Self-directed Retirement Plans: Are they really the best option for your employees?
Updated: Jun 4
Over the past 30 years, organizations across Canada have embraced group RRSP’s and Defined Contribution plans as an alternative to the more costly Defined Benefit pensions. This trend shifted the investment risk on employees as their lot in retirement became inextricably linked to how well their investments performed. With this shift, self-directed plans began to increase in popularity—particularly among small and medium-sized businesses. As a result, employees are left to their own devices to select and manage the investments.
Why the switch?
There are several factors as to why many organizations have adopted the self-directed approach. Some of the most commonly cited reasons include:
Desire to provide employees with freedom of choice.
Concern over the liability associated with participating in the investment selection.
Lack of administrative capacity to monitor investments.
Instinctively, the first reason might sound appealing and logical. But as illustrated below, freedom of choice can have many drawbacks for employees. The second and third reasons, while certainly legitimate, can both be substantially mitigated by selecting a plan provider that can take on the role of a fiduciary for the employees and manage the portfolios on their behalf.
The consequences of self-directed plans
The self-directed model not only assumes that an average employee will be capable of making sound investment decisions, but that they will also be monitoring the markets regularly and adjusting their portfolios as needed.
These assumptions have their own flaws as the Benefits Canada’s 2016 CAP member survey has shown. According to the study, 86% of surveyed plan members don’t have the time to invest and 87% find investing complicated. Unsurprisingly, 85% of the respondents said they wish someone could make the investment decisions for them.
The other draw-back of self-directed plans is the fees involved. Because most self-directed plans charge retail prices, investors will end up paying substantially higher fees than they would in a plan with pooled assets. People who start investing in their 20’s may be managing their portfolio for as long as 40 years, so compounded investment fees can really add up.
A possible alternative
Self-directed plans can be well suited for investors that do the research, know how to balance a portfolio, have the time and are prepared to take on the risk, but these investors are more often the exception rather than the norm. Given these limitations, many high-net-worth individuals have traditionally enlisted the services of discretionary managers to manage their money. These licensed professionals manage the investments of their clients proactively and without requiring a sign-off. This provides them with the ability to quickly respond to changes in the markets and mitigate risks as well as take advantage of opportunities. With such great responsibility in their hands many of these managers also act as a fiduciary, meaning they must serve only the best interests of their clients. Unsurprisingly, this investment model has achieved great success for those utilizing it and continues to be one of the key tools wealthy individuals use to safeguard and grow their assets.
At Open Access we’ve found a way to deliver a similar discretionary model, but for all working Canadians.