By Sheryl Smolkin

If you save for retirement with the Saskatchewan Pension Plan, the Contribution Fund allows you to invest in a professionally managed balanced portfolio or a short-term fund. The composition of the balanced fund at September 30, 2012 is illustrated below. On average, annual fees are targeted to be one percent.

Yet a recent article in the Globe and Mail by columnist Rob Carrick reveals that the average management expense ratio (MER) — that’s the ratio of fees to the total amount of money in the fund — is 2.37 per cent for six types of retail balanced funds he reviewed.

Carrick also notes that yield on a five-year Government of Canada bond — that is, the annualized return from the interest you receive — is about 2.5 per cent right now. A five-year provincial government bond yields about 2.9 per cent. Subtract the average balanced fund fee from these yields and you’re not left with much. Those same fees will grind down your returns from the stocks in your balanced fund, though not quite so dramatically.

How much of a difference do fees make? Take a look at the following two scenarios:

1. If starting at age 30 you save $2,500/yr. in the SPP for 35 years with an average annual net interest rate of five per cent you will have savings of $237,090 at age 65.
2. If starting at age 30 you save $2,500/yr. in a retail balanced mutual fund for 35 years with an average net annual interest rate of 3.63 per cent (lower because admin expenses are 1.37 per cent higher than in SPP) you will have savings of only $177,235 at age 65.

That’s a difference of almost $60,000. And the results are much more dramatic if you deposit $2,500/year for 35 years and transfer in another $10,000/year from your RRSP. Earning 5 per cent a year in SPP, your balance would be $1,185,454 but if you only earn 3.63 per cent in a retail balanced mutual fund you will save only $886,176 or 25 per cent less.

For more information about SPP investments, see Investments.

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