The Investment Funds Institute of Canada (IFIC) is urging the federal government to consider the full spectrum of retirement assets in its efforts toward reform of the retirement industry, including those in the “fourth pillar” of non-registered vehicles.
IFIC’s submission to the Department of Finance Canada identifies a significant component of household financial assets—referred to as the fourth pillar—set aside by Canadians, including tax-free savings accounts and other non-registered savings vehicles.
“The debate related to Canada’s retirement income system must include a discussion of all potential retirement assets,” says Joanne De Laurentiis, IFIC president and CEO. “This fourth pillar, with its significant asset base, can only serve to enhance the retirement income of Canadians.”
IFIC estimates the value of these assets at $1.7 trillion, or roughly the same amount of assets in all of pillar three, which include all public plans and those sponsored by private employers, including defined benefit (DB) and defined contribution plans, and group and individual RRSPs.
Pensions vs. mutual funds
The submission compares the mutual fund industry’s customized approach to the one-size-fits-all model of DB pension plans. It suggests the former is better at providing reliable retirement income, considering the current environment of low interest rates, which will make attractive returns on fixed-income assets problematic in the future.
“The mutual fund industry in Canada has been consistently providing Canadians, primarily through advisors, the opportunity to build and maintain effective and suitable portfolios of funds based on a customized assessment of each client’s circumstances,” the submission says.
Further, for the period of 2008-2009, IFIC states that mutual fund returns net virtually all fees outperformed the largest most economical DB pension funds in Canada. Such funds “will likely be constrained in their ability to match the returns of individually-styled portfolios for meeting the retirement goals of Canadians,” says the submission.
IFIC offers the following recommendations for Canada’s retirement income system.
1) Make it easier and more appealing for employers—and particularly small- and medium-sized businesses—to establish retirement plans affordably and without liability.
2) Increase the number of Canadians that participate and save enough in employer or individual retirement savings plans through the introduction of automatic enrollment, contribution escalation features and financial education.
3) Ensure that those with RRSPs enjoy the same tax benefits as those with standard DB and DC plans by increasing RRSP limits from 18% to 34% of earned income to achieve the average benefit value of the federal government employee plan benchmark.
4) Understand the value of Canadians’ access to financial advice when comparing all-in costs and benefits of features available within government-provided, employer-sponsored and individual retirement plans and other savings.
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