as with mutual funds. As it happens, this percentage includes both the fund’s fees and the insurance company’s cut, but does not include HST or trading costs. I have no data on trading costs for this fund, but presumably it is very low on an index fund.
Comparing this fund’s fee (plus HST) to the MERs I pay on the ETFs in the rest of my portfolio plus commissions and spread costs, this group RRSP will cost me about 1.43% more per year than my ETF portfolio costs me.
Fortunately, the rules for this group RRSP permit me to transfer the account balance to my self-directed RRSP once per year without any extra charges. So, on average, my money will only sit in the expensive pooled fund for 6 months. The gap between the group RRSP fees and the fees in the rest of my portfolio is only about half of 1.43%, or 0.72%.
Enough with the percentages. Let talk dollars. Suppose my base pay is $100,000. Then my yearly contribution is $10,000, the company’s match is $5000, and the extra cost of 0.72% (on the whole $15,000) amounts to $108. So, the $15,000 contribution in the group RRSP gives me the same result as contributing $15,000 minus $108, or $14,892, to my ETF-based RRSP. To me, the employer match looks like $4892 rather than a full $5000. That’s still a very good deal for me.
But what would things look like if I had to leave the money in for 10 years before pulling it out of the group RRSP? In this case, money would stay in the expensive fund 10 times longer. The result is that the employer match would look like about $4000 per year instead of $5000.
With a more expensive group RRSP held for several decades, the higher fees would build up to the point where they consume the entire company match and more. It seems hard to believe that a small percentage like 2.5% could overwhelm a 50% company match, but it can. The reason is that the 50% is calculated only on the new contributions, but the 2.5% keeps hitting the entire account balance every year. After 30 years, the first month’s contribution has been bled by 2.5% 30 times!
The moral of this story is that free money from your employer is a good thing, but pay attention to fees.