High fees cause mutual fund investors to work longer or retire with less: study

OTTAWA, Feb. 25, 2015 /CNW/ - High management fees will cause Canadians relying on mutual funds for their retirement income to work into their 70s or retire with 20-40% less compared to pension plans, says a study released today by the Canadian Centre for Policy Alternatives (CCPA).

The study, by CCPA Senior Economist David Macdonald, compares the management fees charged by mutual funds and pension plans. He finds that in 2014 annual average pension plan fees were 0.38% of assets while comparable mutual fund fees were 2.1%.

"Canada has the highest equity mutual fund fees in the world," says Macdonald. "They're so high that in order to offset those fees the average mutual fund investor will have to work until age 72 to match what a pension plan holder made by age 65, even with identical contributions," says Macdonald.

The study finds a large variation in fees among mutual fund families. Across major fund families, Canadians can expect to work two to 11 years beyond age 65 to make up for higher mutual fund fees. High fees in fund families like Investors Group, AGF, and IA Clarington would force investors to work past age 75 to match pensions. MD Management, Beutel Goodman and Phillips Hager & North also have higher fees than pension plans, but their holders would have to work to age 68 or 69 to overcome the difference.

The RRSP system has been a dismal failure at encouraging Canadians to save for retirement.  Even today, most Canadians nearing retirement do not have nearly enough in RRSPs to rely on them for retirement income. At the same time, only 27% of Canadians have a workplace pension plan, down from 43% in 1977.

The study recommends an expansion of inexpensive workplace pension plans or public pension plans, like the CPP.  As a stopgap measure, trailers fees—the portion of mutual fund fees that go back to the advisor—could be capped or banned entirely.

"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. "

The Feeling's Not Mutual: The High Costs of Canada's Mutual Fund Based Retirement System is available on the CCPA website at http://policyalternatives.ca

SOURCE Canadian Centre for Policy Alternatives

Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306