Looking at historical returns, Jaspal figures he could earn significantly more by pooling his individual retirement savings with his employer’s plan—but there’s more to consider.
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Q. A few years ago, I joined a public sector employer with a hybrid defined-benefit, minimum-guarantee pension plan that will allow me to move RRSP contributions made elsewhere, into the employer’s plan.
I have been told that the transferred money would have to remain locked-in until I retire or leave the organization. The total value of the pension plan, including the contribution of employees, employer and returns, is around $2 billion.
Recently, I compared the last 10 years of performance of my RRSP investments with my employer’s DB pension returns, and I noticed the DB pension plan would have offered around 36% more accumulated growth on the original starting capital.
I have 10 to 12 years until retirement and I am seriously considering having my RRSP money transferred to the pension plan. Should I be taking anything else into consideration before making this decision?
A. Jaspal, great that you are paying attention to your investments and doing a double-check before making a big change.
To summarize, you’ve found that past investment returns in your employer’s pension plan have been better than those in your personal RRSP and as a result, you’re considering moving your RRSP into the pension plan—but first, you want to make sure there are no negatives associated with commingling your RRSP with your pension.
I don’t have a copy of your pension plan to read through, but I suspect you’ll be OK to move your RRSP into your pension plan. I’m assuming that your plan has an additional voluntary contribution account, similar to a group RRSP, and it is not connected to the defined benefit portion or the combined contribution account if there is one. Here are a few things to think about:
Past performance is no guarantee of future performance. I know, you’ve heard this one before but it’s true.
Lower fees do not necessarily mean better returns. Personally, I think lower fees mean you’ll have a higher probability of earning more, and the longer you’re invested, the greater the chance the lower-fee advantage will show up, but it’s not a slam dunk. Don’t make your decision solely about fees.
You will be taking on liquidity risk. You mentioned that money in your employer’s plan will be locked in until you retire. This means if you need to withdraw some RRSP money, you can’t (liquidity risk). I’m guessing you’ll consider this a small risk, and one you’re willing to take. Also, confirm that this money doesn’t have to go into a locked-in plan once you retire. I’d be surprised if it did, but you should check.
You will have limited investment options. This may not be important to you, but your investment selection and type will be limited to what is available in the plan.
The type of advice you are currently receiving may change. When you hold your RRSP at a bank, for instance, you’ll have access to face-to-face advice as needed. If you move your RRSP to the pension, you’ll still likely have access to advice, but it will probably be over the phone or online, with different advisors each time, which may mean less personalized and coherent advice.
It’s possible you will contribute more to your RRSP through a group plan than through an individual RRSP. This is because with a group RRSP you’re making pre-tax contributions, whereas most people make after-tax contributions to their RRSP. In other words, a $10,000 pre-tax contribution to a group RRSP may be the equivalent to $7,000 in an after-tax, non-group RRSP contribution—that is, you’re paid $10,000 in salary, lose $3,000 to tax and have $7,000 to invest.
As well, you you may find it convenient to have all of your retirement savings in one place for simplicity, although that alone is not a reason to transfer your money to the group RRSP portion of the pension.
Jaspal, if you’re a confident do-it-yourself investor and a planner who sticks with pooled investments, then moving funds into the group RRSP portion of your pension plan may make sense. By the way, it’s nice that your pension has a defined-benefit (DB) portion. It is always good to head into retirement with some guaranteed lifetime income and, in your case, you’ll have CPP, OAS and the DB pension plan—plenty of savings for a comfortable retirement.