To the uninitiated, of whom there are many, the plethora of investment products available to Canadians to save for retirement can begin to resemble an alphabet soup.
Adrian Mastracci, a portfolio manager at KCM Wealth Management Inc. in Vancouver, refers to the current choices as the ?retirement labyrinth? and offers them up to clients as 15 ?flavours,? such as one might find in a well-stocked ice cream parlour.
There are RRSPs and TFSAs (tax-free savings accounts), of course. But try to decode the following list: ESOP, SOP, DPSP, group RSP, RDSP and RESP. Perhaps those with children hoping to attend post-secondary school could translate that last one, which is only tangentially attached to retirement planning anyway.
But for many Canadians, the federal government?s plan to add another four-letter savings choice for their retirement ? the PRPP ? complicates a process that already has many at a loss.
How simple will it be to choose between the pooled registered pension plan and a tax-free savings account or RRSP, for example, for the 40% of people surveyed recently by the Canadian Securities Administrators who failed a general investment knowledge test.
More than half of those surveyed claimed to be confident in making investment decisions, yet only 12% provided a ?realistic estimate? for the annual rate of return on an average investment portfolio.
Eleanor Farrell, who recently took the helm of a newly created Office of the Investor at the Ontario Securities Commission, said the absence of such basic investment knowledge does not come as a surprise to the regulators. They too often see investors hurt after believing schemes that promise high returns in today?s markets.
?Unfortunately, most Canadians don?t really recognize what a reasonable rate of return is, so that?s maybe part of the problem,? said Ms. Farrell, whose previous job was at the Canadian Pension Plan Investment Board.
Even if working Canadians are successful at directing some of their savings into vehicles such as tax-free savings accounts and pooled pensions, the complexity of planning for retirement may still outstrip their knowledge. Getting a lump sum at retirement isn?t enough. Tricky decisions remain about where to put that money, what rate of return is required, and how much to take out over time to ensure there is enough left for the longer lives Canadians are generally living.
?This is complicated mathematics that we?re pushing on typical Canadians that generally don?t have the financial literacy to make these types of decisions,? says David Denison, who, until June, ran the successful investment arm of Canada Pension Plan.
Unfortunately, most Canadians don?t really recognize what a reasonable rate of return is, so that?s maybe part of the problem
Despite a slew of government and regulatory initiatives in recent years, experts acknowledge that Canadians have a long way to go.
Federal Finance Minister Jim Flaherty created a task force on financial literacy in 2009 to advise him on the matter, and proposals the following year included using the formal education system to provide the ?foundation? for financial literacy. The subject is part of the curriculum, beginning as early as middle elementary school in some jurisdictions.
Some hope that, within a generation, we will be a more financially savvy civilization. But critics fear the implementation is too haphazard.
?What I hear from students, from teachers, from people in the financial-services sector, is that our current approach in the schools ranges from non-existent to ad hoc at best,? says Tim Hudak, leader of Ontario?s Progressive Conservative Party.
Mr. Hudak, whose party published a white paper on ?sustainable retirement? Monday, called financial literacy ?a dramatic weakness? in the system.
?Too many students are graduating with rudimentary, at best, understanding of the way markets work, of the importance of planning for their retirement,? he said. ?They know in their gut that if you have to depend on OAS or CPP you?re not going to have much of a retirement, but they need better instruction how to not end up in that box.?
In addition to schools and governments, regulators such as the OSC and the national Investment Industry Regulatory Organization of Canada have made efforts to help Canadians make better investment choices. Using penalty money collected from enforcement actions, the OSC and IIROC fund a non-profit Investor Education Fund created with a mission to provide unbiased advice and tools to help Canadians make better money decisions.
Information about retirement savings products is a popular item on the Investor Education Fund website, but there is a steep learning curve every time a new retirement planning option such as the tax-free savings account or pooled pension is introduced, says Tom Hamza, president of the IEF.
?People are confused. It takes time,? he says, adding that our lives are busy without accounting for the ?life-long learning? required to keep up with investment products and evolving life stages that change what you need to know.
?It doesn?t take six months today ? it takes three, four, five years,? he says, before the public understands and adapts to new products that might fit into their retirement savings plan.
Tax-free savings accounts, for example, which were introduced in 2009, continue to be routinely misunderstood by investors ? even those who use the investment vehicle. Instead of helping them save, the confusion has resulted in unexpected tax bills.
Mr. Hamza says most of the mix-ups he has seen concerned when to contribute.
That?s backed up by a survey released last week by Bank of Montreal, which showed that while 60% of Canadians said they are knowledgeable about tax-free savings accounts, only 44% correctly identified the annual maximum contribution limit of $5,000.
What?s more, the survey said, 35% said they did not know what investments can be held within a TFSA, and the majority of TFSA holders are unaware that stocks, bonds, and exchange-traded funds can be included in their account.
Joanne De Laurentiis, chief executive of the Investment Funds Institute of Canada, says such surveys are useful because they can help pinpoint where investor education is falling short.
?I don?t think we can say one of these [financial literacy initiatives] is the magic bullet,? she said. ?We have to keep pushing at it?. There isn?t one point in time when you do it and then consider it done.?
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