DC plans and the ORPP : Why fees matter

The authors thank members of the C. D. Howe Institute Pension Policy Council and anonymous reviewers for comments and suggestions on previous drafts and Anne Mackay, a postdoctoral researcher in actuarial science at ETH Zürich and a Fellow of the Society of Actuaries, for assistance with financial modelling. [...] This is an important question, for the following reasons: • Employer-paid expenses effectively deliver the same value to DC plan members as employer-paid contributions; • For a given employer cost, DC plan members’ overall outcomes are better when employers pay expenses; and 1 The so-called ‘Flat Benefit Formula’ is a standard method of calculating an employer’s contribution to an employee’s defin [...] DB Plan Members 2,251,590 1,399,902 To the extent that employer-paid DC expenses are not DB Coverage Rate 31% 12.1% recognized as contributions for purposes of ORPP- comparability, employers will be discouraged from DC Plan Members 233,341 893,713 establishing and maintaining the DC pension-delivery DC Coverage Rate 3.2% 7.7% models that operate most efficiently and deliver the best outcomes for m [...] More broadly – and given the increasing importance of DC plans as a source of retirement income for Canada’s private-sector workers – we hope this E-Brief will enhance understanding of DC plan expenses and stimulate a constructive dialogue about those expenses among policymakers, regulators, plan sponsors, plan members and service providers. [...] Essential Policy Intelligence 4 e-Brief 1. All expenses are paid by members, often through a combination of direct and indirect charges; 2. Responsibility for payment of expenses is shared, with some paid by the employer (e.g., record-keeping fees) and some paid by members (e.g., investment management fees); and 3. All expenses are paid by the employer outside of the plan.