The following is a guest post by Dr. John Robertson
Having access to a group RRSP plan can be confusing: so many forms and options and none of it looks optimal. But it’s often automatic and the contributions come off your pay invisibly (like taxes), which makes them a great way to get over behavioural hurdles and get investing for the future.
Chris asked me to look specifically at the Canadian Actors’ Equity Association group RRSP plan. The Association will take at least 6% of your performance earnings and ensure that it gets put away in the group RRSP plan: forced, automatic savings.
Now for many artists, you may go through a TFSA vs RRSP decision guide and find that the TFSA may work better in your situation. Or find that while the fees are not super-high, you can do better on your own.
So it’s not optimal… so what. There are big benefits to being automatic and invisible (or forced), which may outweigh the other factors. That might mean that you won’t end up voluntarily topping up your contributions, but you’ve still got to register and choose how your contributions will be invested in the group plan.
And remember that a pretty good plan that you actually follow is better than an “optimal” one that exists only in a dusty filing cabinet.
Choosing Your Funds
In general, try to make your group plan fit your overall investing plan. That can mean looking for low-cost, broadly diversified funds to use, and finding ones with the title of a major index (like “S&P 500”) or that have the word “index” in the title can be good shortcuts to finding what in a big list of funds might work for you.
Target-date funds are not very common in the DIY world, but you can find them in group plans, and they are there for Equity. That can be a good, simple way to go. As can funds with “portfolio” or “balanced” in the name.
There are often lots of options in these plans, and few of them are what you find in the model portfolios you see in The Value of Simple or funds that everyone talks about on Reddit or in MoneySense. Remember that picking something and getting enrolled is far preferable to picking nothing while you try to research to identify the “optimal” fund (or mix of funds).
If you have investments outside your group RRSP, then it’s fine to make an incomplete portfolio with your group RRSP because it will be complemented by those other investments. For example, if you’re targeting 25% in each of bonds, Canadian equity, US equity, and international equity, and half your investments went into your RRSP[footnote], you could use ETFs to buy the US and international equity on your own and pick a bond and Canadian equity fund (or “balanced” fund using those two) from the group provider, and end up with an overall balanced portfolio.
Footnote: to be precise, you’d want to discount the value of your RRSP relative to your TFSA for the taxes you’d have to pay on withdrawal (i.e., if you only held US equity in your RRSP, and only held Canadian equity in your TFSA, to make them “equal” the dollar amount on your US equity in the RRSP would be higher than the Canadian in your TFSA). The Practical Index Investing for Canadians course has a module on this, but really there is no precision in investing in the first place, so if you just make the nominal amounts balance out and stick to that plan, you’ll likely do fine.
Specific for Equity (Canadian Actors): the fees for the funds are lower thanks to efforts by the association, so what might show up on Morningstar for these funds in terms of costs isn’t necessarily what you’d pay. There are a small enough number of funds to actually look at them without going blind, and there are all-in-one funds as well as sector funds, so you can complement an external portfolio with your group RRSP, or have a complete allocation with ease.
They have 4 asset allocation funds, each with a mix of fixed income, Canadian equities, and US equities, with the fixed income portion ranging from 75% (conservative) to 0% (Aggressive), with 20% for the Advanced and 60% for the Moderate fund. There’s also the Balanced Global fund, which is similar (but under a different heading on the sign-up form), with 30% fixed income.
So of those 5 funds, simply find the one that’s closest to your risk tolerance, put 100% of your contributions towards it, and call it a day.
Understand Your Risk Tolerance
Of course, that advice may be a bit too cavalier if you don’t have a good handle on your risk tolerance. That’s a central factor in figuring out what you can invest in, and a surprising challenge to really understand: it’s hard to say how you’ll respond to a market crash when you’re not really sure what a market is in the first place.
One of the advantages to a group plan is that you can set your allocation to be a little riskier (more aggressive, i.e. fewer bonds) because you’re less likely to see the declines, and panic selling is a lot harder because of the way the plan is administered. So if you’re not sure of what your risk tolerance overall is, do the best you can, then err a bit on the aggressive side for your group RRSP, then a bit on the conservative side for your other investments (e.g. your TFSA).
Integrating with Other Investments
The Canadian Actors’ Equity Association will help force you to save 6% of your pay in the group RRSP, and other employer-sponsored RRSP programs have deductions in a similar range. While it’s a great start, no financial planner is going to say that that’s actually enough for a secure retirement, let alone other long-term financial goals. So odds are, you’re going to have to save more than that.
You can opt to save more within the same plan, which keeps everything simple, or you can save a bit on fees and have some more control by investing on the side. (As for how to do that, check out a robo-advisor or learn to do-it-yourself with this awesome online course or The Value of Simple)
So if you also invest outside the group RRSP (e.g., in your TFSA), you can view each account as parts of one big portfolio, and just put one (or a few) component(s) in your group RRSP, and hold the others in your TFSA/self-directed RRSP/other accounts. Or you can build complete, parallel portfolios in each account, which may be the way to go if you’re using one of the all-in-one asset allocation funds in your group RRSP.
As an aside, you may notice that the funds on offer in the Equity group plan are more heavily weighted in Canadian equities than the typical split of the canonical portfolio many index investing gurus talk about. Remember that there is no precision in investing, and one perfectly good solution is to just shrug that off and build your TFSA as you would otherwise, and let your group RRSP be a touch maple-flavoured. But if you like, you can also hold less Canadian equity in your TFSA (and more US and international equity) to compensate for the excess in your group RRSP fund.
It can be easy to fall into analysis paralysis with the group plan registration material, and how to make a (mandatory) group plan fit your financial plan. Remember that a good enough automatic investment is better than a headache and an unsubmitted form. For the Equity group plan in particular, a decent default is to take your best guess at your risk tolerance and then put all of your contributions towards the closest asset allocation fund. Costs do matter in investing, but so does simplicity and sticking to a plan. Plus, many group plans negotiate to bring the cost of their funds down to be competitive with simple, automatic options like Tangerine or robo-advisors (the asset allocation funds for Equity in particular cost 0.94%/yr, vs 1.07% for Tangerine).
A Silly But Also Kinda Serious Postscript
Model portfolios are quite popular because it’s scary to pick funds to meet even the simplest investment plan. There are tonnes of index funds out there, and even more closet index funds and the like in group plan offerings, and nearly any of them would be good enough for most investors. But it’s still really helpful to have a table with a shortlist of funds to pick from, and knowing that together that collection of funds forms a complete portfolio.
Unfortunately, every group plan is different, with lots of funds you may never hear of in books and articles. The guidelines above should help you find a fund (or a few funds) in the selection your plan offers that will work well enough with your investing plan. However, if you’re still having trouble choosing or if there are just too many to even read through them to filter the list, here is some silly-sounding advice that may actually work: pick a bunch at random.
When investing on your own there is a real cost to complexity: it takes effort to make the trades, to track the contributions, monitor your performance, etc. But in a group RRSP complexity is nearly free: once you sign up they handle splitting your contributions amongst the funds, and because it’s an RRSP you don’t have to track anything for taxes other than how much you put in (and eventually take out). So one way to get balance is to just strike off any funds you know are not appropriate for you (e.g., the highest fees if the group sponsor isn’t subsidizing, or ones with titles so vague you have no idea what they invest in), and just start assigning percentages to the rest. 10% in almost any random set of 10 funds (or 5% in 20 if your group plan has a really large menu) is going to get you some balance and some diversification, especially if it’s 10 balanced/asset allocation funds. This is quite unlikely to be perfect for you, but maybe close enough, especially if your group RRSP is just a portion of your overall investments – you can use your TFSA to make more logical investments, and fix your RRSP later when you know more.
And doing that at first may at least give you an alternative starting point if you’re having trouble picking funds: just build something that’s better for you than randomly choosing a whole bunch of funds was, and stop when you find it.
E.g., for the Canadian Actor’s Association Equity: if you put 12.5% into each of the 8 options (other than the asset allocation ones), you’d end up with a portfolio that was 66% very conservative fixed income, and the rest split between global and Canadian equity. Not ideal perhaps, but you could do worse and at least you picked something, which can be especially important if there’s an employer match just waiting for you to fill out your enrolment form.
PhD, Author of The Value of Simple