Should you consolidate your RRSPs?
If you’re like me you’ve heard about the days when someone would graduate from high school or university, find a job with benefits and a pension, and work there until retirement and thought - I don’t know anybody that has happened to. Most people will have on average 5-7[1] careers in their lifetime, across multiple employers. If you’re lucky, a few of them had Group RRSP plans that you could pay into, and they would match the contributions. They may have even had a Defined Contribution or Defined Benefit Pension Plan. When you leave an employer, if you don’t choose how to proceed, your group RRSP plan is simply moved into an individual plan. The funds currently invested remain that way - but the result is that some people have two, three or even four RRSP accounts, and the question is - should you consolidate them?
There are a few things to consider, so let’s start with whether or not you can, and then move to whether or not you should.
Does your plan allow a transfer out?
Generally, there are no restrictions on moving RRSP accounts, however some Group RRSP accounts will have a provision restricting withdrawals while employed at the request of the employer. If you have your benefits booklet, this will tell you whether this is the case. If your plan does allow a transfer, it will typically offer one free transfer per year and then charge $25-$35 per transfer thereafter to discourage transferring out the contributions as they are received. Once you have left your employer, you are free to transfer this plan to any individual RRSP as you see fit (again your booklet will advise if there is a fee or not).
If you have a DPSP plan (Deferred Profit Sharing Plan) you will be unlikely to transfer this while employed. This is because it is an employer only paid plan, with a vesting period so the employer does not want to risk employee’s transferring the funds out and then leaving before their funds vest. These types of plans are not very common, so we won’t get into a lot of detail. Just know they probably won’t be able to be transferred while employed, and after you leave, any vested amounts are treated like an RRSP.
If you have a DPSP or an RRSP with a “no transfer” provision, don’t fret - this certainly doesn’t mean the plans are bad! A DPSP is fully funded by your employer, and if your employer RRSP offers a match, you are still receiving free money that you would otherwise not receive. It does however mean that you will need to manage these accounts separately (your Financial Planner should be willing to work with you to ensure that your accounts with your employer group are invested appropriately as per your asset allocation).
You can, does that mean you should?
Say you’ve reviewed your plans and determined there are no issues with transferring accounts and consolidating your plans. That is great! Most people like to minimize the number of institutions they are dealing with as this reduces the number of statements received, investment decisions to make,
places to make sure your personal information and beneficiary designations are up to date, etc. So now that you’ve decided to consolidate, where do you consolidate? If you ask the institutions of the accounts (your bank, advisor, or employer plan) they will all tell you you should put all the money with them, and why wouldn’t they? Rather than asking them who the best recipient is, let’s look at the account details and determine the best fit. Generally with an investment account you are going to want: low fees, funds that align with your investment objectives, and good advice.
Low fees - this one makes a lot of sense, fees are deducted from your returns, so if your account returned 8% last year, having 1% versus 3% in fees means you either actually saw 5% or 7% (and there are funds out there charging nearly 3% in MER[2], before you take into account trading fees, transfer fees, registration fees, DSC penalties, or front end loads. Segregated funds, since they also add an insurance element can go even higher). If you compound this over time, the resulting discrepancy can be shocking. The other thing to consider is what kind of fees you are paying. Are your fees fully built into the MER? Are there additional advisor fees being paid out of your registered account? Are there incentive fees in the funds in your account, and does this align with your objectives? Are there fixed costs, such as an annual fee for your account?
Availability of funds - While most individual and employer plans these days will offer a full suite of funds, you will occasionally still find a plan that is invested at the employers discretion or that offers a very limited set of options. On the other side, some employer plans don’t want to limit the options available to employees and put a carrier’s full suite of options on the plan. I have seen plans with over 100 investment options, and a lot of confused and frustrated employees, trying to decide which of 15 Canadian Equity funds is right for them. You want to ensure that you have enough variety available to create a diversified portfolio, but not so much that you will get overwhelmed and not make a decision at all - and that number is different for everyone. At a minimum you will want Canadian Equity, US Equity, International Equity, Global Fixed Income, and maybe a Real Estate option. Depending on how savvy you are, and how much you enjoy research you can certainly opt for more, but that is a good minimum.
Good advice - If you are confident in making all your investment decisions on your own, the first two may be the only items you want to consider. However, most people get a lot of value from the advice of their Financial Professional. Whether it comes from having a deeper understanding of the different investment management companies and their funds, being able to recommend which accounts to save more or less into to reduce current and future taxes, or even ensuring that you create a plan and stick with it when the markets are turbulent, there is value in receiving good advice regarding your accounts.
Some of these items will work in opposite directions - typically if you are getting more in-depth advice, your fees will be a bit higher. If you look at those factors for each of your accounts, you should be able to determine
which is the best option for you. At that point, you can start consolidating everything into that one account, keeping any transfer restrictions in mind. You will simplify your investment life, and hopefully enjoy better returns and some peace of mind! If you want to review your various accounts, feel free to reach out to me here.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations.
[1] Career Change Statistics, www.careers-advice-online.com
[2] “Mutual Fund Fees Around the World”, Ajay Khorana, Henri Servaes & Peter Tufano, 2009.