A new report recommends capping, or banning, mutual fund trailer fees and expanding public pension plans, to help Canadians save for retirement.
The Canadian Centre for Policy Alternatives (CCPA) published a new report Wednesday, which argues that the high cost of mutual funds in Canada will cause people who use them to save for retirement to either work into their 70s, or retire with 20-40% less than they would with workplace pension plans.
The study, authored by CCPA senior economist David Macdonald, finds that in 2014 annual average pension plan fees were 0.38% of assets, compared to 2.1% for mutual funds. Over a lifetime of contributions, this means that the average mutual fund investor would have to work until age 72 to accumulate the same amount as the pension plan holder had by age 65, the study says.
Moreover, the study notes that the industry average masks larger variation in mutual fund fees between firms. It says that cheaper fund families translate into just two years of added work, versus 11 years for the most expensive families.
The study notes that pension coverage has declined from 43% of workers back in 1977 to just 27% of workers today.
The CCPA calls on policymakers to address the issue. “It is not in most people’s power to reduce mutual fund fees, expand the Canada Pension Plan or start a company pension plan. Their choices are limited. But policymakers have more options; their choices could help everyone retire more comfortably,” it says.
For example, the CCPA recommends that trailer fees be capped, or banned, forcing financial advisors to get paid directly by investors. “This would reduce fees but likely not to the level of pensions plans,” it says. Beyond that, it recommends that policymakers encourage the expansion of workplace pensions, or the expansion of the Canada Pension Plan (CPP), and other public options.
“The anxiety that Canadians feel in RRSP season about whether they’ve saved enough, whether they’ve picked the ‘right’ mutual fund and whether their savings will be wiped out in a down market are features of the RRSP retirement system,” concludes Macdonald.
“A retirement system requiring high fees and delayed retirement is not a foregone conclusion. There are plenty of viable alternatives available to policy makers that would improve the system for all Canadians.”
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Editor’s note: Read the response from Advocis, Understanding the role advisors play.