Higher investment fees in capital accumulation plans can potentially set an individual’s retirement date back by four years, according to Mercer’s latest retirement readiness barometer.
The analysis found a person paying the median retail fee (1.9 per cent) would be retirement ready at age 70. On the other hand, someone paying the median fee available in an employer-sponsored defined contribution plan (0.6 per cent) would be retirement ready by age 66.
This difference in fees illustrates the power of group pooling available to those with access to a workplace pension plan, said the report, noting these plans can achieve economies of scale, reducing costs relating to low-fee funds, which in turn delivers a higher net rate of return on an investor’s portfolio over time.
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“Individuals can make all the right investment decisions, but a workplace DC and savings plan could provide a level of scale unavailable to an individual going it alone,” said Jillian Kennedy, partner and leader of DC and financial wellness at Mercer Canada, in a press release. “Participating in a workplace program and maximizing the benefits could leave you with a significantly larger nest egg — and shave years off your working life.”
The impact isn’t just limited to the accumulation phase, noted the analysis. It found that an individual paying the medial retail fee (1.9 per cent) during their retirement years would be expected to completely draw down their savings — i.e., run out of money — five years earlier when compared to paying the median group fee (0.6 per cent).
The report also found the effect compounds when both the accumulation and decumulation period are considered together. “An individual who pays the median group fee (0.6 per cent) throughout their career, who retires at age 65 and who subsequently invests their nest egg in an account paying that same rate would have an average of 12 more years of retirement income compared to a similar person paying the median retail fee (1.9 per cent ) over the same period.”
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Employers, regulators and service providers must recognize the importance of transition support and make sure people have a comprehensive retirement strategy, noted the report. In particular, some levers that employers can pull include highlighting the importance of flexibility, promoting attention to personal savings and even engaging vulnerable employees who may have low levels of financial wellness.
Another area of focus for employers is plan design changes, according to Mercer. These changes include the addition of workplace registered retirement savings plans or tax-free savings accounts that provide flexibility, as well as a move toward auto-enrolment in workplace pension plans at an optimal contribution rate to improve participation levels.
“When these changes are implemented, employees can begin to accumulate wealth regardless of their knowledge, the amount of time they dedicate to planning for retirement or the commitment to ongoing management of their savings,” said the report. “They are then able to experience the fee advantages associated with the power of group pooling and can be guided to an investment option that sets them on track to help achieve their retirement goals.”
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