Posted: Tuesday, 29 November 2011

November is Financial Literacy month. Celebrities aren’t yet growing moustaches to raise awareness about the issue but stay tuned because this may be coming soon, if the time and money devoted to the cause is any indication. A Task Force on Financial Literacy was appointed in June 2009 and reported in December 2010. Soon after, the 2011 federal budget promised the nomination of a Financial Literacy Leader to spearhead a national drive to boost the financial smarts of Canadians. Beyond the $2 million a year provided to the Financial Consumer Agency of Canada, the budget announced an additional $3 million annually to be spent on financial literacy efforts. Financial Literacy Month is just the latest new endeavour, with its own website and a calendar chock-a-block with national events.

We can all support promoting the knowledge and skills to make good financial decisions, especially when it comes to preparing for retirement. All Canadians, for example, need to know how they as investors are being royally fleeced by Canada’s mutual fund industry.

A Morningstar study published earlier this year gives the Canadian industry industry an F- for having the highest mutual fund fees among the 22 countries surveyed. Canadian have $750 billion in mutual funds, with a median total expense ratio of 2.31 per cent for an equity fund. That fee would eat up almost 50 per cent of an investor’s lifetime returns.

And how many know that the highest-earning 11 per cent of Canadians contribute more to RRSPs than the bottom 89 per cent of tax-filers combined? Canadian taxpayers subsidize those RRSPs to the tune of $7.3 billion in annual net tax expenditures.

Small investors may well know too little about their investments, be swayed by their gut feelings, and end up selling cheap and buying dear. More and better information can help.

But is buyer beware really good enough? Having knowledge won’t protect you against being swindled, if one side holds all the cards. Canadian mutual fund fees continue to be among the highest in the world and going from mutual fund company A to company B isn’t going to change this.

Improving the financial acumen of investors is a laudable goal, but hardly adequate to confronting the retirement crisis in Canada. More than 60 per cent of paid workers in Canada, including 75 per cent of private-sector workers, have no workplace pension plan, and 30 per cent of Canadian families lack any retirement savings outside of the Canada Pension Plan. It’s more than a bit contradictory when financial firms like the Royal Bank – this largest public company in Canada – strongly support financial literacy efforts, even as they close their own defined-benefit pension plans and force employees into defined-contribution arrangements.

In a fend-for-yourself world, stressing the need for financial literacy is understandable. But it’s also the case that workers are simply better off, on average, as members of large-scale, defined-benefit pension funds. Having professional investment management and access to alternative investment classes give large funds better returns and economies of scale, and better governance practices give them lower costs. Large pension funds are also not vulnerable to the high management fees and expenses that afflict small investors. By pooling risk, large pension funds are also much better able to roll with the punches of turbulent financial markets than are individual portfolios.

As individual savings falter and workplace pension plans come under growing attack, workers need the security and convenience of defined-benefit pension plans more than ever. In fact, virtually all Canadians already belong to a secure, universal, and low-cost pension plan that guarantees inflation-protected retirement benefits until death -- it’s called the Canada Pension Plan. Increasing CPP benefits is the most effective and cost-efficient means of overcoming the retirement savings shortfall of Canadians. And we can double future benefits for all workers for just a few additional dollars each week (initially about $3.57 more a week for a worker earning the average wage).

Despite this, the federal government has now introduced legislation to provide for Pooled Registered Pension Plans (PRPPs), an inferior proposal given the scale of the problem facing working families. Minister Ted Menzies can’t guarantee that employers will offer or contribute to PRPPs, that savings will be protected against inflation or future market turbulence, or that the management fees charged by financial institutions will be any lower than today’s exorbitant rates. Employees’ earnings will now be deducted and invested by default in the high-priced retirement products of banks and insurance companies. Financial literacy will be feeble protection indeed.

Financial literacy is simply inadequate as a response to the retirement challenge facing us. We need to commit to doubling future CPP benefits now. It is a solution that works.

Ken Georgetti is president of the 3.3 million member Canadian Labour Congress.