An RRSP is not a product

The retirement industry has a problem. We are obsessed with regulatory categories.

When people talk about the kind of retirement plan they have, they inevitably talk about the regulatory category. “It’s a Group RRSP.” Or a target-benefit plan. Or a defined-benefit plan. Or a Pooled Registered Pension Plan.

We love our regulatory alphabet soup.

Regulatory categories do matter. They tell you things like:

• What is the tax treatment of contributions, investment returns, and withdrawals
• What kinds of things must be or cannot be included in contracts for the plan or product
• What must be disclosed to the member or consumer
• The nature of the sponsor or plan / product issuer’s duty to members
• Who bears the risk in the arrangement (e.g., plan members, sponsors, or both)

These are important things. But they also tell you relatively little about other critical elements of the product or plan. For instance:

• Investments: How are the assets invested? What is the investment strategy? The asset mix? Who is managing the investments? What is the process for selecting and overseeing the managers? How much choice do members have? How do they choose?
• Governance: How is the arrangement governed? Is there a fiduciary duty to members to act in their best interests? Is there a board? What kind of people are on the board? What processes does the board use?
• Costs: What are the fees and costs associated with the product or plan? All the fees, not just the ones that are visible to the member. No plan is free. Especially in an era of lower expected returns, keeping costs to a reasonable minimum is especially important.
• Administration / member service: How is the plan administered? How does it communicate with and educate plan members? How intuitive and secure is the technology? What is the member (and employer) service like?
• Contributions: How much money is being put into the plan? How much money comes from the member? How much from your employer? What behavioural features, if any, are included in the plan?
• The income phase: How does the plan help members generate income in retirement? Can it help members manage / insure against the risk of outliving their money? How much flexibility does it provide on withdrawals? How does it help members de-risk their exposure to market risk? How secure is the retirement benefit? The regulatory category may partially answer these questions for DB or target-benefit plans, but it doesn’t provide answers for other kinds of plans or products.

An RRSP is not a product or plan. Neither is any other regulatory category. To constitute a real product or plan, you need to combine the right regulatory category with the right answers to the questions above, and more. And you need to do so in an integrated, holistic fashion, with a focus on outcomes and member needs.

Take, for instance, the my65+ plan that we at Common Wealth created in partnership with SEIU Healthcare. What is my65+? It is a retirement plan for modest earners. Yes, it uses the Tax-Free Savings Account (TFSA) regulatory category, because that allows members to keep their government benefits in retirement, avoiding the punitive Guaranteed Income Supplement “clawback” (to learn more, read this excellent guide by John Stapleton). But it is not right to think about it primarily as a TFSA because in most other respects, besides tax and public-benefits treatment, it is very different from most TFSAs. It is used for long-term, not short-term purposes. It is collective, not individual. It has a fiduciary duty and a non-profit governance structure. It uses low-fee, diversified, professionally allocated investment funds from Vanguard. The shorthand “TFSA” tells you nothing about any of these things.

This regulatory category obsession is partly the retirement industry’s own fault. We have created a whole season around RRSPs. Pension and retirement consultants and lawyers frequently lead with the regulatory category when talking to their customers. If the retirement marketplace were a supermarket, its aisles would be arranged by Income Tax Act section, by statute, by regulatory instrument. First you select the regulatory category, and then you sort out the other details.

Because the alphabet soup of regulatory categories is confusing, focusing on that increases the demand for specialized retirement industry advice, creating an incentive to double down on our regulatory obsession. The obsession is also perpetuated because pensions and retirement firms often organize themselves by regulatory category, with DB representing a different business unit from DC, and relatively little collaboration between the two.

The regulatory obsession is also exacerbated by governments. They created the categories in the first place. Further, instead of improving the categories we already have, they create new categories and promote them if they were products. Instead of improving the governance, fees, behavioural design, portability, and transparency of defined-contribution / capital accumulation arrangements (as the U.S. has begun to do with 401(k)s, and Australia with the Super system), governments created a new category: the Pooled Registered Pension Plan (PRPP), with a whole new regulatory infrastructure. Hardly anyone is using the PRPP. For those who are, their version of PRPPs looks very similar to other capital accumulation plans offered by those providers.

We continue to debate the relative merits of regulatory categories as if they were political ideologies or religions — something handed down on stone tablets rather than manufactured and ultimately changeable public-policy constructs. Think the RRSP has failed as a policy instrument? Then recommend ways to improve it. There are lots.

Our regulatory obsession distracts us from the other important things. Often, those things are more important in determining the quality of a product or plan — in short, its ability to efficiently turn today’s savings into tomorrow’s retirement income.

For instance, there is more similarity in tax treatment among the regulatory categories (most use tax-deductible contributions, tax-exempt investment returns, and taxable withdrawals) than there is in investment approach within a particular regulatory category. Investment performance over a lifetime is arguably the most important driver of the effectiveness of a retirement product or plan. Yet the regulatory category tells you little if anything about the investment approach.

Similarly, studies show that strong, members-first governance can add 1% or more per year to the performance of a collective retirement plan. Yet governance structures vary widely within any given regulatory category.

Plan members and everyday consumers suffer when the industry focuses so much on regulatory category. Instead, we should be focusing on the needs of these members, based on their incomes, work patterns, retirement needs, and so forth. We need to replace our regulation-centric approach to plan design with a member-centric one — an approach focused on generating the maximum retirement value-for-money based on unique member needs. There is a lot that can be learned from customer/user-centered product development processes in other industries, including design and software.

Most of all, we need to redirect our focus from regulatory category to plan quality — specifically value-for-money. That can only be achieved through a holistic assessment of what drives retirement value for the member.