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.
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.
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!
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.