Higher fees could delay your clients' retirement by 4 years

A new report by Mercer Canada reveals the power of scale that could impact retirement plan choices

Higher fees could delay your clients' retirement by 4 years
Steve Randall

The cost of investing in a retirement savings plan could be the difference between your clients retiring in their 60s or having to wait until their 70s.

A new report from Mercer Canada reveals that those who join a workplace defined contribution (DC) and savings plan could benefit from group pooling that would enable them to retire 4 years earlier than if they go it alone as an individual investor.

The firm’s analysis found that, based on various investment management fees available in the market, a representative individual paying the median level of fees available (1.9%) would be ready to retire when they are 70.

But if they had opted for a workplace DC & savings plan with fees of just 0.6%, they would have been retirement ready at 66.

Transitional impact

As many people choose to transition their retirement savings from their workplace plan into an individual account before they retire, this analysis shows how moving too soon can lead to higher costs.

For someone retiring at 65 and paying fees at 1.9%, they would run out of money 5 years sooner than if they had been paying at a 0.6% rate.

Because the effect of fees compounds when pre-retirement and post-retirement are considered together, an individual paying the lower fees throughout their career and then invests their nest egg into an account at the same rate could gain 12 years of retirement income than those paying the higher rate.

“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.”