Research suggests a Canadian pension plan outperforms the do-it-yourself approach in five distinct ways
Self-directed investors take note—a do-it-yourself approach to saving for retirement might not yield the best results.
Hard evidence suggests that a voluntary, or self-managed retirement savings approach is rife with challenges on every step of the journey. From consistently saving, to making properly informed investment decisions, to converting assets into steady income the typical independent pension contributor misses the mark when it comes to their own retirement plan.
In its report called The Value of a Good Pension, the Healthcare of Ontario Pension Plan uses academic and industry research to identify five distinct ways that a good pension plan outperforms individual retirement saving.
These five key “value drivers” include:
- Saving: People tend to save less, later and less consistently with a do-it-yourself approach, compared to a collective plan with mandatory contributions or automatic enrolment.
- Fees and costs: Management and administration costs for good pension plans are “significantly lower” than those involving retail investing and advice.
- Investment discipline: Those who self-manage portfolios have a “striking ability to do the wrong thing” when making investment decisions like asset allocation, security selection and market timing; such decisions made by professionals tend to produce better results.
- Fiduciary governance: Investments managed by professionals with a fiduciary responsibility to members tend to perform better than retail funds.
- Risk pooling: A good collective retirement plan creates efficiencies by pooling longevity and investment risk, in stark contrast to individual risk management that entails costly strategies.
There are simple solutions readily available for employer sponsored pension plans. Link Investment Management’s Multi-Employer Pension Plans (MEPPs) tick all the right boxes.
A MEPP is open to any Canadian business and offers multiple benefits to both plan sponsors and employees, including outsourcing administration and compliance, increased flexibility and reduced fees due to economies of scale and its advanced digital recordkeeping.
“The HOOPP study shows that for every dollar invested, the return is $5.32 for a Canada-model pension plan compared to $1.70 for a typical individual approach,” notes Brian McClennon, President and CEO of Link Investment Management.
“And cost is just one advantage,” he adds. “Our MEPPs addresses all five of these key value drivers, yielding the opportunity to produce better retirement incomes.”
Specifically, Link’s MEPPs address those value drivers through:
- Elimination of the bulk of the administration and management burden with Link assuming plan investment strategy and implementation, monitoring, disclosure, communication and service provider oversight.
- Reduced costs through lower service provider fees, lower investment management fees and a reduced strain on internal resources.
- Increased investment efficiency with employer contributions 100% non-taxable resulting in employees receiving 100% of their employer’s contribution.
- A centralized compliance approach that streamlines federal income tax law, legislation, plan rules and provisions and governance.
- Added flexibility, with customizable plan features to meet employer objectives.
- Reduced fiduciary responsibility and risk, with Link retaining fiduciary liability.
“Link’s experienced portfolio management team harnesses the power of passive investing, Exchange Traded Funds (ETFs), and a lower and completely transparent fee schedule,” adds Mr. McClennon.
“Our MEPPs offer a lighter burden for employers, and less worry and guesswork for employees—a win-win all around.”