Choosing the Funds in a Company Retirement Plan

Back in November 2013, Wifey was hired at a new company. In addition to a higher salary, wifey's new company included benefits such as a Group RRSP and company match of up to 5%. It was a no brainer to subscribe to the company match. It was a guaranteed return of 100%. The problem that wifey faced, the same problem I'm such many new graduates and regular folk of the general populace faced, was that she had to pick the funds to invest in. Of course, that responsibility fell to me. This was before I was the Loonie IT Guy so I had no idea what to select either. We signed into her account and poked around trying to figure out which funds were ideal to invest in.

As with most companies that sell or hold your mutual funds, we were given a risk assessment survey to fill out. Wifey and I filled in the questions and out popped a result. The site suggested we invest in their BLK LP Index 2045 Funds. If we chose to select our own funds, the site suggested a portfolio allocation with the following mix:

• Bonds - 40%
• Canadian Equities - 25%
• US Equities - 20%
• International Equities - 15%

Not knowing what to do, we looked at the fund options available and looked at the performance data of each.

YTD Returns on the funds offered.

Many people would tell you that past performance is not an indicator of future results. I hear it all the time in those radio ads where some company or another is pushing their investment products. Of course, being clueless in investing, that's what we did first. Look at past performance*. Although, this chart was updated last in May 2014, we looked at a chart similar to this to make our investment choices. In addition to charts like this, we clicked on each individual fund to find a pop-up window of past performance data.

Detailed performance data. This is only a small portion available.

While I don't remember our original choices exactly, I do remember we put together an eclectic choice of funds of every type. Five percent in wifey's company shares, five percent in B.G. Canadian Equity, twenty percent in BLK Bond Index Fund, twenty percent in CI American Value Fund, etc. It wasn't pretty.

We finished everything in half an hour and signed out of her account. We weren't sure what we selected, but it matched the percentages laid out by the suggested portfolio, so we felt we did good enough.

Of course, something like selecting funds for retirement (or early retirement) shouldn't just be good enough, but this was before I became more financially adept.

As I mentioned in another post, I read a few books on investing and finance. Found some websites that provided model portfolios and eventually, this got me thinking about past investment choices. When we got around to wifey's group RRSP at her company, the first thing I did was look for the index funds. I had read on a few places that some group RRSPs do not contain index funds. Fortunately, wifey's company was not one such company. The index funds were the BLK Bond Index Fund, BLK S&P/TSX Comp Index, BLK US Equity Index Reg, and BLK EAFE Equity Index. We were fortunate that we somehow selected two of these index funds. However, none of these two funds were selected with our target allocation. The next thing I did was look for the MERs of these funds.

Management fees of the funds offered.

Compared to the MERs of some of the big banks, these MERs were quite reasonable. However, due to our dartboard selection process, we had selected some funds with MERs on the high side of this chart. Overall, I was pleased that the MERs of the index fund were lower than the MERs of the TD e-series funds. Although the MERs are a little higher than the ETFs we are invested in, considering the 5% company match, it was still a very good option. 

Since our target allocation is the following:

• Bonds - 30%
• Canadian Equities - 30%
• US Equities - 20%
• International Equities - 20%

I changed the allocation of future contributions to the following funds:

• BLK Bond Index Fund - 30%
• BLK S&P/TSX Comp Index - 30%
• BLK US Equity Index Reg - 20%
• BLK EAFE Equity Index - 20%

I also calculated the MER for this allocation (just for fun) and it was 0.328%. Not bad. The TD e-series we invested in had a calculated MER of 0.421%.

Although I changed how the future contributions would be invested, we still had money in the old funds. I looked through the website and determined that if I sold the fund within 30 days, there would be a 2% fee. Of course, I don't like fees. However, I wasn't sure what the cost comparison would be for the little amounts we invested in so I decided to wait the 30 days after the last time these funds were purchased before selling them. Fortunately for you, this date happens to be on Monday, so tune in and I'll post an update on how that goes.

Overall, if you're into low-cost index investing like wifey and I are, selecting the funds should be done in this order. Determine your target allocation and look for the low-cost index funds. If index funds are not available, determine if target date funds are available and look for the target date that has your ideal allocation targets. If target date funds are not available, figure out which funds have the lowest MERs and select funds based on your target allocation.

*Holy cow! A lot of funds had good past year. Not surprising as the stock markets are having a crazy bull run the last few weeks and in 2013. It's no wonder we selected a mishmash of funds in the first place. We were trying to grab a piece of the action in all areas!