Higher fees can set back retirement by four years  

New Mercer analysis indicates that the power of group pooling available to members of a workplace Defined Contribution (DC) and savings plan can secure better retirement outcomes

Toronto, Canada, February 24, 2022 – Higher investment management fees could potentially set your retirement date back by four years, according to the 2022 Mercer Retirement Readiness Barometer.

The new Mercer analysis of various investment management fees in the market found that a representative individual paying the median level of fees available to the individual investor (1.9%) would be retirement ready by age 70 – well above the traditional retirement age of 65.

Comparatively, an individual paying 0.6% in fees – the median fee available to investors in a workplace Defined Contribution (DC) and savings plan – would be retirement ready by age 66.

While this is much closer to the traditional retirement age, achieving retirement at 65 requires a holistic look at retirement income. This might mean higher contribution levels, a smart investment strategy, and having a comprehensive approach, including personal savings and being wise with money after retirement. 

The power of scale

This difference in fees – long commented on by personal finance experts – illustrates the power of group pooling available to those who have access to a workplace DC and savings plan. Group workplace plans could achieve economies of scale, reducing costs relating to low-fee funds, which in turn delivers a higher net rate of return on an investor’s portfolio over time.  These individuals would have the advantage of four more years of retirement – and significantly lower risk of having to reduce their spending, and therefore quality of life, in and throughout their retirement years.

“Individuals can make all the right investment decisions, but a workplace DC and savings plan could provide a level of scale unavailable to an individual going it alone,” says Jillian Kennedy, Partner and Leader of Defined Contribution and Financial Wellness at Mercer Canada. “Participating in a workplace program and maximizing the benefits could leave you with a significantly larger nest egg – and shave years off your working life.”

This disparate impact is not limited to the accumulation - or savings - phase. It also affects retirement – the phase at which an employee begins to draw down their retirement savings. Both before and at retirement, many individuals move their savings out of their workplace program into an individual account, at which point they could start paying higher fees.

Based on our analysis, with a retirement age of 65, an individual paying the median retail fee (1.9%) during their retirement years would be expected to completely draw down their savings – e.g. run out of money – five years earlier when compared to paying the median group fee (0.6%).

The effect of fees compounds when both pre-retirement and post-retirement are considered together. An individual who pays the median group fee (0.6%) throughout their career, who retires at age 65, and who subsequently invests their nest egg in an account paying that same rate, would have an average of 12 more years of retirement income compared to a similar person paying the median retail fee (1.9%) over the same period.

This puts the importance of retirement transition into perspective. The experience of transition can be overwhelming, and it is clear that more support is needed for workers to make wise decisions with their money as they end their working lives. Employers, regulators and service providers are all beginning to recognize that transition support is necessary to ensure comfort and dignity in retirement for all.

Fees continue to make a difference, and retirees should be aware of the fees they are paying and the associated support services they are getting.

Get your workforce retirement ready

Achieving the traditional retirement age of 65 requires a comprehensive retirement strategy, including a close look at sources of savings across both workplace savings programs, government benefits and personal savings alike. Employers who wish to assist their employees in developing this comprehensive strategy have levers at their disposal. Past Mercer Retirement Readiness Barometer results have shown that some of these levers include the importance of flexibility, promoting attention to personal savings and even engaging vulnerable employees that may have low levels of financial wellness.

Employers are also adapting to improve retirement outcomes for their employees with plan design changes. These changes include the addition of workplace RRSP or TFSA accounts that provide flexibility for savings, and moving towards auto-enrolment in a workplace pension plan at an optimal contribution rate to improve plan participation levels. Employers recognize the power of small changes that continue to build on the advantageous fee structure.

When these changes are implemented, employees can begin to accumulate wealth regardless of their knowledge, the amount of time they dedicate to planning for retirement or the commitment to ongoing management of their savings. They are then able to experience the fee advantages associated with the power of group pooling and can be guided to an investment option that sets them on track to help achieve their retirement goals.

About the Mercer Retirement Readiness Barometer:

The Mercer Retirement Readiness Barometer measures the age in which different personas can comfortably retire based on their participation within an employer-sponsored DC plan and benefits provided by the government (like CPP/QPP/OAS).

This analysis draws on the retail investor fee data available in the September 2019 report, Morningstar Global Investor Experience Study: Fees and Expenses. For group retirement fees, it draws on the fees available in Mercer’s Defined Contribution (DC) Canadian fee database covering workplace DC and savings plans. Individuals were assumed to be invested into a “balanced” target date portfolio with a 12% combined contribution rate – with 6% coming from the employee and 6% from the employer.

Retirement readiness was defined at a 75% probability of not running out of money before death, with a target income replacement ratio of 70%. The results are based on analysis using Mercer’s proprietary Retirement Readiness tool.

All fees are representative, and all assumptions are reflective of the reality of the Canadian market.