A group of nonprofits, foundations and retirement security experts is proposing a new retirement investment program for nonprofit employers, employees and freelancers in Canada. They have partnered with a retirement security consulting and management firm called Common Wealth, which characterizes itself as “a social purpose business”.
A large share of Canada’s workforce are in low and moderate wage jobs, with very limited benefits. About 22% of workers (compared to about half that proportion in many European countries) are in what OECD calls the Low Wage Category, earning less than 2/3 of the median wage. Many more are in a modest income range.
And unfortunately, many of the employers of these workers are nonprofit organizations delivering very valuable, even essential services. (Makes you wonder why looking after people doesn’t pay as much as looking after their cars.)
The group has issued a consultation paper called Common Good Retirement Plan, which estimates that about 850,000 people working for nonprofits do not have a workplace retirement plan. The overwhelming majority are women, and the average wage in the sector is well below the average for the rest of the workforce (which explains part of the gender income gap).
Canada ranks well internationally for having a public retirement income program (OAS, GIS and CPP) which protects the lowest income people in retirement (that is, making their low income secure). Public sector employees also for the most part have very good defined benefit, inflation-protected plans. But most of the others are basically on their own.
The consultation paper points out that …Since the late 1970s, workplace pension coverage has dropped from about 35% to about 25%, and defined benefit coverage is less than a third of what it was then. International experts have highlighted this large and growing coverage gap as one of the biggest weaknesses of Canada’s retirement system.
Although there is tax assistance for RRSP’s, most people wind up investing in mutual funds being sold by banks and other financial institutions. They are not treated well:
Canadians pay some of the highest investment fees in the world… Mutual funds, still by far the most popular investment vehicle for individual Canadian investors, have average industry-reported fees exceeding 2%. Regulation does not require that all-in fees be disclosed, and many Canadians have no idea what fees they pay, or that they pay fees at all.
So the proposed initiative would organize a kind of massive savings/investment group using RRSP’s and TFSA’s. Employers could join and make participation either mandatory or voluntary for employees, and employees or self-employed people could also join on their own. The management structure would be a nonprofit board with an expert advisory board. Participants could port their plans from one employer or work status to another. The plan would tend to invest in ETF’s and Index Funds, which have lower management costs, believing that overall performance of these instruments is competitive with so-called “actively managed” funds.
To illustrate the effect of the large fees charged by banks and financial institutions …
compare a retail mutual fund with a management expense ratio (MER) of 2.2% with a fund with the same asset mix with a MER of 0.6%, fees typical of a large collective retirement plan. Assuming gross returns for both funds of 6% per annum, the results are dramatic. The nest egg at age 65 for the high-fee fund is $360,500, and for the low-fee target date fund it is $504,100 – a 40% improvement in the member’s savings outcome
The Common Good Plan would also permit contributors to remain in the plan after retirement to have help with their process of “decumulation”, with tax-appropriate arrangements, deferred annuities for older age, etc.
The consultation phase of the project was funded by several foundations, including Atkinson, Maytree, Metcalfe, and Hamilton Community Foundation. Project representative Connor Bays added that Vancity Credit Union also made a contribution.
As of early March 2020, the project has drawn indications of intent to participate from about 100 organizations with about 3000 employees. The objective for reaching a scale for operation, is about 20-30,000 members. So they are now seeking development funding, probably from a government source, to permit four years of operation and scale-up.
Anyone wanting to get more information or to explore joining the plan, can contact the organization at cwretirement.com