Group RRSP Fees Matter

The high MERs charged by some employers’ group RRSPs can be frustrating.  But these fees seem small compared to the employer matching of employee contributions.  A recent guest on The Wealthy Barber podcast said “those [group RRSP] fees aren't going to eat that [contribution matching] up over time.”  Challenge accepted!  People, including experts,  consistently underestimate the corrosive effect of high MERs over long periods of time.

It’s not my intention to be overly critical of David Chilton or his guest Brian Orlando.  They gave some great information for helping Canadians with their finances.  But I do want to explain how high fees can consume an employer match faster than we might expect.

An example

The podcast segment began with the example of 2.5% MERs in the group RRSP.  So, let’s compare two scenarios for a hypothetical employee Evan:

Group RRSP

• Evan’s contributions are invested in a crappy closet index global stock fund with 2.5% MER. 
• Evan’s contributions are matched 50% by his employer.

Personal RRSP

• Evan’s contributions are invested in the ETF VEQT with a 0.19% MER.
• No matching.

There are other relevant factors, such as internal fund trading costs, commissions, trading spreads, foreign withholding taxes on dividends, and whether or not the quoted MERs include HST.  A publicly available fund such as VEQT must include HST in its advertised MER, but the quoted fees in a group RRSP may be just management fees that exclude HST.  This was the case with my most recent employer.

Let’s suppose that after taking into account all of these factors, Evan’s group RRSP investments earn 2.3% less each year than VEQT in his personal RRSP.  

How long does the employer match survive?

The question now is how long it will take for the high fees to eat up the 50% employer match.  The answer is

ln(1.5) / (-ln(1 - 0.023)) = 17.43 years.

So, after Evan’s contributions have sat in the group RRSP for 17.5 years, the entire employer match is consumed by excess fees.  Somehow it doesn’t seem possible for such a seemingly small cost to consume the entire employer match, but it does.  The employer match is given only once on each dollar of contribution.  But the excess fees are charged on every dollar every year, and they’re charged on both Evan’s and his employer’s contributions.  These excess fees add up faster than our intuition tells us they should.

Solutions to the problem

The best solution would be for employers to offer better fund options with much lower fees.  However, deeply entrenched interests aren’t going to give up these fees easily.  This battle will rage on, and in the meantime, Evan has to make choices.

The next best solution that I used in my career is to pull money out of the group RRSP regularly.  Chilton mentioned this possibility.  My employer’s group RRSP allowed me to transfer money from my group RRSP to my personal RRSP once per year.  So, I did.  This eliminated almost all of the potential excess fee buildup.

I’ve heard of group RRSPs that placed restrictions on withdrawals.  In some cases, employees had to wait for some sort of vesting period to end before they could make a withdrawal, or else they’d forfeit the company match.  In such cases, the best they could do was to transfer whatever amounts were permitted to their personal RRSPs.  This usually significantly reduced the excess fee buildup.

If Evan really can’t make any withdrawals before retirement, things become more difficult.  Any contribution that sits in the group RRSP for more than 17.5 years loses all the company match anyway.  So, the best Evan can do in this case is to invest in his personal RRSP until he thinks he’s 17.5 years away from retirement, and then start investing in the group RRSP.  However, I’ve never heard of a group RRSP that is this restrictive.  The solution of making occasional transfers to a personal RRSP without losing any employer match usually works well.

How much of a difference does it really make?

Suppose that over Evan’s 30-year career, stock returns beat inflation by 4% per year.  Suppose further that if he had invested only in his personal RRSP, he would have ended up with $500,000 saved (inflation-adjusted to today’s dollars).  In the group RRSP, he would have had $510,000. Even better, if he had invested in his personal RRSP for 12.5 years and then let that ride while all new contributions went to the group RRSP, Even would have ended up with $548,000.  But, this still is a far cry from the $750,000 you’d hope for given the employer’s 50% match.

The real story is that if Evan had used the group RRSP for the whole 30 years, but had transferred amounts from the group RRSP to a personal RRSP every few years, his final portfolio value would have been over $700,000.  This is a substantial win.  The details in your case are unlikely to be the same as Evan’s, but what stays the same is the benefit of avoiding high fees.

Conclusion

The moral of this story is that it’s a good idea to take advantage of employer matching in group RRSPs, but if the investment choices are expensive compared to what you can get in a personal RRSP, you should consider transferring savings to your personal plan when your group RRSP allows you to do so without significant penalty.