Q. I have been registered with an insurance company through my employer since 2001. At the present time, I have about $50,000 in my plan. I pay 3% and my employer matches 3%. My concern is that I’ve noticed that the insurance company is charging me a high amount in management expenses.
Every month I put in about $100 and my employer matches it. However, the insurance company charges me between $75 to $80 a month in expenses. Is this an appropriate amount or am I being overcharged? I’m in a defined contribution plan in a target-date mutual fund. — Renee
Investment fee disclosure has always been terrible in Canada, Renee. And not surprisingly, poor disclosure and high fees are positively correlated. The less consumers know, the more the financial industry can gouge them.
Recent changes—so-called CRM2—have provided a modest improvement for many retail investment accounts. I still think the disclosure is deceptive and favours the financial industry over the consumer.
Assuming the $75 to $80 per month in expenses is a true representation of the all-in expenses for your investments, this would equate to about 1.8% to 1.92% annually. This is actually a bit less than the average retail mutual fund fee in Canada, so the fees are slightly better than average on a relative basis.
But given that your Defined Contribution (DC) pension plan is a large group plan where you should be benefitting from economies of scale, it’s unfortunate, but not surprising, that fees are that high.
At least if you’re paying that much in fees to a mutual fund salesperson, you may be receiving a degree of personal advice or complimentary financial planning. This is generally not the case with DC pensions.
Despite the relatively high fees for a group plan, Renee, I’d say I wouldn’t bat an eye to make whatever contributions you need to make to get the maximum employer match. You mentioned you’re contributing 3% and your employer is contributing 3%. That amounts to a 100% match – or 100% instant return – on your investment. I would take advantage of that even if the fees were twice as high.
You may have better or lower cost investment options for any additional savings you’re doing beyond the 3%. And some or all of that extra savings should potentially be going to non-retirement destinations like debt repayment, a Registered Education Savings Plan (RESP) or Tax-Free Savings Account (TFSA) anyway. That’s more of a financial planning decision.
Sometimes, Renee, a group plan can be transferred to a third party. I’ve seen group RRSPs that are eligible for transfer, but maybe only your contributions made more than 12 months ago, for example. DC pension plans are generally locked-in with the employer plan until you leave, at which point you can transfer the balance to a locked-in RRSP and have more flexibility with your investment choices.
You’re in a single target-date mutual fund, which is a nice, easy solution. Target-date funds work really well in some circumstances. You may be able to build a better portfolio choosing the individual components on your own – bonds, Canadian equity, U.S. equity and global equity. Target-date funds may not do as good a job with each of the individual components as fund managers that are focused on a specific asset class. So sometimes, the sum of the parts is actually greater than the whole. But this takes work for you to determine asset allocation and rebalance on an ongoing basis, thus, the appeal of target date funds.
Many group plans offer index fund options, which tend to have lower fees, Renee. So, if low cost is your primary objective – and it is an important one – consider index funds for a passive investment approach at a discount to what you’ll pay for active options.
Beyond that, Renee, I think I’d be inclined to talk to your employer. Sometimes the decision maker on a group plan isn’t all that well-versed in investment options or what’s a fair fee for a large group plan. Maybe it’s time for a review of your plan options and fees with an independent pension consultant who can lobby for your best interests.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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