Understanding Fees for Group RRSPs and Defined Contribution Pension Plans
Much has been written about fees in the mutual fund industry but I still come across people who have no clue what fees they are paying on their investments.
Related article: Mutual Funds and Fees
When it comes to fees forGroup RRSPsand Defined Contribution Pension Plans, there is an even greater misunderstanding about fees both from the employer and the employee. Hopefully, this article can provide some clarity.
In most cases, the only significant fee to the employer on a group RRSP or Defined Contribution Pension Plan is the matching contribution by the employer. For example, a 4% matching plan means the employee contributes 4% of their pay and the employer also contributes 4% of pay.
Investment Management Fees (IMFs) are imbedded
Investment Management Fees (IMFs) are significant fees to understand. They are equivalent to Management Expense Ratios (MERs) in the retail mutual fund industry.
An IMF is an expense charged by the fund and expressed as a percentage of assets. The IMFs are charged by the fund and therefore paid by the investors and not the employer.
As an example, a 1.5% IMF means that 1.5% of the fund is taken out to cover fees. The fee is imbedded which means investors typically don’t know they are being charged the IMF. The IMF is important because it directly impacts the rate of return on the investment to the investor. For example, if the fund produces a return of 5%, the IMF will reduce the net return to 3.5%.
Typically the IMFs paid by members participating in group plans are lower than those available to individual investors. The lower the IMF, the better it is for participating members as more of their contributions and earnings grow.
Related article: What is an Investment Management Fee (IMF)?
Employers can lower Investment Management Fees
In some plans the employer can choose to help lower the IMFs in one of three ways:
- A Member Fee – The most common member fee is $2 per month per member. This fee is directly invoiced to the employer and helps cover some of the fixed costs associated with the Group RRSP or Defined Contribution Pension Plan. Some plans will go as high as $4 per month per member. The higher the member fee, the lower the IMF. A plan with 100 members would cost the employer $2400 ($2 x 100 x 12)
- A Cashflow or Contribution Fee – Essentially, the contribution fee is also billed directly to the employer. This fee is expressed as a percentage of contributions. For example, let’s say go back to the 4% matching example from above. If the total contributions (employer plus employee) going into a plan are $600,000 per year, a 1% contribution fee means the employer would pay $6000 ($600,000 x 1%). The contribution fee can be any amount usually no higher than 2%.
- Plan Fee – The plan fee is usually a flat dollar amount charged to the employer. It’s usually $250 to $1000 per year. The plan fee has the least impact on IMFs.
In most plans these fees are not charged to the employer and instead are wrapped into the IMFs. In the end, it’s the employers choice to pay these fees or charge them to the IMFs. Employers who choose to pay these fees should really promote that as a benefit of the plan and provide greater financial education to the members to highlight the fact that the employer is bearing the majority of the costs of the plan instead of having the employees pay the fees in the IMFs.
With respect to Defined Contribution Pension Plans, there is an additional fee charged by the Pension regulators to file an Annual Information Return (AIR).
With respect to Deferred Profit Sharing Plans, there can also be an annual trustee fee that ranges from $250 per year to $750 per year.
As you can see, there are many fees associated with Group Retirement Plans in Canada. In most cases, when you look at the total fees, the fees for Group RRSPs and Defined Contribution Pension Plans, theywill be lower than fees paid by investors on a retail basis. Employers and employees should still have a better understanding of how these fees are charged in their plans.
Thanks for those 5 new posts that just arrived in my mailbox all at the same time today. That data was very imformative.
I have a question. We have a generous (in contribution $’s) DC P-plan at work. The provider is GWL. Basically the company contributes each employee’s full contribution every year over and above their pay.
The plan is “Locked in” until retirement age in segregated funds. Is their a legal way to remove part or all in kind to a less costly in IMF/MER’s at another institution? If the company is not willing to do a review of the funds at your request to look for lower cost alternatives (as some of us have requested) do we have any options? On one hand the plan is very generous on the other 2.5% MERS -even on bond funds is a bit much. Any suggestions?
Hi Paul, I agree the 2.5% MER will reduce your final retirement balance substantially. Prior to age 55, assets in a Defined Contribution plan can only be moved to a Locked-In retirement account (LIRA). One example of a LIRA: a Locked-In RRSP, which you could open with a low cost provider such as Questrade. You should then be able to transfer your assets from the DC plan to your self-directed Locked-In RRSP.
Alternatively you could raise this concern with your employer, and ask them to search for a lower fee option. I’d be happy to help with this search.