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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My company uses Sunlife as their provider for DCP or RRSPs. They have a large selection of funds, no index funds, but they are all segregated fund versions of a non-seg fund. They publish the MERs for the seg funds, which are very low (0.2-0.7%), but seem to imply that’s the only fee. I have to believe that the underlying fund also has an MER, but not sure how that all works.

I’d love to get a Canadian stock index fund in my group RRSP with an MER of 0.675%. Our plan is with GWL as well, but we have only a small Canadian operation and the best fund we’re offered has an MER of just under 1.6%. The only sensible course of action for me is to withdraw my money roughly yearly. I’m told that I can do this without cost, but we’ll see.

We re-balance my wife’s DC plan with new money/contributions, not by selling existing assets. This way we avoid more (unnecessary) fees.

Totally agree with the “look for the word index” in your employer-sponsored RRSP or DC plan.

I’m one of the fortunate ones where my wife and I are in DB plans. What I don’t like about my particular plan is the employer controls it 100%, meaning I can’t contribute and they don’t let you. It is also not indexed to inflation. Makes it very tough to make a future pension forecast. What you get today will be what you collect in 20 years. It is free money and costs me nothing today, however you have to plan for the shortfall as you age.

Hi FT. I have helped many people choose funds for their DC pension. I’ve seen most of the common plans and have some insights:

1. Getting free money from your employer is nice, but all plans (except one) severely restrict your investment choices. The pension administrators sometimes are vague about whether or not you can transfer out. Some plans let you transfer out any time, but then stop employer matching for a year or two. If you have the option to transfer out every year and continue to have your employer match, that is a good idea.

2. They do not include anything that is aggressive (because the employers want to avoid the risk of being sued). Funds called “aggressive” in DC plans or group RRSPs are almost always “medium” risk.

3. By knowing the fund managers, almost all DC pensions have better choices than buying only index funds. This is particularly true when the index fund MER is almost the same as the professionally managed funds. Remember that 100% of index funds lag the index. It is worthwhile doing some research on the fund managers.

4. Finding the full MER can sometimes be tricky. They may tell you the management fee, which is only one component of the MER. Most are seg funds, which also include a higher MER to pay for the guarantees (that I believe are worthless from employees). The plan you show looks more like only the management fee and not the full MER, FT. Are you sure that is the full MER? To check, try comparing the performance & MER to the identical regular fund from Morningstar.

5. With interest rates being so low today, the biggest drag on performance in DC plans is usually the inclusion of bonds. Of course you have to understand your risk tolerance, but DC plans are usually long term and don’t have aggressive investments. The bond funds in DC plans usually are mainly Canadian government bonds, which are paying little more than savings accounts today. They are also riskier today, since they will likely go down if and when interest rates eventually rise. Having 25% in bonds will likely be a bigger drag on performance than MERs. Consider avoiding the bond exposure.

Just a few thoughts from experience with DC pensions.


@Michael James

My company also uses GWL and have index funds provided by TDAM with the expenses ranging from 0.676% and 0.694%. Money goes here first because of the generous RRSP match offered by my employer.

Even with these “lower” expenses, I transfer my contributions out once per year (I haven’t been charged a fee, GWL allows one free transfer per calendar year). Unfortunately GWL won’t allow you to transfer the funds in-kind, it has to be in-cash. In the past, it has typically taken about 10 calendar days between the cash leaving GWL and the cash arriving at TD Waterhouse, meaning a part of my portfolio is out of the market for this period.

@B: Thanks for the account of your experience with withdrawing from a GWL group RRSP. As it happens, the best of poor options in my plan is a TDAM Canadian stock index fund, but the MER for our little group plan is almost 1.6%. So, I wouldn’t want to withdraw in-kind anyway. I’m happy to put that money into VCN once a year.

@Michael James: My preference to transfer in-kind is simply to maximize the time the money is invested in the market. If in-kind transfers were allowed, I could sell the fund once it hit my brokerage account and buy my desired ETF while the money is out of market for only the 3 day settlement period, instead of the 10-ish days for the in-cash transfer.

I have a DB but my wife has an employer RRSP with matching up to 3% of pay. She asked me to choose for her. I browsed the 20 or 30 options offered and none appealed to me. I suggested one at 1.2% fees for pretty much being an index ETF type of mutual fund. The other were either higher fees for similar type of funds or bond funds. HR recommended her to get multiple ones for diversifying. I replied, its an index-type mutual fund, its already diversified. So she only got that one fund.

10-yr return was 9% or something but basically, we don’t care about the returns as long as it beats the fees and inflation, we only want the employer matching. All other savings are done through our own personal TFSA/RRSP where we do care about returns.

re: “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.”

My employer, the government, over-matches my contributions — 115% I believe (how generous they are with tax payer moolah) — but I have zero control over the investments.

A gov’t DB plan is not all people believe it’s cracked up to be. All payment options, from earliest to latest, will give me a ~7% annual return on total contributions (employee only; worse if employer contributions are factored).

If the average general market long-term return is supposedly ~10% per year, I’m losing at a minimum 3% per year on my money by being forced into having no investment choice whatsoever. In other words, all that “free money” is costing me a lot.

@SST: By my calculations, that 7% return you’re getting is a real return, not nominal. Getting a long-term 7% real return is a dream for the vast majority of investors. When we factor in the employer contribution, the real return drops to a still excellent 4.5% per year. You’re getting a great deal. You’re not losing anything.

@Ed: All research on the search for great fund managers shows that “doing some research on the fund managers” is futile. You just end up chasing past performance and getting future crappy performance.

@Michael James — nope, that 7% is purely nominal.
According the their own literature, “adjustments for inflation…are not guaranteed and are only offered subject to available funding”, thus any calculations cannot be on a real basis.

As well, part of my contribution, currently 1.25% employee + 2.75% employer, goes towards supporting inflation adjustments. As you can add, the gov’t thinks long-term inflation runs 4%, yet their average inflation adjustments have been 2.6%/yr over the last 31 years.

So a real return on just my contributions would be around 3%. Factor in the employer contributions and the whole plan might reap <0%.
Ponzi anyone?

And yes, I am losing — not only a "free" 3% per year but also any other opportunity costs by i) being forced to contribute to the plan, and ii) having zero control over allocation. No wonder the free market calls…

As for searching for great fund managers, I am inclined to agree with both Michael and Ed. It will be management that is the largest return driver, however mutual fund management alpha will be diluted through the various levels of management in which the fund invests, as well as the "inefficiencies" of the market itself.

Hi Michael,

The most in-depth studies support fund managers outperforming and being able to identify them. Your point is well taken, though, that perhaps it requires a reasonable amount of research to identify them.

Check out the study on “Active Share” by 2 Yale professors. It is more in-depth and unbiased than any study supporting indexing I have seen. It shows that the main reason the average mutual fund lags the index is because most are “closet indexers”, that always try to be similar to the market. Closet indexers are not really trying to beat the index.

In Canada, about 70% of mutual funds are closet indexers. I believe that nobody should buy these funds. Once you remove the closet indexers, than most mutual funds beat the indexes and the ones that do tend to continue to beat it. The study is very interesting an a “must read” for anyone interested in the professional management vs. indexing discussion.


@Ed: Not true. The paper you cite was subsequently found to have errors. Once these errors were corrected, active share was shown not to be predictive of outperformance. Active share predicts the degree of deviation from market returns, but these deviations are as likely to be lower as they are higher. In the end, the best predictor of higher returns is lower fees.

Hi Michael.

Active Share refers to the degree that holdings are different from the index. This is intuitive that you can only beat the index by being different from the index. The study showed that mutual funds that have an Active Share (as opposed to a passive share) of greater than 80% (meaning less than 20% of the index holdings), the majority beat the index after fees.

It also showed this to be a good predictor of future performance.

I’m not sure what study you are referring to, but it is not the Active Share study by Martijn Cremers and Antti Petajisto.


@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.

@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, 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.


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?

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.


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: 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.

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.

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?