RRSP Q&A: How are Couch Potato fees different than MERs?

Answers to your RRSP questions.

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From February 16 to 19, 2010, MoneySense.ca’s top financial planners are answering your RRSP questions. For the full list of questions answered — or to submit a question of your own — click here.

I like the couch potato concept. I’m confused or misunderstanding something. If I follow the advice and invest in 60% stocks (20% divided into each of the suggested allocations) and 40% in bonds, and if each cost about .5%, doesn’t that equal about 2%? Isnt 2% around the MER for an actively managed fund?

How do I go about making contributions using this strategy if I want to make pre-authorized monthly payments, as I do not have a large lump sum to invest? —Believe10

Karin Mizgala: The Management Expense ratio (MER) is the fee to manage a fund calculated as a percentage of the amount of money you invest.  If the management fee on an actively managed fund is 2% and you have $10,000 invested, you would be paying $200/year in fees.  If the MER is only .5% you would only be paying $50/year in fees.  Even if you are investing in several different funds, you would be applying the MER only on the amount of money you have in each fund.  So if you have $2,500 invested in 4 different funds with MERs of .5%, then you would be paying $12.50/year in fees per fund – the same amount you would be paying if you invested $10,000 in one fund with an MER of .5%.

You can set up the Coach Potato strategy with monthly pre-authorized payments at most banks or financial institutions that sell index funds. Most bank issued index funds are set up to allow you to invest with as little as $25-$50/month.

Next question: What’s the best way to rebalance my Couch Potato Portfolio?

Back to main RRSP Q&A page.

Have another idea? Let us know in the comments.

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