The pros and cons of segregated funds

There are lots of bells and whistles on the Manulife Retirement Plus segregated funds.

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From the June 2014 issue of the magazine.

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Q: My financial adviser strongly recommends that I place one-third of my RRSP with Manulife Retirement Plus. What are the pros and cons?—R.D.B., Montreal

A: There are lots of bells and whistles on the Manulife Retirement Plus segregated funds. Perhaps the most important is the guaranteed lifetime income component. You can choose when and how much income you take, and that income is protected if the stock market takes a hit. If you’re risk averse, for practical or psychological reasons, this is a pro.

The first con is cost. Depending on the fund you choose, the Management Expense Ratio could climb as high as 3.3%, versus the average mutual fund MER of 2.4%. That can make a significant dent in your returns over time. The second con is complexity. The product has three phases in its life cycle, there are income credits you can earn, bonuses tied to interest rates and fees that may apply if you need access to your money.

I’m assuming your financial adviser has your best interests at heart, but I would ask how the commission works. Typically, if you buy a fund with a deferred sales charge (DSC), the adviser earns a one-time commission of 5%. That can sometimes be an incentive to move you from one fund to another even if the current fund is already doing the job.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca

One comment on “The pros and cons of segregated funds

  1. This comparison seems a little slanted when you use the high side for segregated funds and the average for mutual funds. Not a fair and equal comparison. Please give us the high side on Mutual Funds. There are also guarantees with segregated funds that are not available with mutual funds which do add to the MER but can be offset be tax advantages and creditor protection.

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