Thursday, May 10, 2012

Pitching a Group RRSP to Employees

I recently had the pleasure of listening to an insurance company pitch a group RRSP to employees at my company. Some parts of the pitch were expected, but others were unexpected.

One expected part of the pitch was that the presenters were pretty and tanned. They definitely looked the parts of successful salespeople. The main unexpected part was that they almost immediately launched into a discussion of the importance of fees and how much could be saved by minimizing fees.

However, I think the real thinking behind this discussion of fees was “the best defense is a good offense.” Instead of trying to avoid fee discussions, they decided to meet the inevitable questions head on. The funds in the plan have fees in the 1.5% to 2% range, and because typical retail investors pay 2% to 2.5%, we were told that the proposed group RRSP would save us 0.5% per year. In one scenario the salespeople calculated that we could get an extra $300 per month in retirement payments due to this seemingly small 0.5% savings.

We weren’t invited to take this thinking to the next level by imagining even lower fees, but I’m not going to let that stop me. My portfolio of ETFs currently costs me 0.21% per year in MER costs. This is about 4 times the savings that the insurance company offered. So, in the scenario they described, I’d end up with about an extra $1200 per month in retirement income compared to a retail investor. That sounds a lot better than just $300 to me.

There are a number of ways to set up an automatic savings plan using index funds and index ETFs that are even simpler than my investing approach. These wouldn’t be quite as cheap as the 0.21% MER that I pay, but they would have much lower costs than the insurance company’s offering. However, these approaches require a little work to set up. Even better would be if my employer offered such a plan to employees. But that doesn’t seem to be how the world works.

I don’t know what the barrier is to an employer setting up much lower cost group RRSPs. Presumably it has something to do with cost to the employer. Jim Lorenzen describes an interesting case in the U.S. that illustrates some of the complexity involved. I don’t know if anything from this case is relevant to us, but the end result of employees paying high fees seems to be a common denominator.


  1. My company does group RRSP through Sunlife. The portfolio they offer contains all the index mutual funds required for a standard couch potato portfolio. The fees are comparable to TD e-series level of pricing. I was quite surprised.

  2. @Anonymous: Years ago I had savings plans at 2 different employers through Sun Life. They used to take expenses in addition to costs within the funds. I have no idea how they work now, but you should find out what your total costs are. Hopefully, it really is just TD e-Series level of pricing, but I'm not sure how Sun Life gets paid if this is true.

  3. When I worked in the private sector I took advantage of an employer match for my RRSP contributions. The problem was that we had to use HSBC mutual funds in order to get the matching dollars.

    I couldn't even transfer the funds out immediately after contributing because of an early redemption charge.

    So when I left that job, one of the first things I did was set-up an in-kind transfer to TD Waterhouse.

    I just looked up the MER of the global fund I was in - 2.73%!

  4. I think in many cases the committees in companies that set up and manage group RRSPs aren't themselves very savvy investors. In my group RRSP recently lower MER funds were replaced with higher MER funds from different fund companies. The stated reasoning was the committee didn't like changes in the fund managers and was concerned that the short term performance (in the previous year) had lagged.

    I don't think anybody can pick a good fund manager and to sell because performance was not great last year and buy something that did better last year???? The plan has a 50% employer match, sometimes I wonder if even that makes it work participating.

  5. @Echo: A group RRSP with an early redemption charge sounds nasty. At 2.73%, that MER was 13 times what I pay now. Painful.

    @Greg: Maybe you're right that the problem is simple ignorance. If your employer was doing performance chasing, it's plausible that the 50% employer match could get chewed up a a decade or so.