Jeff buckstein
Globe and Mail Update
Published Saturday, Feb. 25, 2012 6:00AM EST
Last updated Tuesday, Feb. 28, 2012 8:24AM EST

Canadians who own registered retirement savings plans recognize the critical importance of building and maintaining value within their RRSPs. But comparatively few think about the need to protect their RRSP against potential creditors, or understand the degree to which they are covered could depend on the jurisdiction in which they reside.

Those most at risk are likely “self-employed people, owners of corporations, and professionals who might be subject to unlimited liability. Even those professionals who are incorporated are still subject to personal liability,” warns chartered accountant Robert Snowdon, who runs a CA firm in Kanata, Ont.

Cognizant of that reality, and recognizing the prudence of planning ahead for unforeseen events, Mr. Snowdon protected his own RRSP assets in the past by putting them into a segregated fund as part of a 10-year life insurance contract.

RRSP and registered retirement income fund (RRIF) proceeds held under any life insurance contract are generally fully protected from creditors, provided the proceeds have not been deposited fraudulently to avoid paying creditors, and so long as the insurance policy names a beneficiary.

Certain RRSP and RRIF holdings are also protected from creditors under a provision of Canada’s federal Bankruptcy and Insolvency Act, which came into force in July of 2008. This act provides protection under specific circumstances involving bankruptcy.

It covers situations where “a trustee takes over an individual’s financial affairs once they have been petitioned into bankruptcy by their creditors, or the individual makes a voluntary assignment in bankruptcy because they can’t pay all their creditors,” explains Jack Courtney, assistant vice-president of advanced financial planning with Investors Group Inc. in Winnipeg.

However, this act also contains an important timing proviso. A trustee can claw back, or seize, RRSP or RRIF proceeds contributed within 12 months of the date of bankruptcy.

Somewhat complicating the matter is the existence of provincial legislation in jurisdictions such as British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, and Newfoundland and Labrador that also specifies RRSP and RRIF assets are generally protected from creditors. Other jurisdictions might provide protection under certain circumstances. However, most of these provincial laws do not contain a time provision exempting certain deposits (B.C. is an exception, mirroring the 12-month federal period).

“In most provinces that exempt RRSPs from seizure, the clawback will not apply. So if you’re in a province that always exempted RRSPs, the fact that federal law in bankruptcy has now changed does not alter the status of the injection of RRSP money in those provinces in the previous 12 months,” Toronto lawyer Fred Tayar explains.

When Mr. Snowdon’s segregated-fund insurance contract expired, after the Bankruptcy and Insolvency Act was in force, he decided against establishing a new insurance contract to cover his RRSP proceeds, electing instead to transfer the full amount to a new self-administered RRSP.

There were a couple of other things he wanted to change. Within the insurance contract, Mr. Snowdon felt his management fees for transactions were higher than those of other RRSPs, as a result of guaranteeing at least 75 per cent of the value in the segregated fund. He also felt restricted to a selection of only five or six mutual funds.

There is a trade-off for the added protection, experts say.

“The more guarantee you buy, the more expensive the underlying fee associated with the product will be,” Mr. Courtney explains. “You can buy segregated fund products that have very minimal guarantees where the pricing is very comparable to mutual funds, and many of them will almost mimic an underlying mutual fund in their investment mandate and the way they are managed,” he says.

Those who do elect to put their funds into an insurance product have all the same flexibilities built in as they would in an RRSP held with any other financial institution. Plan holders can take out money for an emergency. At age 71, they can also make the same choices available to RRSP holders with a bank or elsewhere; convert their RRSP proceeds into their choice of a RRIF (if they want to continue managing their funds with a similar degree of autonomy and risk, with the same investment portfolio), or convert the proceeds into the certainty of a fixed income annuity.

“A segregated fund will typically have a maturity date within the contract. That’s going to be at the end of the year that you’re 71, but the investment is open ended until that time. They really are designed as lifetime arrangements, and [they are] liquid at any time,” says Ron Sanderson, the Toronto-based director of policy holder taxation and pensions for the Canadian Life and Health Insurance Association Inc.

As investing fees bite, make sure there’s a slice of profit left

ROB CARRICK | Columnist profile | E-mail
From Tuesday’s Globe and Mail
Published Monday, Feb. 27, 2012 6:10PM EST
Last updated Tuesday, Feb. 28, 2012 8:42AM EST

Be a friend to the investment industry. Stay ignorant about fees.

Mutual fund companies and other investment firms certainly hope you do because they could soon be confronted by the greatest fee challenge they have ever faced. Returns from both bonds and stocks could be disappointingly low in the years ahead and, after fees, there may not be a lot left over for investors.

The case for low stock market returns was succinctly made in a recent article by Samuel Lee, an analyst with the independent research firm Morningstar. I featured the article in my daily blog, The Reader, because its thesis seems so plausible. Basically, Mr. Lee argues that what he describes as a “deleveraging process” – a slowing of the economy caused by a gradual paying down of personal and government debts – may limit stock market gains to 4 or 5 per cent for the next several years.

That’s a U.S. perspective, but it’s relevant here as well. Canada is not swamped by debt like the United States is, but our deficit is still large enough that the upcoming federal budget should be the toughest in ages. Individual Canadians have pretty much the same debt levels now as Americans did before their housing market crashed. It’s not hard to imagine a period of household austerity ahead as these debts are paid down.

As for the U.S. economy, Mr. Lee said the two best analogies for what’s ahead are the latter half of the Great Depression and Japan’s lost decade. In that light, he argues, then U.S. stocks today look “worryingly overvalued.”

Your stock market returns could well be on the low side in an economically tepid environment of low corporate profit growth, but your mutual fund fees won’t be. The average Canadian equity mutual fund’s management expense ratio is 2.45 per cent. Prefer to focus on the most popular funds? The average MER for the 10 most widely held funds in this category is 2.1 per cent. If we get 4 to 5 per cent stock market returns as Mr. Lee suggests, then you could be in a position of seeing your returns halved by fees.

Now, let’s look at bonds. Interest rates are already near historical lows and there’s not much room for further declines. Rates moving lower is what drives big price gains for bond funds. With stable rates, you collect the usual interest payments on the bonds in the bond fund and maybe a little more if you have a smart fund manager. If rates rise, your bond fund would probably lose money.

The outlook is for today’s low rates to stick around a while, which suggests bond fund returns will largely reflect the interest rate on bonds. Let’s see now – the five-year Government of Canada bond yields about 1.3 per cent, and a five-year bond issued by a financially solid company might get you between 2 and 3 per cent. Meanwhile, the average Canadian bond fund MER is 1.72 per cent and the 10 largest funds in the category cost an average 1.5 per cent to own. So much for the yield on that five-year Canada bond. It’s going to be devoured by fund fees.

Do not count on the fund industry to lower fees if returns diminish, although this has happened in the past. Back in 2009, money market fund fees were chopped so that unitholders didn’t end up losing money. Interest rates had fallen and fees as they were at some firms would have more than offset the interest paid on the short-term securities held by money market funds. The industry would have had a massive scandal on its hands if money market funds, a supposed haven, were allowed to sink into the red.

The lesson here is that mutual fund companies will cut fees only if absolutely necessary. That means it’s up to you to take care of yourself. One option is to join the slow but steady migration to exchange-traded funds, which in their classic form are index-tracking funds that trade like a stock. ETFs, with their low costs, are a more frugal alternative to funds for both do-it-yourself investors and those who use advisers.

But there’s no reason for cost-conscious investors to give up on mutual funds. Just remember to weigh two things when considering a fund – its fees and the possibility of low investment returns in the years ahead. Don’t be the ignorant investor who lets his mutual fund companies make out better than he does.

Carrick, Robb. “The Globe and Mail.” Home. The Globe and Mail, 27 Feb. 2012. Web. 01 Mar. 2012. .