While group retirement compliance is a legal requirement in the U.S., Canadian plan sponsors only have a set of guidelines and best practices to follow.
These are in place to help plan sponsors maintain fiduciary responsibility by keeping the interest of the plan member at the forefront of decisions regarding their group retirement plan. One of the main responsibilities for plan sponsors should be maintaining low management fees for their members.
The vast majority of defined contribution pension plans, group registered retirement savings plans and deferred profit-sharing plans are funded by plan members through investment management fees, or management fees if the plan provider is a bank or mutual fund company. Since plans are funded by members at no cost to plan sponsors, the degree of investigation into investment management fees is often overlooked by plan sponsors.
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Management fees can have a significant financial impact on plan members, so parameters should be reviewed by plan sponsors with fiduciary responsibilities in mind.
Multiple studies have illustrated the variation of an investor’s financial results based on differences in management fees. Looking at a $50,000 portfolio as an example, if fees paid by the plan member were reduced by $500 per year, with no growth on that account over a 25-year period, the fees would equal $12,500. This cost could be lowered by 50 per cent using a provider with one per cent lower fees.
Plan sponsors should keep plan members in mind when making this decision. It’s hard to justify plan members paying more for their fund management when they’re not receiving the results or services they value in return.
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When plan sponsors are making these decisions, the topics to keep in mind include:
- Is the group retirement plan managed on an aggregate basis or as many individual accounts? Typically, insurance companies aggregate the amount of members’ money in the plan and charge a management fee accordingly. So if a plan has a significant number of members and assets, management fees would go down to one per cent and lower.
- Index funds are a good option to keep fees low and have two advantages: they typically have lower costs than managed funds and satisfy another fiduciary item of benchmarking (results versus peers). Since the investment is benchmarked already, it removes the requirement to scrutinize results. Using the index options results in lower cost and less oversight.
- At least one employee in the decision-making group should be non-management. Although many registered pension plans require a committee to oversee large decisions, group RRSPs and small pension plans don’t require a formal committee. Employee participation in the decision-making process, including on management fees, will not only assist in maintaining the Canadian Association of Pension Supervisory Authorities’ guidelines, it will encourage openness and buy-in from employees. As well, employees are the most affected by management fees, so they should be involved in the decision-making process.
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Management fees may not seem like a big deal when a plan sponsor is deciding which plan provider to use because they aren’t paying the fees — in most cases. Fiduciary responsibility and the best investment experience needs to be at the forefront of the plan sponsor’s decision. It could cost employees a year or two of retirement if their plan sponsor doesn’t make an informed or careful decision regarding management fees.