© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of BENEFITS CANADA magazine.

Group mentality

Market volatility is testing group RRSPs, but plan sponsors and members are committed to the concept. In fact, life cycle funds are expanding the market.

By Doug Burn

This is a testing time for the group RRSP concept. Critics had warned that a significant market decline would expose employers who set employees adrift to deal directly with providers. It was predicted that employees would panic as their losses mounted and hold their employers morally, if not legally, responsible for dashed dreams of carefree retirement.

The critics have yet to be proven right. But many group RRSP providers and sponsors do acknowledge that while plan members are not panic-stricken, they are concerned. Although some individuals are now directing their contributions to money market rather than fixed income and equity funds, almost all of them continue to make the same contributions each payday. Employers are not second guessing their decisions to offer group RRSPs and, surprisingly, many even want to continue expanding the investment options they offer.

COMMON GOALS

Plan sponsors are not dissuaded from this retirement option because return on investment wasn't the only concern when they chose to offer and participate in group RRSPs. Plan members--particularly the younger and more mobile ones--were looking for more portable retirement savings plans and greater autonomy in investment selection. Employers wanted to accommodate these needs and pass off administrative and regulatory requirements to the insurers, banks and other group RRSP providers.

North American Lumber of Winnipeg dropped its money purchase pension plan in the mid-1990s because regulations were amended to make matching contributions mandatory for all plan sponsors. Payroll manager George Wallace explains, "We have contributed to our employees' pensions every year but whether we contribute and how much we contribute has always been based on the company's profitability. Under the new legislation we would have no choice so we wound up the money purchase pension and switched to a group RRSP."

Regulatory compliance is particularly awkward for organizations that operate across Canada because defined benefit (DB) and defined contribution plans are regulated provincially. Loewen Group Inc. of Burnaby, B.C., offered both a DB plan and a group RRSP up until 1995. Benefits administrator Dan Cruz explains that the company wound up the DB plan that year because it had over 900 plan members spread across Canada with pension regulations governing the plan varying in each province. "Mainly for the ease of administration it made more sense to offer only the group RRSP," he says.

COMPETITION DRIVES INNOVATION

The proliferation of investment choices and member services reflects the intense competition for business among group RRSP providers. Greg Hurst, manager of the pension division with Heath Lambert Benefits Consultants in Vancouver, says that competition between life insurers, banks, trusts and investment dealers explains the four-fold growth in group RRSP assets throughout the 1990s. Since 1990, the banks, trusts and credit unions have expanded their share of the group RRSP market from approximately 20% to 30% (see "Measuring market share," below). The investment dealers and fund managers started the decade with 1% market share and ended it with 24%. Such significant shifts in market share kept all the providers on their toes.

"Group RRSP providers were fairly inflexible and that created an opening for the banks and brokers who were late to the game," says Colin Deane, principal, Cap Gemini Ernst & Young in Toronto. "When contracts came up for renewal, the banks and brokers would offer more investment options and services to win the business away from the insurers. The insurers responded in kind and now most offer 50 or more funds."

A provider's selection of investment options is a major consideration for prospective sponsors. Echo Bay Mines Ltd. of Englewood, Colo. switched group RRSP providers in January because its Canadian employees complained the company's former provider didn't offer enough choice. Echo Bay hired a broker to request proposals from the leading providers and ultimately chose Canada Life because of its range of funds that includes five life cycle funds.

Although plan sponsors have always wanted more investment choices from providers, they have traditionally restricted the choices they make available to their members. This is beginning to change. "One of the most notable developments of the last 18 to 24 months has been the expansion in fund choices offered to plan members," says Mary De Paoli, vice-president, national sales and marketing, group retirement services, Sun Life Financial in Toronto.

"Traditionally, sponsors would offer three or four options, perhaps a guaranteed income certificate, a balanced fund, a bond fund and possibly an equity fund," says De Paoli. "Now, most sponsors offer between eight and 15 options--the original three or four plus a value equity, a growth equity, a U.S. and/or an international equity fund plus index funds. The selection is being expanded to provide plan members with more investment flexibility."

Loewen Group expanded the options within its group RRSP to seven by adding a global equity and a small cap fund. The plan already offered a U.S. equity fund but the raising of foreign content limits prompted the company to add the global fund. The small cap fund was added to give plan members a second domestic equity option.

RANGE OF OPTIONS

Two Toronto-based group RRSPs illustrate the range of investment options that sponsors offer to their members today. The Unisys Canada Inc. group RRSP offers all 53 funds to its employees that its provider features. "We want to provide as much choice as possible so that individual plan members can select the mix that best suits their comfort level," says Deborah Nanton, director of human resources at Unisys. However, she says that most members choose only two or three funds.

On the other hand, the ACTRA Fraternal Benefit Society's group RRSP offers only two funds--a bond and a balanced fund--to its 15,000 members in the television, radio and film industries. With over $300 million in assets, the ACTRA group RRSP is one of Canada's largest, but the Society pays its investment managers directly and chooses to employ as few as possible.

When the balanced fund was under-performing the TSE 300 composite index in 1998 and 1999, the Society's director of finance, Rick Jenkins, received complaints from plan members that their group RRSP didn't offer enough investment options. "Many were asking why we didn't offer 20 or more choices," recalls Jenkins. The 14-member board of governors declined to add more funds but it did bend somewhat to members' calls for more foreign content and added a foreign equities specialist to the balanced fund's investment team.

Foreign equity funds remain one of the most popular additions to group RRSP portfolios. Interest in the funds was piqued in the mid-1990s by the superior performance of the American equity funds relative to domestic funds. Popularity increased again when Ottawa raised foreign content limits for RRSPs to 25% in 2000 and then 30% in 2001.

Meanwhile, index funds fell into favour two years ago because few of the actively managed funds were matching the bull market performance of the TSE 300, Standard & Poor's 500 composite index and other benchmarks. The index funds, based on these benchmarks, also offer significantly lower management expense ratios (MERs).

LIFE CYCLE FUNDS

The newest fund category that's rapidly gaining popularity is the life cycle fund. That might seem odd because, unlike the foreign and index funds, life cycle funds command high MERs and invest 25% to 75% of their assets in domestic fixed income securities. These disadvantages are overcome by several attractive features: their performance relative to equity funds in today's volatile markets; the range of funds suit most investors' needs, goals and risk profiles; and professional management.

"We were specifically looking for these life funds when we were reviewing prospective group RSPP providers and the lifestyle funds of our new provider have been very well received by our plan members," says Lois Broderick of Echo Bay Mines.

Life cycle funds are similar to asset allocation funds with two differences. They adhere strictly to the advertised asset mix and most group RRSP providers offer three or more funds to suit the particular needs of plan members.

Although an investor can hold other funds as well as a life cycle fund, it is assumed in the selection process that this will be the investor's only fund.

Mike Irwin, an investment and education officer at Clarica, says that life cycle funds are a hit with group RRSP members. "Despite their higher fees, they are attracting more money than I would have expected. People didn't see the value in them three or four years ago but the value of a disciplined and steady asset allocation has become apparent in the midst of this market volatility."

REASSURANCE WANTED

When it comes to employees' reaction to market volatility, Irwin says group RRSP members are more calm than they were in the 1994 downturn. He attributes this attitude to improvements in pension plan communications. He concedes, however, "that occasionally you can hear a slight panic in their [employees'] voices. They're really calling for reassurance."

Irwin adds that many plan members were surprised when they got their quarterly statements in January. They didn't expect the Nasdaq to have such a chilling effect on their rates of return. "Plan sponsors are providing much more information but the plan members now want more explanations and more timely information. The sponsors are storming into my office to ask, 'Can you be down here for a meeting next week to explain things to our members?' "

Joan Johannson, director, product and marketing for investments and pensions with Canada Life Assurance Company in Toronto, says, "the recent volatility in the economy proves an excellent test for all of us as to just how risk tolerant we really are. We have had such a long run of an upswing economy that we've been cushioned from the harsher realities of a volatile market." She adds that market volatility and the recent proliferation of fund choices "increase the need for employers to ensure that their employees have access to self-help tools." These tools include fund fact sheets, asset allocation models and projection models as well as prospectuses.

Employers are not yet reconsidering the wisdom of providing group RRSPs to their employees. Employees may one day panic and capitalize their equity market losses. But that's not what happened during the market's last serious correction in 1994. Group RRSP providers added new services and a plethora of new investment choices and over the subsequent six years, group RRSP assets more than doubled to $28 billion. This is an indication that group RRSPs will not only weather the storm, but continue to prosper.

Doug Burn is a freelance writer in Toronto and a regular contributor to BENEFITS CANADA.

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