Group plans
lack clear disclosure on fees
If you have
a group RRSP or group pension savings plan through your employer, you might
have been pleased, or felt privileged if you saw these words in the plan
documents: “Fees have been paid for by
your employer – meaning that there is no cost to members for this plan”.
However, there’s a good chance you were misled.
There are
two basic types of pension plans:
defined benefit and defined contribution. Defined benefit plans specify
a formula that determines the pension payable at retirement. In other words,
the plan sponsor (i.e. the employer) must make sure that there is enough money
in the plan to fund the pension dictated by the formula. This type of plan
places all of the investment risk with the employer.
Defined
contribution plans function more like individual investment accounts, for
practical purposes. They’re not quite as liquid, but the pension payable
depends on how much money is in each individual’s “pension account” at
retirement – much like RRSPs. There is no formula or other implied promise as
to a set level of pension income. In other words, the plan member (i.e.
employee) assumes all of the risks of investing.
Group RRSPs
are no different than a regular RRSP account and are nearly identical to
defined contribution plans. Over the past several years, the trend has been
away from defined benefit plans, in favour of the less complex (and cheaper)
defined contribution plans.
Most
investors, like you and I, are considered retail investors. If you buy
investments through a broker or advisor, the advisor must ensure she is
reasonably familiar with your circumstances so that her recommendations are
well suited to you. That’s generally known as the “know your client” or KYC
rule. Also, the advisor is required by law to hand you financial statements of
the recommended funds, along with a simplified prospectus – a legal document
detailing pertinent information on the funds – at the time of purchase.
When
investments are bought in a pension plan, it is the pension plan that is deemed
to have purchased them. Pension plans are considered “institutional investors”,
which are exempt from the prospectus and KYC requirements because they are
considered “sophisticated purchasers” – i.e. since they’re institutions, they
don’t need that level of consumer protection. In the absence of that exemption,
some plan administrators have applied to securities regulators for relief from the
prospectus and KYC requirements in order to eliminate what they consider to be
an unnecessary layer of regulation.
No
financial advisor alive can apply for any exemption from his requirements to
“know his clients”.
The problem
is that the assets are managed on behalf of individuals; and more and more
plans put investing decisions in the hands of individual plan members. So,
individuals (just like you) are deciding where to invest their money –
decisions they will literally have to live with for a lifetime.
The
regulatory framework must catch up to the reality that individual plan members
are ultimately making the investment decisions. Fortunately, this is not an
issue that has escaped the watchful eyes of regulators. They’ve been working on
drafting regulations to harmonize securities and pension laws for a few years
now; but as you’d expect, it’s taking a long time to finalize.
One could
write hundreds of pages on the group RRSP regulatory evolution. However, rather
than get into that nitty-gritty, I’ll show you how poor disclosure remains
today and the importance of the current initiative to get implemented.
A
Toronto-based relative of mine was offered the opportunity to join an
employer-sponsored group RRSP plan. He was given a marketing brochure that
summarized the benefits of investing in the plan and highlighted the employer’s
generosity in picking up the tab for the fees charged for the plan.
Since the plan basically offered a menu of mutual funds, I knew that couldn’t have been true. They wouldn’t give me any information so I had my relative e-mail the address listed in the brochure to request a summary of the fund-related costs applicable to each fund in this group RRSP. They replied with the management expense ratio (MER) applicable to each fund in the plan.
The plan was a good deal because it involved employer matching and had a nice selection of funds from which to choose. The fee picked up by the employer was the RRSP trustee fee, which almost nobody charges these days. While the “plan” was technically free, they further gave the impression that investments attracted no fees. That’s no different than a blatant lie in my book.
To squash
another common myth with such plans, I found that the fees applicable to each
fund (which were managed by such firms as Perigee, McLean Budden, Trimark, and
TD Quantitative Capital) were identical to the fees charged to the same funds
available to any investor. Sometimes, fees on funds in group plans are lower
than that available to individuals outside the plan. However, it’s not always
the case, so it shouldn’t be assumed.
Was the
plan good? Sure. Were plan members misled? Absolutely, but that will be the
case until harmonized legislation is finalized and introduced to protect plan
members.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.