Fees matter. Whether you’re buying a home, purchasing a car, or saving for retirement, what you spend on fees reduces the amount of money you have for the product you want. When it comes to paying for your pension, the importance of low fees is magnified year, after year, after year.

Canada’s investment marketplace is expensive. A 2017 report from Morningstar showed that Canada received a bottom grade for investment fees and expenses when compared to 25 different countries. The report highlights that average fees charged in the investment equity retail sector were 2.36% per annum. That is, every year, 2.36% of the assets within an equity investment fund are removed to pay fees.

Why is this a problem? A quick calculation illustrates the answer:

Assume Holly expects to retire 30 years from now and saves and invests $10,000 every year.  Based on the advice of her financial advisor, she invests her money in retail equity mutual funds with solid track records. The funds earn 8.0% on average each year but Holly is only paid 6.0% on average after fees are paid each year over the 30 year period. As a result, Holly accumulates net assets of approximately $700,000 at the end of the 30-year period.

Holly is likely happy with this result. Holly’s financial advisor and the fund investment manager are even happier. Since the fees averaged 2.0% each year over the 30-year lifetime of Holly’s investment, she has sacrificed approximately 30% of her savings to her financial advisor and investment manager.  Without fees she would have had assets of approximately $1 million.

This example is grim. It is also the reality faced by many Canadians who do not have an employer sponsored retirement savings program. For those lucky enough to have a workplace retirement program, they can expect lower fee levels. How much lower often depends on the size of their employer and/or the plan they participate in.

Small to mid-size employers can expect to provide retirement funds that have total fees of approximately 1% to 2% per annum to their employees, while some larger employers provide retirement funds with total fees less than 0.5% per annum.

Given the disadvantage in the marketplace for individuals and workers in small to mid-size companies, the ability to pool assets together to achieve lower fees is a necessity to ensure the needed accumulation of retirement savings. The Ideal Canadian Pension Plan (ICPP) does just that. Its mandate is to provide lower fees so that the maximum amount of each dollar paid into the ICPP is used to provide pensions to its members.

Current fee levels for the ICPP are 0.55% to 0.6% per annum. As membership in the ICPP grows these already low fees are scheduled to reduce even more.  The goal is to achieve total fees of approximately 0.3% per annum.  At this fee level, the ICPP will be one of the most inexpensive full-service pension savings arrangements in Canada. This low-fee, full-service support is available both before and after a member’s retirement.

Read more about the ICPP’s low-fee investing here.