“Once taking into account active management costs, passive managed assets would provide superior returns,” the report says.
It suggests that financial advisors may not be conveying this message clearly enough: “Individual investors do not seem to be advised sufficiently to invest in indexed and exchange-traded funds to improve fund performance.”
In contrast to the fees facing mutual fund investors, pension plan administrative costs are much lower, at 30 to 45 basis points for private plans and 25 to 35 basis points for public sector plans. The CPP costs are 20 basis points.
“Overall, it is clear that pension plans offer opportunities to save costs for investors compared to retail mutual funds,” the report concludes.
The RRSP advantage
But Canadians investing in individual RRSPs enjoy a number of other advantages relative to those in pensions. The research shows that pension funds provide much less liquidity compared to other investments, since individuals cannot easily withdraw funds for contingencies or to invest in assets like housing. Also, when an individual passes away, pension benefits are not payable to an heir except to a spouse.
In contrast, Mintz says that RRSPs provide much more flexibility and choice.
Many financial services industry groups agree with this view of the value in RRSPs, and suggest that the best way to boost retirement savings is to enhance the current system. A recent report by the Canadian Bankers Association recommends increasing the age at which an RRSP must be closed out and taxing RRSP withdrawals at more favourable rates.
“The retirement savings system in Canada is not broken, but it is in need of some urgent improvements,” said Nancy Hughes Anthony, president and CEO of the CBA.
But many Canadians remain convinced that broader pension coverage is the best solution. In a poll last week of more than 1,700 members of CARP, an advocacy group for older Canadians, 80% of respondents endorsed the creation of a supplementary pension plan. More than half of respondents said they do not agree with the financial services industry that the current system should simply be improved.
“The idea of a Universal Pension Plan has gained sufficient traction that it will challenge the retail investment industry to better serve Canadians or lose their business,” said Susan Eng, vice president of advocacy at CARP.
Mintz’s advice for policymakers is to thoroughly consider all issues at hand before making changes. “These issues are complex and given the long-term effects of saving decisions, it is important to make sure that any policy decisions do not have unintended consequences that impact on the ability of Canadians to save for retirement and other needs,” the report says.
Keywords: pension, RRSP
