A survey conducted by Sun Life Financial found that one in five Canadians who have access to a group RRSP in which the employer provides some sort of a match, do not take full advantage of the benefit. A bit of a head-scratcher from the survey: when asked why, 6% said they preferred to invest on their own instead. It doesn’t sound like a rational response when you consider that the employer match ranged from 25% to 150% of the employee contribution.

Group RRSP programs in which the employer offers to match your contributions are a no-brainer because:

  1. Free Money: Even if you are funding other financial plans such as paying down the mortgage or saving for your child’s education, it makes sense to contribute to RRSPs to get the maximum match. After all, where else can you get an immediate, guaranteed and risk-free, 25% to 150% return on your investment.
  2. Periodic and Automatic Investing: With group RRSPs, you typically make a contribution during each pay cycle. Your contribution and the match from the employer is invested in the fund(s) of your choice. By investing regularly and automatically, you avoid many of the emotional pitfalls involved in investing.
  3. Up-front Tax Refund: Unlike a lump sum RRSP contribution, you don’t have to wait to file your tax return to get a refund on your taxes. With Group RRSPs, any money you contribute is pre-tax and has less of an impact on your cash flow.
  4. Low-Cost Mutual Funds: I participate in a Group RRSP at work and I can attest to the fact that mutual funds with MERs as low as 0.8% are available. Even if the selection is limited to actively managed funds, low MERs tilt the odds in favour of the investor. Also, many group RRSP programs provide access to mutual funds that are not available to small investors.

Bottom line: When someone offers free money, take all of it!

This article has 34 comments

  1. I read a complaint once about an employer in the US that offered to match 50%, but only offered high MER funds and charged an extra percentage of the entire portfolio on top of that. If the total cost is 3% per year, then it would take just over 13 years to eat up the entire company match. So, if the average dollar contributed stays in the savings plan for more than about 13 years, the whole thing is a bad deal.

    I have no idea if this sort of problem is widespread (or even if the compaint I read had any merit), but it is the only reason I can think of for passing up free money.

  2. Mind boggling why people would not partake in these plans… I posted similarly here:


  3. I am puzzled as well as to why people do not at least take full advantage of their employers contributions.

    However, once important point is that many employers require that you remain with the company for a certain amount of time or else you are only entitled to your contributions.

    Great blog!

  4. I think that several employers benefits are not well explained to employees. I have seen similar situation with company’ share program. Our employer was giving a free (but taxable) contribution of 25% of the amount we put in. Even if you are afraid that the stocks drops during the year, chances are that it’s not going to drop by more than 25% each year!

  5. My companies plan is:

    1) Instantly Vested
    2) Matched 100% to 6% of your salary
    3) Have ‘Investment Management Fees’ of 0.9% (I can’t seem to find if this is the total fees, or if it’s on top of other fees)
    4) Offer a very small selection of 5 funds (Money Market, Bonds, Balanced, Canadian Equity, and Global Equity).

    Yet in my department I’ve had to nearly force people to sign up because it’s too complicated and/or they just don’t want to. Pretty much all of them let me know how well the funds are doing, and lately have been griping about losing money. I have to remind people of how much the funds cost them . . . and are they really ‘losing money’?

    I wonder what the actual participation rate is in my department. We have about 150 people and I know I’ve signed up over 10, now I just need to verify with the other 140 people that they’re in there.

  6. Canadian Capitalist

    MG: I missed your post because your feed has switched from atom to FeedBurner. Not to worry, I am now subscribed.

    Michael: Good point about expensive mutual funds. Not sure how widespread the problem is with Group RRSPs.

    Traciatim: Yes, it is very surprising when people give up free money. At your employer, the match is especially good and participating is like getting a 6% salary hike. Think of it this way: when they are retired, your 10 colleagues will be thankful you made them sign up.

  7. I think that one of the biggest barriers to involvement in these plans is the difficulty in setting them up. I jumped at the chance when my employer started offering a match (100% match up to 2% of total salary). However, it wasn’t easy to get enrolled and I can certainly understand why someone who isn’t as enthusiastic about this type of thing would just give up. There were some barriers that needed to be overcome including:
    -Understanding what the program is. Many people just don’t know what the program is and why they should use it.
    -A complicated enrollment process. In my case it was quite difficult to enroll because the enrollment process was far more complicated than it ought to be.
    -Restrictions such as poor choice of funds or limitations such as vesting periods. I am only funding my RRSP through my employer just enough to get the match. The choice of funds offered in my employer’s program is limited to high MER, actively managed funds.

  8. Most group RRSPs allow you to transfer out some or all of the funds to another institution for a small fee – usually $25 or 1% of the amount. Therefore, you can get the company matching portion, and still have the ability to invest it how you like.

  9. Canadian Capitalist

    Jamie: Good points. Awareness is a huge problem and I recall reading that employers are reluctant to give investment seminars or talks at work because of liability concerns. Like Michael points out high MERs might negate the advantage offered by the match.

    ksin: I think it depends on the group RRSP. At my employer, employees cannot transfer out the contribution that attracts the match and the match itself until they are no longer employed.

  10. In response to Michael’s comment (and CC’s question), my husband’s group RRSP has about 15 MF options and every single one of them has a MER of 2-3%. I think one of the bond funds has a MER of 1.9% and that’s the “cheapest” option. He still contributes enough to receive the match (100% of 3%) but I’ve often wondered (and was too lazy to figure out) if, despite the fact that it is free money, he might be better off putting the money into an ETF in a self-directed account.

    I agree that most people that don’t contribute don’t because they claim they can’t afford it but when you consider MER’s & vesting, it may not be as cut and dry.

  11. I think the equal match factor will beat the high mer for all but the youngest workers.

    I just did a super-quick spreadsheet where I had one worker investing $20k lump sum and a 7% return minus 0.3% mer (net return is 6.7%). The second worker invested $40k (with the match) at the same time and their mer is 2.8% (net return of 4.2%).

    For that scenario it takes the non-match, low mer employee 30 years to catch up.

    For all the analysis and hand-wringing we do about rate of returns and expenses, the amount saved or contributed is one of the biggest factors.


  12. I’d like to see that spreadsheet FP. 🙂 At my company they match 6%, but the available mutual funds are all in the 3% range. I won’t be eligible for the match for at least another 3 months, but afterwards I’ll have to see if it’s worthwhile to continue doing my own outside ETF RRSPs.

  13. Hey…thanks Mike! Good thing you’re not nearly as lazy as I am. 🙂 I’d like to see the spreadsheet as well.

    Vesting times may be a factor as well but that’s not something you could know up front.

  14. I didn’t even save the sheet since it was so simple and rough.

    From an intuitive level however, think of the fact that a low mer account (let’s say zero mer) will outperform a high mer account (let’s say 3%) by 3% each year. However if the high mer account has a 100% head start because of the match – then the low mer account will take a long time to catch up.

    I think for the question of if you should enroll in a ‘matching” investment program you have to consider both the match and the mer and not make a decision based on only one factor. Yes, a 3% mer is high but if the 100% match makes up for it then it’s a good deal.

  15. Maybe I’ll do a guest post for CC on this topic… 🙂

  16. Canadian Capitalist

    I think I’ll take you up on the offer Mike 🙂

    Anytime I can get a day off from blogging is welcome!

  17. Many of the larger group RRSPs allow an annual free transfer out from the group RRSP to another RRSP account (but not all). It is fairly common to contribute to the Group RRSP, get the match and then get the funds out on an annual basis to deploy as you see fit.

    Four Pillars – can you include regular contributions in your analysis as well? 🙂

  18. I find that many people in my place of work may not participate in matching programs either because they do not have enough funds to invest to receive a match or they simply do not understand the importance of the free money.

  19. Four Pillars said: “I just did a super-quick spreadsheet where I had one worker investing $20k lump sum and a 7% return minus 0.3% mer (net return is 6.7%). The second worker invested $40k (with the match) at the same time and their mer is 2.8% (net return of 4.2%).”

    You’re not making a valid comparison here. Some portfolios with higher MERs outperform those with lower MERs. My mix of mutual funds returned 5.76% in 2007, compared to the Sleepy Portfolio’s 0.2%. Even funds which do not outperform the index in every year, can still outperform that same index over time. This is especially true if the managed fund maintains lower losses in poor years, as occurs with value investment managers such as Chou.

    If you look at this graph from a Canadian Fund Manager:
    you can see a number of years where the index out performed the fund, however, over a decade, the managed fund had a return nearly double of the index. So if you are going to base you portfolio selection criteria on poor statistical statements such as “X% of fund managers fail to beat the index in any given year”, you might be disappointed that a managed fund will outperform your unmanaged fund choices. The example shown has a return less than the index in 3 or 4 years out of 10. Still it handily beat the index.

    I would have happily paid a 3% MER for the fund shown in the graph in order to reap the reward of the returns.


  20. “I think the equal match factor will beat the high mer for all but the youngest workers.”

    But even for the youngest workers, it only becomes an issue if they stay in the same fund for a long time. I was enrolled in a group RRSP when I started working at age 23. There was a 100% match up to a maximum of $1500 per year, so I contributed $1500 per year to the group plan and put additional money in a separate RRSP.

    At the time I didn’t know or care about MERs. However, the salient point is that even though I was young when I started working, and I’m still more or less doing the same job 10 years later, my money is no longer in the same funds. I was laid off at one point and then hired back, then the company managing our group plan was bought out, then we changed which company was managing the group plan, and then we were bought out by a company with a defined contribution pension plan rather than a matching RRSP plan. Each time there was a switch like that, I dumped the money from the old fund into my personal RRSP, although you could leave it scattered around or move it to the new plan.

    So from my experience, I think it’s unlikely that anyone will have their money in the fund they first invested in by the time they retire. And certainly, anyone who is aware enough to worry about whether a high MER cancels out a matching plan will have options to get out of the high MER funds.

  21. CC – I’ll try to have it ready for next week.

    WDAMMG – I was going to do annual contributions in my analysis but I guess monthly would be more accurate.

    David – you make a great point that different funds can have very different returns. As a passive investor fan, I tend to just focus on the costs since I don’t believe in active management.

    Aleks – I’m assuming that the money in the group rrsp stays there as long as the employee continues at the job, which is the extreme situation. I made that extreme assumption to show that most employees would definitely be better getting the match regardless of whether they can move the money into a different account or not.
    If you can switch the money out to a cheaper investment periodically as WDAMMG says, then that makes the match even more valuable.

  22. I disagree with point 4. At least it is not a case in my plan. My employer has a plan with Sun Life and as I compared MER’s charged by my plan to generally accessile funds they are not that different. Here’s a few I own:
    Fidelity Global 2.47 %
    Trimark Fund A 2.73 %
    Trimark Canadian Fund A 2.73 %
    Trimark Cdn Bond Fund 2.73 %
    Fidelity True North Fund 2.45 %
    I think these numbers are in line with funds accessible through financial advisors, and if there’s a difference I would say it is not in favour of Sun Life. 2.73% for a bond fund seems eexpensive to me, also Trimark Canadian at 2.73%? What would be cheap to me is a Canadian fund at 1.5% and an intenational one at 2% .
    But, my employer will match 100% of up to 2% of my salary as contribution so I am still doing it.

  23. Canadian Capitalist

    Jerry: Thanks for your input. You may want to talk to your HR department about the high fees for the mutual funds in your group RRSP. If your employer allows you to transfer out money, maybe that’s something you could consider.

  24. People forget about RRSP. Try some GoLD and Silver. Hit $1000 today and was $300 in 2000. Did you RRSP outperform GOLD and Silver??? World currencies are losing pace with inflation. Mutual funds won’t save you but what do I know.

  25. John Rubino, you forgot to mention that Gold was also $850 in the early 80’s so 17% in over 20 years. . . sounds great to me 🙂

    I don’t even think that beats inflation over the same period.

  26. Lets learn about market cycles. In 1980 the bull market in commodities was over and the bear market in stocks was over. One oz. of Gold could buy one share of the Dow Jones. Gold = $800 Dow Jones = 800. The smart money and real investors would sell gold and silver and move there money in stocks and real estate. The suckers would keep buying gold and silver and hope it would go higher. Sounds like the tech bubble of 1999. If people can’t understand a simple cycle then please continue to buy Trimark fund and save worth paper in your RRSP. Smart Money is moving into real assets and GOLD. I guess it’s still cheap at $1000. I will wait for the suckers to come in at $5000 and sale to them.

  27. Canadian Capitalist

    JR: Firstly, in C$ terms gold bullion is up 9.34% from 2000 to 2007. During the same time period the TSX Composite is up 9.35% with all dividends reinvested. So, what outperformance are you talking about?

    But here’s the kicker: Can you guess the best performing asset class between 2002 and 2007 in C$? While Gold did perform well, emerging markets beat Gold in all years except 2002. Moral of the story: Better diversify, because picking the asset class that is going to outperform in the short term is a mug’s game.

    In any case, I am investing for 2030, not 2010. And over the long term, we do know one fact about gold: it has an expected real rate of return of 0. Maybe there are people who can accurately predict the twists and turns of the various asset classes. I don’t play that game and I don’t think most average investors should. YMMV.

  28. Yes, Good points about no dividends, and TSX. The Canadian dollar is strong why the Fed. reserve is devaluing it’s fiat currency. That is the only result the CDN dollar is stronger. Gold is a store of value and true real money. Who do you trust? Central bankers and governments or real money. They can print as much paper currency as they want. Gold isn’t man made. The average investor better start learning about money creation because by 2030 they may find that mutual fund and RRSP isn’t enough to live on. Do some research on Argentina hyperinflation

  29. John, You make a really good points on the GOLD. The average investor isn’t a investor. They are apart of the work hard save money, and invest mutual funds for the long term crowd. They buy high and sell low and always get slaughtered in the markets. Look at our friends in the south. My house is my best investment and prices always go up. Not understanding what the Federal reserve did by lowering interests rate to nearly 1%. That’s what created artificially high housing prices because of inflation and easy lending practices. Now the bills are due and nobody can pay. True investors look for under valued assets and waits and sell them to the sucker crowd and moves into another under valued asset class. My friends RRSP aren’t going to help you become rich. So why do so many people believe in them? ” If I save $200 per month for 30 years I will have about $100,000.” That isn’t investing my friends. That’s being a sucker.

  30. Great article on inflation adjusted Gold Prices. Gold should really be above $2000 per oz.

  31. Now that gold has broken the $900 dollar barrier it’s now on it’s way to $5,000,000/ounce. I love gold nuts. It’s still a commodity and those are ruled by supply and demand.

  32. Canadian Capitalist

    There are warning signs that this gold fever could end as badly as others: According to this Globe article (Link) buyers now outnumber sellers 5 to 1 and there is a ten-fold increase in interest in gold. Sure, it sounds like a gutsy, contrarian move to buy gold now.

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