Segregated Funds - What is the true cost?

[jeebuz]

I am looking to find out if anyone can give me hard numbers on what the real cost is to wrap a mutual fund in its segregated fund covering.

My company's group RSP/DPSP program is currently administered by SunLife. The one and only index fund they offer (the TD Canadian Bond Index fund) has a MER of over 1.65%. Considering that I can buy the non-segregated version of the fund for an MER of 0.91% (never mind the e-series version of the fund which is even lower cost) it appears that either the segregated wrapping costs 0.74% a year to offer (unlikely) or SunLife is gouging us on the fees they are charging us to own the fund (likely).

I plan on approaching my retirement plan administrator to see if they can get SunLife to provide us with better and lower cost fund choices but I thought I'd ask around to see what the real costs should be for segregated funds before doing so.

Of course whether we should be forced to buy segregated funds to participate in the retirement program is a different issue...

- Jeebuz

[randomwalker]

Friday, June 25, 2004
Seg funds cut the risk -- but at what price?
For middle-class investors, the costs often outweigh the benefit of guaranteed returns

by DEREK DeCLOET
What they don't tell you about seg funds

https://secure.globeadvisor.com/servlet ... UNDSEGMN25

[Bylo Selhi]

Insurance giant: We overcharged

Faced with a class-action lawsuit on one flank and the risk of a reduced credit rating on the other, a leading life insurer has admitted it may have charged excess fees that hurt customers' investment returns...

Fantl complains the Can-Am Fund, where he put about $27,000 of his savings, failed to replicate the performance of the Standard & Poor's 500 index, as his information folder indicated the company would make its best efforts to do. "This was a clone fund that did not clone," his factum states.

His statement of claim alleges his and some other contracts limited the company to charging no more than 2.5 per cent a year for management fees. Other contracts set higher limits, or none at all. It's not clear whether NN Life and Transamerica were entitled to charge for other expenses such as the capital guarantee.

Lawyers have not provided an estimate of how much Fantl may have lost due to excess fees. But the gap in annual returns between the S&P 500 (in U.S. dollars) and the Can-Am Fund has been far more than 2.5 percentage points. The average annual difference for calendar years 1996 to 2001 was 4.85 percentage points, according to figures from Morningstar Canada.

(TD eFunds charges 0.31% for an S&P 500 index fund.)

P.S. Since this article was written by James Daw using data from M* I assume the comparison between "the S&P 500 (in U.S. dollars) and the Can-Am Fund" is greenbacks-to-greenbacks rather than greenbacks-to-loonies.

[arnyk]

I manage my parent's work RSP which is also through Sun Life but have a different variety of seg funds - up until this month there were no index funds. MERs ranged from 0.70% - 1.21%. After a year of giving them "feedback", they finally threw in a US Index Fund (0.69%), and a couple PH&N funds (Balanced and Canadian Equity, both 1%). You find that in a lot of cases the seg version of the fund is more expensive than the retail version. Of course, wrt the PH&N funds, you're able to access them with much lower starting capital than if you were to buy directly from them.

Anyways, just to compare with ya - here's what I see when I ask for "fees"..

Code: Select all


      Company X's Stock Fund      0.27 %
     MB Balanced Value    0.73 %
     MB Cdn Equity Value    0.70 %
     MB Money Market    0.72 %
        BG International Equity    1.21 %
     PH&N Bond Fund    0.99 %
     PH&N Balanced Pension    1.00 %
     PH&N Canadian Equity    1.00 %
      BGI US Equity Index    0.69 %

Blah it's been so long I forget how to make those look pretty. MB = Mclean Budden (SunLife I believe), BGI = Barclay's.

Anyways, as always there was craploads of fineprint for your enjoyment at the bottom of the page:

Fund management fees include, but are not limited to, operating expenses for both the segregated fund and the underlying fund and investment management fees. Investment management fees pay for professional investment managers to select the underlying fund's investments and build the fund's portfolio. These fees also pay for keeping records of your account, GST and member servicing costs. Operating expenses both for the segregated fund and underlying fund, are generally made up of brokerage commissions and other expenses of buying and selling securities for a fund, and any expenses relating to the operation of a fund, including legal, audit, trustee, custodial and safekeeping fees, interest, operating and administrative costs (other than advertising, distribution and promotional expenses), member servicing costs and costs of financial and other reports used by the fund.