Draft legislation was tabled today for a PRPP program (Pooled Registered Pension Plan). The exact details have STILL yet to be determined, but here are the highlights:
- The PRPP is aimed at small businesses and the self-employed to help them save for their own retirement
- Employees will be automatically enrolled, but can opt out
- Employers can also make contributions but will not automatically be enrolled
- It’s expected the economies of scale will reduce costs of managing the funds
- Financial institutions will be allowed to manage the funds, but the details of how this would happen are unclear
So while there is a lot of good intention to help put small businesses on par with big company pension plans and increase retirement savings for Canadians en masse, I have my reservations based on the speculated details.
- The people most likely to opt out are the ones who arguably need the most help with saving for retirement
- What defines low cost? The CPP is roughly 0.43% to run. Alberta’s sovereign wealth fund (The Alberta Heritage Savings Trust Fund) is about 0.13%. A retail individual portfolio might be 2.00%. A DIYer can get down below the CPP’s MER.
- This affects roughly half of working Canadians, some will participate but a lot of people assume an investment portfolio = financial planning. Will they be less likely to seek financial advice?
- Or more likely to seek advice because there is something else to confuse them?
- It’s a defined contribution plan. Others have argued an expansion of the CPP (defined benefit) would be better.
- You can already set up a group RRSP with a small business with as few as 3 people
- Businesses smaller than that, or the self-employed, can currently save for retirement already.
But most importantly:
How do you mandate lower costs on a PRPP but not on mutual funds? Mutual funds were designed for smaller investors to pool their money together to get a professionally managed portfolio at lower cost.
So if the costs are limited by legislation, and these costs are below mutual fund MER averages in Canada, the government is basically acknowledging investment costs in Canada are too high. If they set the maximum fees to be anywhere near mutual fund MER averages, the PRPP switches from suspect to useless.
Here’s a short two minute piece from CBC’s Havard Gould that appeared on The National: