A recent survey conducted by ADP Canada has revealed that 77% of Canadians would leave their job for a company that guaranteed better retirement support. This astounding result is a much needed reminder of the necessity for employers to maintain a competitive retirement plan.
Not only can a retirement plan serve as a competitive edge in attracting and retaining talent, it contributes to the overall well-being and engagement of employees.
This begs the question, what exactly does it take to make a retirement plan competitive?
For a retirement plan to justifiably be deemed "competitive", strong long-term investment returns are a must. Yet equally important is lower risk taken to achieve those returns. The latter is perhaps the less glamorous of the two metrics, but a plan that achieves high returns at higher risk than benchmark is an unsettling long-term strategy.
A truly high performing plan/portfolio is one that attains higher-than-benchmark returns at lower-than-benchmark standard deviation (risk) over a long-term period.
There are many cases when companies have fairly high performing plans but the employees are not able to reap the full benefit due to high MER (Management Expense Ratio), that trim away a sizeable chunk of the returns.
To illustrate this, let’s assume the following scenario:
John Smith is a worker at a medium-sized manufacturing company. His company sponsored group RRSP is invested with “Provider A” in the “Balanced Portfolio”. Over the past year, this portfolio yielded a return of 7.5%. On the surface, this return appears fairly impressive. But because Provider A happens to charge an embedded fee of 1.95%, John ends up with a net return of only 5.55%.
This scenario of high fees offsetting otherwise strong returns occurs far too often in small and medium sized companies that lack access to institutional pricing. One only needs to think how better off John would have been if Provider A charged an MER of 1% as opposed to 1.95%. He would have instead seen a net return of 6.5% instead of 5.55%. Compounded annually, this difference goes quite a long way. It is therefore essential that pricing, especially embedded fees, be given close attention when shopping for a new plan provider.
A plan is managed on a discretionary basis when the provider actively monitors the different funds in the portfolio and makes investment decisions on behalf of plan members. This spares the members the burden of making difficult buying and selling decisions. It can also lead to higher employee engagement when the members don’t have to worry about making complicated investment decisions.
Having investment professionals manage your retirement plan is far more likely to yield good results. Yet it is essential that the investment managers be bound by no other incentive but to serve the best interests of plan members. A fiduciary that is mandated to serve only the best interests of plan members will not be positioned to make any personal gains from selecting (or not selecting) a certain investment. Being a fiduciary is thus essential for the discretionary model to work. If a plan provider, for instance, does not own and sell its own funds and does not accept referral fees from fund companies, then it is far more likely that only the best interests of plan members will carry weight in the investment selection process.
A workplace pension plans serve a purpose, both for employees and employers. Employees reap the rewards of lower fees and professional management. Employers also gain an advantage in attracting talent and keeping their workforce engaged.