Monday, December 8, 2014

Which Group RRSP Costs are Worth Paying?

Many companies offer their employees a group RRSP rather than a defined-benefit pension plan. The main attraction of a group RRSP is that the employer often matches employee contributions with an additional 50 cents to a dollar on each employee dollar. Such plans have embedded costs as well. Here I look at my own plan’s costs to examine which are providing value and which are not.

There are actually more parties involved in our group RRSP than I initially guessed:

Employees: Those who save money and invest it in their personal accounts within the group RRSP.

Employer: Main functions are to hire a benefit services expert and match employee contributions (with an extra 50 cents on the dollar in my case).

Benefit Services Expert: Hired by the employer to help choose a group RRSP provider and set up the plan to suit the employer’s needs. Also performs ongoing negotiations with the group RRSP provider to make changes such as lowering fees or changing the available investments within the plan.

Group RRSP Provider: Typically an insurance company that does most of the administrative work of handling employee accounts, collecting contributions, issuing tax receipts, etc. Also works with institutional money managers to create a set of available investments for employees to choose from.

Institutional Money Managers: Similar to mutual funds, these money managers take grouped assets within the plan and invest it in stocks, bonds, real estate, etc. The funds may be actively managed or passively managed (index funds). In the case of my group RRSP, only one fund is a passively-managed index fund.

Nobody works for free

The benefit services expert, group RRSP provider, and money managers get paid. In my case, I’ve been told that my employer pays the benefit services expert and also pays certain administrative costs from the group RRSP provider. The remaining group RRSP provider costs and institutional money manager costs come out of employee savings. That’s the way you need to think about these costs. The helpers who make the plan work earn a living by dipping into the savings in your account.

The all-in cost borne by employees varies by fund. In the case of my group RRSP, after adding in HST and not counting trading expenses within each fund, the fund costs range from 1.45% to 2.11% per year. Even the recently reduced cost of the one Canadian stock index fund is still 1.50% per year.

Who gets these fees?

I tried to find out how these costs were split between the group RRSP provider and the institutional money managers. Our benefit services expert was very reluctant to put a number on this, but finally estimated that only about 30% of costs went to the group RRSP provider. If true, this means that we pay over 1% of our savings every year to institutional money managers.

But institutional money managers are the least valuable part of the entire group RRSP. Active picking of stocks and bonds is a zero-sum game. This means that, on average, institutional money managers add no value. In fact, once you factor in the higher trading costs, they subtract value.

You might think that you’ll only pick the good money managers. But which are these? Poorly-performing funds are routinely closed. Funds with good past performance routinely give mediocre results in the future. Odds are the funds you pick will be just average and their returns will lag index returns by the amount of fees charged.

How to lower fees

The employees would be better served by replacing all actively managed funds with index funds and passing the savings on to employees. It’s bewildering that the one index fund offered in my plan has its fees set so high. This fund’s managers get paid the same as active stock pickers, but they just let a computer make all the decisions.

If the fund choices were all index funds, the costs to employees would be just the rock-bottom index fund costs plus the group RRSP provider’s administrative costs. As assets in the plan grow, these administrative costs would become a progressively lower percentage of employee savings.

Barriers to lower fees

There is a big barrier to moving to index funds. The benefit services expert touts the access to institutional money managers as second biggest advantage of my group RRSP after employer matching of employee contributions. Some of these money managers only accept clients with large investments such as $250,000.

Even this could be overcome if it weren’t for the fact that this pitch was so effective. Most employees seem sold on the idea that these star money managers offer real value. Maybe some employees even feel the supposed prestige of being allowed to invest alongside wealthy elites.

Clinging to the status quo

In theory, the benefit services expert shouldn’t care whether the funds offered are active or passive as long as he is paid the same either way. But if employees are impressed by star money managers and a pitch based on index funds causes fewer employees to sign up for the group RRSP, the benefit services expert will have failed to achieve the employer’s goals.

In theory, the group RRSP provider shouldn’t care whether the funds are active or passive as long as the provider gets paid the same either way. However, the group RRSP provider also serves as the institutional money manager for some of the funds offered in the group RRSP. So, the provider has an incentive to maintain fat fees.

A possible compromise

Offering both active and passive options would cause problems because employees would notice the glaring differences in fee levels. The likely explanation for the expensive index fund in my plan is that a very low fee would make the other choices look bad. The benefit services expert worked hard to compare our fees to typical mutual funds and declare that we were saving money. Huge fee differences among funds make it clear that much higher savings are possible.


In the end the only way there would ever be a shift to low-cost index funds in my group RRSP is if someone convinces my employer to insist on this change. I’m not holding my breath.


  1. Interesting. One of our DCPs (not a group RRSP admittedly) only offers index funds for equity investment. And the fees are very similar to Vanguard. I guess partly it depends on the size of the company you work for (this is a huge company.) The only problem with that DCP is that they only offer ONE fixed income choice, and it's a medium term bond fund: not an ideal place to invest given the possible surge in interest rates ahead. On the other hand, it's a PH&N fund and it's returned over 7% ytd because they actively trade bonds and don't just hold them to maturity. (Perhaps it's ironic that the bond fund has active management but the equity funds don't?!) It was hard for us to decide whether to keep our fixed income outside of the plan entirely and balance across it and our RRSPs or not. We came up with a compromise that's working so far for that.

    Both DCPs are NOT optional so maybe that's a factor? There might be a revolt if the investment choices were not low-fee index for equity?

    1. @Bet Crooks: That is a curious mix you're offered, but I certainly prefer it over my choices.

  2. It's a shame that your employer won't just deposit an extra 50 cents on the dollar in your RRSP at a discount brokerage... I've never heard of any companies offering that, but surely such an agreement must be possible in principle?

    1. @Anonymous: I'd like that, but I doubt that employers would go for it. Employers have an interest in seeing employees save for the long term. A group RRSP allows employers to measure the effectiveness of their plans and to change the rules if too many employees tap into their savings.

  3. My group RRSP with manulife is quite ok.

    I don't know what my employer pay Manulife, but from my perspective, they offer index funds at around 0.3% to 0.5% MER, so quite good.

    Worse comes to worst, most group RRSP permit you to transfer (not withdraw) to your own RRSP account for free at least once a year.

    1. @Anonymous: Your group RRSP looks great compared to mine. I definitely plan to use my free yearly transfer.

  4. I get PH&N Canadian Equity, Balanced and Bond funds in my group RSP and the fees are 2.25% (2% provider & .25% fund MER). I transferred around 95% of my balance at the beginning of Sep to my brokerage account without paying any fees. My plan is to transfer in cash to my personal account every year and save management fees.

    1. @Anonymous: Wow. 2.25% is painfully high. I can see why you plan to move the money out.

  5. Whatever the amount I receive as a dividend, they deduct the same or more as a mgt fee. However, I am happy that I am getting free money from our company.

    1. @Anonymous: If you're getting a large match from your company, this will likely work out well. But even a 50% match can be consumed. If fees are 2% per year higher than you can get elsewhere, then it takes 20 years to consume a 50% match. The reason for this is that the 2% per year accumulates. Initially, the 50% match takes you to 150% of your contribution. After one year, you're down to 147%. After another year, you're down to 144.06%. After 20 years, you're down to about 100% (the match is gone). Fortunately, this only applies to money that stays in the plan for 20 years. More recent contributions are affected less.

  6. I have commented about this subject before. I believe you and I have very similar group DCPP's. I have struggled with our provider for years to bring down the MER's and add index funds. They did both. MER's down ever so slightly, and they added 4 index funds that I could get myself for a full 1.0% cheaper then from the plan. Kind of negated the whole idea of what I was trying to bring to our table. I believe our providers salesperson hates me.

    Michael, another thing that you should look into is to squeeze out the copy of all your rules and regulations about your DCPP from your contact. Not the thin one, and not what is buried on the website with all its crappy "tools". The one that tells you for example that if you don't make a decision (of what to do with your DCPP) within 60 days of your termination or leaving for other reason, your money will irrevocably be rolled into an expensive locked in annuity and you have absolutely no recourse to get out of it. You will be married to those high fee's until you die.

    There are some other interesting rules as well. IMO - good to know now, rather then later so you can plan for those days. These companies lock you in for life and take their 1 or 2 + % out of you literally for your entire working life and then through your retirement. This system really needs a shake up.

    1. @Paul: We'll see if I have any luck convincing my employer to insist on low-cost index funds. Your warning about what happens if you make no decision within 60 days of termination is something I hadn't thought about. I'll see what I can do to find out about this.

    2. @Paul: I got hold of the detailed documentation you recommended I try to get. I found out that if when I leave my job I don't make a decision within 60 days, my group RRSP provider can throw my savings into any new plan they "deem appropriate". So, I guess they could lock it in for life if they want to.

    3. Hi again Michael,

      Looks that way does it not. You should call in and run up the chain. Usually the 1-800 number just gives you general info and website navigation help. If you ask a question out of their scope like about this subject, you will be directed to others that must eventually take out the "I guess" part out of your words above.

      It's fully my intention to take all my plan holdings with our present work provider and transfer it into a low cost index portfolio when I no longer am employed. (somehow locked in - no idea how that can be set up now) I have a string of e-mails with our provider saying that I can do this as long as
      I stay within "Ontario legislation rules". I am told also without penalty. After all the interactions we have had to date I have trouble believing that.

      I really think when that time comes they will throw some kind of roadblock in front of me when I attempt this. I suspect I will have to get help with that from someone in the know. I'm thinking I'll have to be prepared a full year out of retirement.

      My dealings with the provider have been less than amicable since I kept on them to reduce the MER's. They spoke to the person who is in charge of the funds at my work who unfortunately has no investing knowledge whatsoever, and fed that person all the standard jargon to confuse and discredit my requests. Sorry for ranting a bit. However i think this is an important subject where the fine print needs to be taken very seriously.

    4. @Paul: It sounds like your situation is more difficult than mine. All money going into my plan vests immediately. So, I can clean it out periodically (with a transfer to my self-directed RRSP account) to reduce any risk that comes from reduced control.

  7. My wife works for a much smaller company and her plan expenses were similar to ones you described. The provider was just gouging employees (and the employer). I think the employer finally woke up and switched providers. While her new plan isn't as good as mine, she has similar index funds (@ about 50 bps) and some good active funds (@ about 100-125 bps).

  8. Michael,

    Love your blog…
    I think Group RRSP plan comes down to a combination of size of employer (bigger = better bargaining power) and the interest/knowledge of their HR in providing good value to employees. The way I see your plans is that neither employer nor employee gets value.
    I work for a financial institution and I know the plans I am offered are very competitive. The provider costs are paid by the employer. The investment options are a mix of some index funds, some 3rd party mutual funds and my employer's own mutual funds. All of the funds have an expense ratio of under 100 bps,(about 100-150 bps less for the same funds offered outside the pension plan) with index funds around 10 bps. They even provide a registered US index funds to avoid to the tax drag. I think I am just lucky.
    My wife works for a much smaller company and her plan expenses were similar to ones you described. The provider was just gouging employees (and the employer). I think the employer finally woke up and switched providers. While her new plan isn't as good as mine, she has similar index funds (@ about 50 bps) and some good active funds (@ about 100-125 bps).

    1. @P=NP?: Thanks. The fees charged by the group RRSP provider are certainly driven by size, but you'd think that offering index options wouldn't be, but who knows?