From cost drag to cost smart: How ETFs are reshaping group retirement

This article is sponsored by BMO Global Asset Management.

In today's tight labour market, retirement benefits have become a meaningful differentiator. Recruitment and retention data underscore this shift: 85% of Canadian employees rank retirement as the top financial goal for their workplace savings plan,¹ and nearly half say they would switch jobs for better retirement benefits.² Offering the right plan is no longer just a perk; it is a competitive advantage.

But with multiple plan structures available, the question for employers is not simply whether to offer a retirement benefit, but rather how to choose one that delivers real value to employees. Because in a competitive hiring environment, the quality of a plan — its fee structure, investment options, and overall design — can be just as important to employees as its existence.

The active management reckoning

In group retirement plans such as Registered Retirement Savings Plans (RRSPs) and Deferred Profit Sharing Plans (DPSPs), plan sponsors and members have historically defaulted to actively managed mutual funds. These funds often charge fees in the range of 1% to 3% in management expense ratios (MERs),³ with the promise that a professional fund manager will outperform the market. The evidence suggests that promise has gone largely unkept — and the cost has fallen on plan members.

Research shows that the vast majority of active fund managers fail to beat their benchmark index over the long term:⁴

• 98.82% of Canadian Equity funds underperformed the S&P/TSX Composite over 10 years
• 97.14% of U.S. Equity funds underperformed the S&P 500 over 10 years
• 98.67% of International Equity funds underperformed over 10 years
• 100% of Canadian Small/Mid-Cap funds underperformed at both the 1 and 3-year marks

For group retirement plans, the practical implication is significant. Consider a plan member whose fund carries a 2% annual fee. That fee is premised on the manager generating returns above what the index would naturally deliver. In the overwhelming majority of cases, after fees, that is simply not happening.

The consequences compound over time. The “cost drag” of a 2% annual fee sustained over a 25 to 30-year accumulation period can erode a significant portion of a member’s retirement savings. When the active manager is not beating the index — and statistically, very few do — plan members are paying a premium for market returns they could otherwise access at a fraction of the cost.

The insurance wrapper: Convenient for whom?

Segregated funds — investment products sold exclusively through insurance companies — have long been a fixture in group retirement plans, particularly in legacy arrangements where insurers have historically dominated plan distribution in Canada. But alongside the active management fees outlined above, seg funds often introduce an additional layer of cost: an insurance premium. While useful in some cases, for some investors, this guarantee feature may not align with the needs of most group plan members.

What’s more, the insurance premium is just one component of a broader, layered cost structure — plan members may also absorb the underlying fund MER as well as Advisor and distributor trailing commissions. Depending on the product and plan design, these layers can add up to a significantly higher total cost than members might expect. And in a group retirement context, where members are accumulating savings over 20 to 30 years, that fee burden can be enormously consequential.

Index the advantage: The shift to ETFs in group retirement

With active managers broadly underperforming their index and seg funds applying a niche use case of uncertain practical value for most members, the case for a cheaper, index-based alternative becomes difficult to ignore. ETF-based group plans offer comparable market exposure at significantly lower cost, and over a 20- to 30-year accumulation horizon, that gap in cost structure translates directly into member outcomes.

The momentum behind ETFs speaks for itself — global ETF assets climbed to over $19 trillion in 2025, with industry executives anticipating continued growth for years to come.⁵ With a significant portion of demand coming from everyday investors, this trend has implications for group retirement plans as well. We now find ourselves in an era where providers must adapt to the possibilities offered by a growing ETF product suite or risk being left behind.

The new BMO|LINK Workplace Savings Platform,⁶ lives at the intersection of these trends, combining LINK’s digital workplace savings and pension platform with one of Canada’s largest and most experienced ETF providers.7 The digital platform offers employers a one-stop digital solution designed to help employees achieve their savings and retirement goals, with BMO Exchange-Traded Funds (BMO ETFs) that offer diversification, liquidity, flexibility, and low fees — a first among major Canadian financial institutions.

The BMO|LINK platform offers four account types, each with distinct advantages for employees and employers:

• Group Registered Retirement Savings Plan (RRSP): Contributions are made with pre-tax dollars, so employees realize immediate tax savings. There is no tax on investment growth until the money is withdrawn.
• Group Tax-Free Savings Account (TFSA): Contributions are made with after-tax dollars, and there is no tax on investment growth or withdrawals.
• Deferred Profit-Sharing Plan (DPSP): Allows an employer to distribute a portion of company profits to employees. Contributions can be vested over a specified period no longer than two years and are not subject to tax until withdrawn. DPSPs are often used in combination with a Group RRSP to house employer contributions.
• Multi-employer DC Pension Plan (MEPP): Allows multiple employers to pool contributions into a single defined contribution plan. Each member holds an individual account, and retirement income is based on total contributions and investment growth. MEPPs offer lower fees, strong governance, reduced fiduciary responsibilities, and effective risk management while providing a lighter administrative burden for employers.

Across all four options, employees invest in low-cost portfolios of BMO ETFs aligned with their retirement timeline — removing the guesswork, reducing the fee drag, and putting more of every dollar contributed to work for long-term savings.

_Source

_{1“2025 Employee Savings Survey: How are plan sponsors addressing shifting financial priorities, savings journeys?” Benefits Canada, August 1, 2025.}

_{2“Employers relying on benefits, perks to attract, retain talent in 2026: report,” Benefits Canada, October 7, 2025.
3Autorité des marchés financiers, Mutual Fund Fees.
4Joseph Nelesen, PhD, et al, S&P Dow Jones Indices, “SPIVA® Canada Scorecard,” Year End 2025.
5BMO Financial Group, “BMO and LINK Investment Management Inc. Launch New Workplace Savings Platform,” April 15, 2025.
6Steve Randall, “ETFs on track for $35 trillion as advisors eye active, digital asset boom,” InvestmentNews, March 2, 2026.
7National Bank Report, February 28, 2026.}

_{This content is sponsored by BMO Global Asset Management (BMO GAM). Benefits and Pensions Monitor was compensated by BMO GAM for this article. Benefits and Pensions Monitor is an independent organization and is not affiliated with BMO GAM.}

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