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When coming up to retirement, should your investments move with you. Find out the options for soon-to-be retirees.
Two questions, two experts share their answers on what to do with a defined contribution (DC) pension plan when Canadians retire.
My husband has an DC RPP through an insurance company and will retire within the next year. It is his only pension, although we have other non-registered investments. We are anticipating receiving $25,000-plus a year from this pension.
We are perplexed about who should manage the pension: Stay with the insurance company or transfer to our advisor with a big bank wealth management, who charges 1.25% in management fees? We have also considered self-directed management, using mostly GICs, which we realize may be only a short-term strategy.
There are a number of articles on the choices to converting to a LIF, but not on the choices for money management. (What about if people are satisfied with leaving their DC pensions with the big insurance companies? I would consider that to be the default option.)
—Pam
Pam, depending on your needs, keeping the investments with the pension provider, transferring to an advisor or a self-directed account can all be good options. What support do you need, if any, to gain clarity and confidence over your future knowing your investments will support your lifestyle?
To help you think about that question, I’ll provide a quick overview of a defined contribution (DC) plan, your investment options, address your comment on fees, and cover why you would stay or flee your pension provider.
Of the two main employee pension types—a defined benefit (DB) plan and a DC plan—the DC plan is the plan of choice by most private businesses. The employer makes contributions into the plan on the employees’ behalf, and it is up to the employee to manage the money and make the investment decisions, just as they would with their own registered retirement savings plan (RRSP). DB is where the employer makes contributions and manages the pension.
In your case, Pam, you’ve acknowledged you have a DC plan. So, let’s look closer at that type of pension.
At retirement your husband will leave the pension plan and transfer the funds to a locked in retirement account (LIRA). It is his choice to keep it with the current provider or transfer it to your current advisor or a discount brokerage.
When it is time to draw an income, the LIRA will be converted to a life income fund (LIF). It’s just like when an RRSP is converted into a registered retirement income fund (RRIF). However, unlike with a RRIF, a LIF has a maximum amount you can withdraw from it. In addition, when converting your LIRA to an RRIF a certain amount can be unlocked and transferred to your RRSP or RRIF. The amount that can be unlocked depends on which jurisdiction the pension is registered in, federally or provincially. To find out if your pension is registered federally or provincially you may have to call the financial institution holding your investments as the jurisdictional registration is not always identified on investment statements. The same person will be able to provide you with the unlocking information. If you know which jurisdiction your pension is registered in a quick google search will let you know how much of your LIRA you can unlock and when.
In retirement, there is no guaranteed fixed payment as there is with a DB pension plan, and it is up to the retired employee to decide how much to withdraw.
Pam, you’ve noted that you anticipate receiving $25,000 a year from the pension. Know that that is not guaranteed, unless you purchase a life annuity that pays $25,000 annually.
Instead, I suspect you have done the math and based the amount on an expected future interest rate and assumed life expectancy. In real world applications, there will be lots of issues tugging on you that may influence your withdrawal decisions. I don’t know what issues may or may not tug at you, personally, but you do—or you soon will. Once you and your husband self-reflect, you will understand what will form your decisions around staying with the pension provider or not.
Pam, is your husband happy with the investment choices offered by the pension provider? Would he like guaranteed investment certificates (GICs) and mutual funds? When he needs to phone for assistance is he happy with the service? How is the on-line experience?
Once your husband retires, it’s likely all those same services will still exist. So, if your husband is happy with the investment selection and services provided by the pension provider, it may make perfect sense to stay put. The one change to watch out for, though, are the investment fees. These may increase when he transfers out of the DC plan into a LIRA, even with the same provider.
Now, you’re also considering transferring the DC plan to your advisor, but you’re concerned about the 1.25% fee. Are you comparing the total fees charged by the advisor to the total fees if you stay with the current pension provider?
Remember the two main fees are the management expense ratio (MER) and the advisor fee, if it is not already included in the MER.
Have you added your advisor’s fee to the MER of the investments they recommend? It is possible the combined fees cost less than the MERs on the investments provided by the current pension provider.
The other thing to think about: Is your advisor providing services over and above the services provided by the pension provider? And are those services of value to you? If not, that may be another reason to stay with the pension provider.
Pam, in the end it comes back to what you and your husband are looking for. Are you looking for a personal relationship with a financial planner to work along side you as a coach or thinking partner? Do you just need a little advice from time to time from the pension provider’s call centre? Or are you confident in your retirement plans and know what your investments need to do to support your lifestyle? If so, going self-directed may be best.
You’re fortunate in that you’ve been working with both a financial planner and the pension provider at the same time. If you had to pick one over the other, which would it be? What is your rationale?
Pam, are you and your husband confident in your abilities to manage your investments, and do you not need or want a coach or a thinking partner to help you with your lifestyle decisions, to see what’s possible? Are you able to maximize your current and future financial resources? And are you both comfortable dealing with change? If so, going to a discount broker may be the perfect solution for you. You have found your answer.
—Allan Norman, MSc, CFP, CIM
I have been with the same employer for nearly 20 years and have participated in the company’s DC RPP for nearly that whole time.
A few years back I consolidated the majority of my different investment accounts—RRSP, TFSA and unregistered—by moving them all to a discount brokerage. While I have no plans to leave my employer, I’d love to find a way to move the RPP funds to save on the fees. I’m looking to maintain the nature of the RPP but move it out into the discount brokerage so that I can take the MER from 1% or more down to 0.2% and save myself a few thousand dollars a year in fees.
—Shawn
It sounds like you are embracing do-it-yourself (DIY) investing, Shawn. It is not for everyone but is easier and more accessible now than ever. Saving on fees is a benefit. There are risks, though, like improper diversification, impulsive buying or selling, and not understanding a particular investment or product.
You can make transfers between retirement accounts on a tax-deferred basis by completing paperwork at the receiving institution. However, there may be restrictions on making transfers between some accounts.
In your case, Shawn, you are looking to transfer from a registered pension plan (RPP), more commonly known as a defined contribution (DC) pension plan. When you transfer funds out of a DC pension, they can only go to another pension or to a locked-in RRSP. A locked-in RRSP or locked-in retirement account (LIRA) has restrictions on withdrawals that are in line with the restrictions on pension plan withdrawals—namely, no withdrawals before age 55, maximum annual withdrawals and limited exceptions.
However, as an active member of the pension, I doubt you are eligible to make a transfer. Every plan is different, but pensions generally only allow transfers once a member is no longer active due to changing employers or retirement.
Group RRSP accounts are different. I have seen some group RRSPs that allow transfers out to personal RRSPs even while the account holder is still working for the company. Sometimes, there may be restrictions, like only employee contributions can be transferred (not the employer’s matching contributions).
So, I think you will be unable to make a transfer, Shawn, until you leave or retire.
Paying 1% in mutual fund fees is relatively good when the average mutual fund management expense ratio (MER) fee in Canada is closer to 2%. Some DC pensions and group RRSPs have more competitive fees in the 0.5% range, especially if the plan includes passively managed index funds.
I think your best bet would be to try to manage your overall investments in the most efficient way. In other words, if you are buying individual North American stocks in your discount brokerage account, consider having an overweight to a global stock mutual fund in your DC pension. (“Overweight” means to hold a large proportion of an asset in your portfolio.) If there is a low-cost U.S. index fund offered in your plan, consider an overweight to U.S. stocks in the account. You would hold less of the asset class being overweighted in your pension than you would in your discount brokerage accounts.
You could also talk to your employer about the investment fees. This may prompt them to speak to your pension provider to try to negotiate better fees for the employee group. If the current company cannot or will not offer lower fees, your employer could consider a switch to a more competitive alternative.
In the short run, Shawn, you may not be able to lower your fees for your workplace plan. You should at least make the contributions required to get all the matching contributions you can from your employer. If you are making any additional contributions that are unmatched, you could consider redirecting them to your self-directed accounts instead.
—Jason Heath, CFP
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