of their insurance guarantees and higher fees. You may also be wondering how
this discussion relates to the segregated funds you hold in your group
The short answer is – it doesn’t relate. And to ease any possible confusion,
here’s an overview of what segregated funds are, and how the funds in your
group plan differ from the segregated funds sold to retail investors.
First things first – the “segregated” versus “mutual” fund distinction
Both segregated and mutual funds hold the same types of investments and
provide the same professional investment expertise, but differ in their
structures and legal status.
Mutual funds are set up as trusts or
corporations, and are typically bought by individual investors (either
directly, or through a financial advisor or broker). Mutual funds are subject
to securities laws that require all fund investors to receive a
Segregated funds, whether for the retail market or for group
plan investors, are offered only by life insurance companies – and are
classified as insurance contracts. These segregated fund contracts are exempt
from the prospectus requirements of securities laws because of the guarantees
or the role of
the group plan sponsor discussed below, but provide
comparable investment fund information to purchasers or members.
Two types of segregated funds
The confusion about segregated funds occurs
primarily because there are really two types of funds contracts – each serving
a different purpose.
- Segregated funds for retail investors:
These funds have
an insurance component that guarantees you’ll receive a certain minimum
percentage, usually either 75% or 100% of your initial investment upon death or
maturity of the contract (typically after 10 years). These funds have fees that
are generally higher than retail mutual funds to cover the cost of this
insurance guarantee. These funds are often purchased by security-conscious
investors who want to participate in the upside potential of investment
markets, but with some downside protection for their capital.
- Segregated funds for members of employer-sponsored group savings and
pension plans. These are the funds that are available in your group
plan, and they contain no insurance guarantee. But because group plans
represent a large single investment for a fund, and thus have substantial
negotiating power, fees are generally lower than retail mutual funds.
While there are distinct and significant differences between these two types
of segregated funds,
there are similarities as well, including their
potential for creditor protection.
Because segregated funds are
classified as insurance contracts, they can offer enhanced creditor protection
in certain circumstances, so long as you name a "preferred beneficiary" for
your fund assets.
A preferred beneficiary is entitled to your fund assets
in the event of your death.
In addition, the naming of a preferred
beneficiary also means that your investment is transferred directly to your
beneficiary upon death, and so probate fees that are levied against the value
of your estate assets do not apply to your segregated fund investments.
Segregated funds – they’re a good thing
Don’t let the discussion about retail segregated
funds overshadow the benefits of the funds you invest in as part of your
employer-sponsored program. The segregated funds available in your group plan
remain a convenient and extremely cost-effective way to save and invest for
retirement and other goals. Take a look at the low cost and extra benefits that
your group plan investments can offer:
- No load funds – When you invest through your group plan,
Sun Life Financial buys directly from the investment manager or mutual fund
company on your behalf. These are wholesale arrangements, so no sales
commissions apply to these transactions.
- Lower investment management fees – Together, your plan
sponsor and Sun Life Financial have bargaining power that you as an individual
do not have. Because of this, they can usually negotiate lower investment
management fees than you would otherwise pay as an individual investor. In
addition, there are no fees to transfer between funds when you make
an investment change.
- Leading investment managers – You have access to some of
Canada’s leading investment managers, with some only available through a group
arrangement such as yours.
If you are not taking full advantage of what your group plan can offer,
there’s no better time to start than today. With investment choice and
flexibility, convenient 24-hour access to your account, and a cost that’s lower
than retail investing, you can save more through your group plan.
Lower fees can mean big savings
While all funds charge an annual management
fee – and group plan segregated funds are no exception – the fees are usually
lower when you invest through your group plan. You may not think these lower
fees make much of a difference, but you’ll be surprised at the impact over the
The table below shows the difference in the total amount you
would save under different management fee rates, assuming you invest $4,000
each year and your group plan account earns 10% annually before
the management fee reduction.
Over a 30-year career, a 0.5% difference in fees (1.5% vs. 2%) means an extra
$52,715 for your long-term savings. And a 1.0% difference (1% vs. 2%) adds an
extra $111,877 to your nest egg.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Source: www.SunLife.ca
I represent the top 4 insurance companies in the country Sun Life, Canada Life, Great west life and Manulife. Whether it may be within your business for group benefits, personal life insurance or products like a GIF / Segregated funds I will be able to help you direct and use my complete product shelfs to properly plan out your future.
Please email me at Dave.Pavelich@InvestorsGroup.com if you have any questions or inquiries, Thank you.