The pension industry has seen a number of issues disrupt the group retirement market recently. They include low interest rates, financial crashes, the switch to defined contribution pension plans and the introduction of exchange-traded funds. In addition, declining profits at the employer level have stymied interest in introducing or increasing contributions to group pensions.
Another trend may soon add to the disruption as online advisors, also referred to as robo-advisors, are considering entering the group retirement marketplace. As a result, there could be a shift away from mutual funds through traditional custodians, such as banks and insurance companies, towards ETF-style funds and fees. Investment vehicles such as Wealthsimple, Nest Wealth and BMO SmartFolio have launched recently with much attention.
While not all online advisors have a group pension or registered retirement savings plan solution, this budding industry is scrambling to roll out a group option, especially in light of the incoming Ontario Retirement Pension Plan.
“Canadians pay the highest mutual fund fees in the world, and those fees can erase a third of your net wealth over the long term,” says Jason Goldlist, head of marketing at Wealthsimple. (Full disclosure: the author of this article is from the Beneplan Co-operative, which is the broker for Wealthsimple’s benefits plan.) “Companies that provide a retirement benefit to their employees may have the best intentions, but locking employees into high fee funds could do more harm than good.”
Others, such as Nest Wealth, are also eyeing the group retirement space. Chief executive officer and founder Randy Cass has stated that group retirement solutions “are of great interest to Nest Wealth and while we have nothing specific to announce yet, it is an area that we are looking at closely.”
He added: “We would never look to enter any market where we couldn’t make our clients much better off than the available options. Reducing fees are certainly a part of that equation.”
How is the ORPP pushing online advisors into group pensions?
Group pension plans are incredibly sticky as the majority of plan sponsors just want to set them and forget them. Once they’ve chosen a custodian, there’s almost never an incentive for them to switch.
There’s a new catalyst in the ORPP, however. [Note, this article was published before an agreement was reached to expand the Canada Pension Plan and Ontario subsequently signalled it would jettison its plans if a finalized plan comes together.] Ontario Premier Kathleen Wynne has pushed ahead with her signature campaign promise, albeit with a one-year delay after several groups, including the Canadian Life and Health Insurance Association, lobbied for extra time.
That said, many sponsors of group benefits plans that don’t have an existing registered pension plan are considering their options. There are two polarizing groups: employers that believe the ORPP is a good thing and those that are against a new payroll deduction. Those employers that would prefer not to be part of the ORPP are suggesting they’d rather set up an equivalent plan so they can opt out of the government scheme.
Information from the Ontario Ministry of Finance, however, has clarified that group RRSPs and deferred profit-sharing plans aren’t equivalent to the ORPP. An equivalent plan would be a group pension that would pool longevity and investment risk; lock in the funds until retirement; provide for mandatory employer contributions; and replace the equivalent of 15 per cent of earnings over an employee’s career.
The government appears determined to prevent employees from outliving their savings or having access to the funds before retirement to spend as they please. It’s unclear, then, how online advisors that have focused on group RRSPs will grapple with the fact that only group pensions meet the ORPP comparability criteria. The idea may, however, be to offer group RRSPs as a supplement to the ORPP.
Safety and protection a concern
While plan sponsors are eager to see a low-fee model, they question whether the new advisors will stick around to see their employees retire.
In the case of Wealthsimple, the backing of Power Corp. would ensure sustainability. In its case, the individual holds each group retirement savings account, which qualifies for Canadian Investor Protection Fund insurance of up to $1 million.
Wealthsimple is already powering several group plans through payroll integration, providing simple signup and management options to plan administrators while giving employees personalized portfolios and transparent reporting. The company is in the process of integrating with more payroll companies and will support direct links to all major providers. At the same time, Wealthsimple’s acquisition of Share- Owner, one of 14 discount brokerages in the country, gives it greater control over the overall experience through trade execution and service.
The firms have also suggested they’d be able to manage and handle the capital accumulation plan guidelines around educating employees in a group plan on their investment risk and choices. However, they have yet to address the extra administration and regulation that comes with group pension plans.
Will plan sponsors go for a lesser-known custodian?
Some plan sponsors show a surprising level of apathy about the fees they pay through their providers. Some will shrug and say their current arrangement seems to be working and they don’t want the hassle of switching.
Others are more willing to switch their group retirement plan if the price is right. “We just lost one per cent on our portfolio because our fees are three per cent and the market is doing poorly,” said one employer recently that showed openness to alternatives.
Convenience and simplicity will continue to play a huge role, of course. But with the ORPP in the works, some companies may be more willing to consider online advisors for their group pensions if they have the option. Further, any company run by a young executive may be more likely to set up a group pension plan through an online venue over an established bank or insurer.
Says RateHub.ca founder Alyssa Furtado: “I already have my RRSP with Wealthsimple, so if we were to consider setting up a group pension plan and a robo advisor like Wealthsimple is offering low fees, I feel that would be a wise choice for our collective savings.”
Yafa Sakkejha is the general manager of the Beneplan Co-operative in Toronto.
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