Increased Efficiency for Canadian Retirement Investment

Abstract

Canada, along with the rest of the developed world, has witnessed a precipitous drop in traditional defined benefit pension plan coverage. The result has been a shift to defined contribution plans and an increased reliance on personal savings vehicles. This process has effectively shifted the risk away from employers to the individual. The consequence of this shift is an individual-centric retirement model possessing heightened complexity and significantly higher costs. On average, the fees paid under a pension plan structure are 0.38% of the assets under management while comparable mutual fund fees average 2.1%. Although the numbers appear small, on a relative basis, this constitutes a cost difference of over five times. Ultimately, the cost difference results in a Canadian mutual fund investor having to delay retirement by over 7 years compared to a pension fund investor with the same investment performance. Does the mutual fund industry’s investment performance justify the significantly higher costs? Overwhelmingly, the academic evidence suggests no! In fact, the vast majority of active mutual fund managers consistently underperform a simple market index such as the S&P/TSX Composite Index. The Canadian retirement model has shifted towards a system where the dominant retirement vehicle consistently underperforms and aggressively over charges. In addition to unjustified fees, the individual-centric retirement model shifts the responsibility for investment decision making onto the individual. This requires the individual