Choosing Mutual Funds in your Employer Pension/RRSP

Typical employer pensions are defined contribution based where they match your RRSP up to a certain percentage of your salary.  For example, my previous employer offered 5% RRSP matching which means that if my salary was $50,000, they would match up to $2,500 in RRSP contributions for the year.  It’s a great deal because it’s basically free money.

Pension Options

The caveat to this free money is that the RRSP investment choices are often restricted to specific insurance/mutual fund company and their limited investment offerings.  For example, a part time NL government  worker will not qualify for the defined benefit pension, but is required to invest in the defined contribution plan (DCP).  This DCP is locked in with Great West Life and their investment options.  While I must admit that the offerings are decent with relatively low MERs for mutual funds (PH&N), over the long run, lower fees would result in a bigger nest egg.

However, when I was working with industry, the company partnered with a mutual fund company that had higher fees, and many actively managed mutual fund options.  Many with a higher MER which I only found out because I asked for the details.  You’ve heard it all before, but 90% or more actively managed mutual funds do not even keep up with the index over the long run (after their fees).

Choosing the Mutual Funds

So the question remains, which mutual funds should you choose in your employer pension plan?  You guessed it, pick the index funds – the ones with the word “index” in the title of the fund.  If you follow the indexed “couch potato” philosophy of investing, then you’ll pick 4 funds:

  • Canadian Index
  • US Index
  • International Index
  • Bond Index

Here is an example of an indexed mutual fund portfolio that I setup for our family RESP along with percentage allocations of each fund.

An Example

When you obtain the mutual fund offerings, it may be in a confusing list, but don’t despair.  As I mentioned, look for the word index which should also have the lowest MER.  For example, this is what my last employer offered:

Canadian Equity Funds (MER)

  • True North Fidelity (1.35%)
  • Canadian Equity Investco Trimark (1.25%)
  • Canadian Equity MB (0.85%)
  • Capped Cdn Equity SLI (0.75%)
  • Cdn Equity Capped Index (0.675%)
  • Canadian Dividend SLMF (0.90%)
  • Small Cap SLI (1.0%)

Foreign Equity Funds (MER)

  • US Equity Beutel G (1.00%)
  • US Equity GEAM (0.95%)
  • US Equity JF (0.85%)
  • US Equity Index SLI (0.675%)
  • International Equity Beutel G (1.0%)
  • International Equity JF (1.15%)
  • International Equity Index SLI (0.90%)
  • Global Equity Invesco Trimark (1.25%)
  • Global Equity Templeton (1.35%)

Fixed Income Funds (MER)

  • Fixed Income MB (0.85%)
  • Canadian Bond Index SLI (0.675%)
  • Mortgage SL (1.125%)

Looking at this list, I would choose:

  • Cdn Equity Capped Index
  • US Equity Index SLI
  • International Equity Index SLI
  • Canadian Bond Index SLI

Spreading your money evenly across the four funds would result in an overall portfolio MER of 0.73% – not too bad!

Final Thoughts

For long term investment performance, a portfolio needs to keep costs low (keep MER as low as possible) and your odds of success is better if the mutual fund is passively managed (ie. indexed).  To do this with a work pension, the best bet is to choose indexed mutual funds and re-balance (maintain the percentage of each mutual fund) at a schedule that works for you.  Personally, I like to re-balance when new money is added to the account, but for others, once a year is plenty.

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Frugal Trader

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Scott
5 months ago

Great post! My DC pension is with Canada Life. I called them to ask about MER’s, fees, etc. I was told if I select 4 funds as follows- U.S. EQUITY INDEX (TDAM)0.907% ,GLOBAL EQUITY INDEX (TDAM)0.915%, CDN BOND UNIVERSE INDEX (PORTICO)0.853%, CANADIAN EQUITY (GWLIM)0.983% I would have to add the MER’s together ? Does this sound right? Currently 100% of my portfolio is in BALANCED CONTINUUM (PSG)1.145%. If what the representative told me is correct I may leave it alone. My employer contributes 7% and I contribute 8%. Thank you for all that you do .

Scott

Khay
3 years ago

When you say defined contribution plan from the work,Is this the cpp(Canada pension plan) they deduct from my salary and also from my employer? How can I access this or make decisions about it?

Alex
6 years ago

Its not just the MERs. I dont know about other companies but Standard Life’s VIP Room (thats what they call their online plan administration tool) just sucks. No quick overview of your holdings and how they have been doing, you can only invest in their funds and not individual stocks (not that it would be possible to properly do that with their interface…) and you cant transfer out your contributions to another institution (not even for a fee). The free watchlist my bank offers is better than that and every online brokerage interface I’ve seen so far has been better as well. I don’t feel particularly safe with this. I have no idea whether I could properly divest if a crash were coming.

Michael James
6 years ago

@Ed: The Yale study’s use of 19 different indexes is one of its problem areas. This study found outperformance in the smallest funds with very high active share. To have a high active share by the definition used in the Yale study, a fund had to have low overlap with all 19 indexes. However, the index that a given fund happens to overlap with the most becomes the fund’s supposed benchmark. The very low overlap makes this selection of benchmark arbitrary. So, if a fund happens to be assigned a benchmark with low returns among the 19 indexes, that fund looks good for no particular reason.

Another concern is that since outperformance was found only in the smallest funds with high active share, perhaps the attempts to remove incubation bias were not effective. The practice of incubating many funds and killing off all but the best performers artificially boosts reported returns on small young funds.

A major difference between the Yale study and Vanguard study is that the Yale study looked at performance while funds had high active share, but the Vanguard study looked at performance in the period after investors could have established that funds had consistently high active share. The fact that Vanguard found no evidence that active share was useful in finding outperformance is consistent with all the other studies showing that mutual fund outperformance does not persist.

I don’t think your claims that Vanguard is biased hold water. Vanguard offers both active funds and index funds. Their only major bias is toward low fees.

Ed Rempel
6 years ago

@Michael,

I think Active Share is safe as a predictor of fund managers that beat their indexes.

I read both the Yale Study and the Vanguard study and clearly the Yale study is far more robust. Yale covers 24 years vs. only 6 for Vanguard. It includes a highly robust method to determine which index to compare each fund to by measuring which index each fund is most similar to. Yale uses 80-100% different from the index as high active share while Vanguard uses 60-100%.

The Vanguard study confirms the Yale study that fund managers with high active share tend to outperform their indexes over the entire 11-year period of their study, but only did not show this outperformance in the 6-year period it focuses on.

The 2 Yale professors attribute the Vanguard study to cherry-picking a specific time period. I did note that the period Vanguard chose, 2006-11, to be a particularly odd period when oil shot up from $40 to $150/barrel. I can remember fund managers during that period saying that low quality stocks were outperforming high quality stocks because of the oil boom.

Then we had the 2008 crash, followed by another commodity rally. The entire Vanguard study covered a down period and a very unusual time with a low quality stock & oil boom.

Bottom line, the Yale professors are far more credible being unbiased and had a more robust study with 23 years vs. an odd 6-year period and a study by a firm marketing indexes.

Active Share can be difficult to find, but if there is a fund manager in a group plan with a high active share, I would probably chose him over an index.

Ed

Sean Cooper, Financial Journalist
6 years ago

Wow, that’s shocking to hear your fees are actually lower. I would have thought your company would have negotiated lower fees. I actually find less is more when it comes to investments. A lot of people don’t invest because they don’t know which investment to choose. I just go with index funds as you suggested. There are target date funds, but I would rather rebalance my portfolio myself than pay higher MERs.

SST
6 years ago

Why does that seem implausible? The pension fund and I have very different investment mandates. If one uses the general market index as the benchmark for long-term returns, 10% should be a minimum return expectation.

Take FT, for example, pretty sure his investment strategy has returned far more than than any pension plan (ex or current) his family holds. Implausible or simply reasonable?

Ed Rempel
6 years ago

@Michael, Vanguard? I don’t read their studies. They’re obviously not an unbiased source. I can’t imagine 2 accomplished Yale professors making a simple math error like that. I’ll see if I can find Vanguard study.

Ed

Michael James
6 years ago

@SST: By my calculations, the government would have to make 4.5% nominal or less each year, on average, to not be able to give you any CPI increases at all. However, you expect to make 10% per year yourself. That seems implausible.

Michael James
6 years ago

@Ed: That’s the study I’m talking about. Look at the follow-up research by Vanguard and others showing that active share does not predict outperformance — it just predicts deviation from the market that is as likely to be down as up.