Canadians pay among the highest investment fees in the world, and these fees can hit employers even harder than employees.
Canadians Pay High Investment Fees
Canadians pay some of the highest investment fees in the world.
These high fees reduce retirements savings, which means it’s possible to run out of money years earlier than anticipated.
As a financial planner for the past 15 years, I’ve often been asked “How much do I need to retire? … Just a ballpark figure?”.
This is a difficult question to answer because everyone has different definitions and expectations around retirement.
However, there is one constant that I can confidently deliver when answering this question: High investment fees can rob you of 10+ years of your retirement. And I’ll prove it to you now with a short story:
30 Years Until Retirement
At 35 years old, Sandy decides to start participating in the group retirement plan offered by her employer. For every dollar she contributes into the plan, Sandy’s employer will contribute a dollar up to a maximum of $1,800 every year.
Because of benefits like the group retirement plan offered by her employer, Sandy plans on staying with the company until she retires at 65 years old. That means she has 30 years to save up for retirement.
Sandy starts contributing $150/month into the group retirement plan and her employer matches that for a total of $300/month going into Sandy’s group retirement savings plan.
Sandy selects an investment fund from a long list within the group retirement savings plan. She didn’t have much guidance on how to pick this fund, and she couldn’t quite find out what all the fees were, but the performance numbers looked good and she expects a decent return.
Sandy’s friend John works at a different company and after speaking with Sandy, he decides it’s time to start saving for retirement as well.
John is also 35 years old and he plans on staying with his employer until he retires at 65 years old. And lucky for John, his employer also offers a contribution matching plan up to $1,800 every year.
John decides to get started with his retirement savings. However, instead of picking from a long list of investment funds like Sandy did, John worked with his company’s pension consulting service and found a low-cost solution that suited him well.
At Sandy’s retirement party 30 years later, John was happy for Sandy and thanked her for getting him thinking about his own retirement savings. John had retired the week previous and was excited about the next chapter in his life.
Over coffee, Sandy and John compared notes about how their retirement accounts had grown over the years.
The $66,640 Difference … And Counting!
Sandy’s retirement account had grown at a rate of 4.5% each year over 30 years so she now had $229,509 saved up for her retirement years.
Her investment fund charged 2.5% in annual fees so even though the investments actually earned around 7% per year, 2.5% went to the investment management company every year. The remaining 4.5% is what went into Sandy’s retirement account.
John’s retirement account was invested in a very similar way as Sandy’s with the same investment performance, but at a much lower cost. John’s account had grown at a rate of 5.9% each year over 30 years so he now had $296,149.
John’s investment fund only charged 1.1% in annual fess so even though the investments actually earned 7% per year, 1.1% of that went to the investment management company every year. The remaining 5.9% went into John’s retirement account.
What a big difference fees can make! Sandy was absolutely shocked that hidden investment fees had taken more than $66,000 away from her retirement savings.
That extra money would have grown into $207,713 during her 20 year retirement and funded at least another 10 years of her expenses (along with her Canadian Pension and Old Age Security).
Now Sandy will have to be extra careful with her money in later years because hidden investment fees in her working years had left her with $66,640 less than her friend John.
The impact on the owners of the business is usually even more substantial. Typically the owner has a higher income than their employees and they contribute more to their group retirement plans as a result.
High fees erode the value of investment accounts at any level, but for larger accounts the difference can often be measured in the HUNDREDS OF THOUSANDS of dollars over time.
- High investment fees can steal years away from retirement
- Often it’s difficult to find all the hidden investment fees
- Company owners get hit extra hard on high investment fees
Next Steps …
Hidden investment fees are kind of like a slow leak at the bottom of a reservoir. You don’t notice it at first, but over time there is a lot less water in there!
That’s why at Canada’s Best Pension Plan we believe in combining low cost investment choices with a high level of service. It’s better for everyone.
Click here for a complimentary review of the fees in your company’s group savings plan.