It’s time for a voluntary national RRSP

A consensus seems to be developing around the idea of expanding the Canada Pension Plan as a way to deal with concerns that many people won’t have adequate income when they retire. I think there’s a better way.

One of the proposals I made to the Senate Committee on Banking, Trade and Commerce earlier this year was the creation of a national RRSP to be run by a division of the Canada Pension Plan Investment Board (CPPIB) or a similar organization.

I see this as a preferable option for several reasons. First, it would not be compulsory. Those who don’t need an enhanced pension wouldn’t be forced to pay into it, nor would their employers. CPP contributions already constitute a heft payroll tax; raising them would increase the disincentive to employers to hire new staff.

Second, a national RRSP would reduce costs for those who have private plans now. Most people pay far too much in sales commissions, management expense fees, brokerage costs, etc. in their personal RRSPs. The costs of a national plan would be much lower because of efficiencies of scale and elimination of the profit factor. The annual management expense ratio would likely be no more than 0.5 per cent.

Third, the CPPIB is able to invest in securities that are not eligible for ordinary RRSPs and/or are beyond the range of individual investors, such as real estate and infrastructure projects like the 407 toll road near Toronto. A national plan should be allowed the same latitude in choosing investments.

Finally, the members of the CPPIB have proven themselves to be very capable money managers over the years. Just check out the returns compared to those generated by mutual funds and you’ll see what I mean.

In my testimony, I stressed that private plans should be allowed to operate side-by-side with a national RRSP. You can bet they would become much more competitive in such an environment. I admit that the private sector would probably fight tooth-and-nail against the creation of such a plan. That’s only to be expected; financial services companies would stand to lose billions of dollars in assets under management if such a plan came into being.

The Senate committee appears to have given a great deal of weight to this issue in formulating its final report, which was released in October. Recommendation six calls for the creation of a national voluntary plan that would enable Canadians “to benefit from the lower fees and shared risk that may result from membership in a group”. However, the committee advised keeping the plan within the private sector, backing away from a conflict with the financial services industry.

Specifically, the proposal contains these features:

1. A plan that incorporates a “limited number” of professionally managed retirement funds that offer a range of objectives, fees, and portfolios. This is similar to the structure now used for group RRSPs and defined-contribution pension plans.

2. The plan should be committed to “clarity, simplicity, efficiency, cost effectiveness, and low fees”. This is nice motherhood language but otherwise meaningless.

3. There should be a clear set of criteria for choosing fund managers which covers such potentially contentious areas as fees and conflicts of interest. Managers should be selected by a “competitive process”. This is more encouraging because it suggests that a rigid vetting program would be applied.

4. Everyone 18 years and older should be automatically enrolled in the plan, with an opt-out option. I don’t like this at all. It’s a variation on the much reviled negative option sales technique that has been widely condemned by consumer groups. In my view, this should be strictly an opt-in plan.

5. The ability to designate payments to the national plan as RRSP or TFSA contributions, within the legal limits.

6. Employers would be able to make matching contributions to the fund(s) of their employees’ choice.

7. A minimum notification period before making withdrawals. I would be cautious about that idea. People can access RRSP money at any time if needed for an emergency (except for locked-in GICs). Why should a national plan be any different?

8. “Impartial and professional guidance” about which funds to choose from the plan’s menu. Good luck with that. Simply providing plan participants with written information is woefully inadequate, a fact we have learned from experience with group RRSPs and defined contribution pension plans. A more interactive way of assisting people with their choices would have to be found. At this stage, I cannot begin to imagine what it might be.

The bottom line is that I think the committee has made this proposal much more complex than it needs to be. My idea of a voluntary plan managed by the CPPIB is much simpler, highly efficient, cheap, and easy to comprehend. I hope this isn’t the last word on this issue.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go here.