What pension funds, plan members should expect from their mutual and segregated funds

A recent national survey conducted by Abacus Data for Canada Life has uncovered a disconnect between investor satisfaction and long-term confidence in their portfolios.

While a strong majority of Canadians express satisfaction with their mutual funds (63 per cent) and segregated funds (74 per cent), fewer believe those investments will actually deliver on future goals. Just 43 per cent of mutual fund investors feel confident their holdings will meet long-term objectives, compared to 61 per cent of segregated fund investors.

When asked what the findings mean for pension funds, Sam Febbraro, senior vice president of wealth solutions at Canada Life underscored that mutual funds and segregated funds remain the go-to options for both institutional investors and pension plans. While their popularity largely stems from their ability to pool assets, he emphasized that the similarities end there.

While both products offer access to professional management and market growth, the structural differences are key to how and why they’re used.

“Mutual funds and segregated funds are both investment vehicles that allow investors to pool their money,” he explained, but they diverge sharply in terms of guarantees, estate planning features, and regulatory oversight. Whereas mutual funds are governed under securities law, do not offer guarantees, and tend to be more cost-efficient, segregated funds, which are regulated under insurance law, offer built-in protections like principal guarantees at maturity or death and potential creditor protection, making them more appealing to investors with lower risk tolerance.

“What we're finding is mutual funds are more widely known and they're accessible. They're often offered through banks and investment firms, and they tend to have some of the lower fees and are commonly used in group retirement plans. Segregated funds, on the other hand, appeal more to risk averse investors or those seeking some of the estate planning benefits. There's higher satisfaction and confidence levels in segregated funds. That's something that I think we have to consider. Investors value some of the built in protection and some of the peace of mind that they offer, especially in uncertain times,” he explained.

Febbraro noted mutual funds often carry over into pension plans due to their accessibility and broad market appeal. Contrastingly, segregated funds tend to serve a different need as Febbraro pointed to features like guaranteed savings protection, reset options, and simplified estate planning.

“Money goes directly to the beneficiaries, bypassing some of the expensive and time-consuming estate settlement,” he said, emphasizing these attributes make segregated funds particularly appealing for those with more complex retirement or legacy planning needs.

But where Febbraro draws the sharpest line is around investor confidence. While mutual funds are generally viewed as suitable for long-term growth, they rely on the investor’s comfort with market volatility. As the recent findings have found, that confidence is becoming fragile.

For Febbraro, this gap highlights a broader issue. Notably, today's investors are grappling with more than just market performance.

“They’re navigating some of the uncertainty around inflation, rising costs, global instability,” he said, arguing that trust now hinges on more than returns.

“Even those who are more financially active feel a little bit more vulnerable. It's not about how much they have, but more about how secure they feel. And in this environment, trust isn't built on just returns alone. It's earned by making sure that the people and people who are focused on their pension feel safe, supported and they're prepared no matter what comes next.”

That’s where Febrraro believes segregated funds can shine as they offer more predictability and downside protection, “which could be a little bit more reassuring when you're thinking about retirement planning,” he said.

“Because that's what we're focused on and I think that may help some of the investors and future pensioners as they think about the volatility and supporting some of their long-term outcomes.”

Education gaps remain

However, the survey findings exposed a broader engagement issue. Canadians who aren’t using these products haven’t actively rejected them, they’re simply unfamiliar or uncertain. The main obstacles revolve around a lack of understanding, concerns about risk, and minimal access to personalized advice.

Febbraro acknowledged that even many plan sponsors still lack a full understanding of the investment tools available to them, particularly when it comes to the differences between mutual funds and segregated funds.

“You have to accept the fact that there’s some knowledge gaps,” he said. “[Plan sponsors] have to educate themselves on the full spectrum of investment options, including the benefits and limitations of mutual funds and seg funds, or any other investment vehicle that they might want to use.”

To that end, he suggests plan sponsors partner with financial advisors who can provide personalized goals-based education to plan for the members and addressing emotional needs that come with it.

“A lot of times we think of employee numbers and their widgets or units of production. It's more than that,” he added. “These are individuals. They're human beings. You have to frame the investment choices around security, peace of mind, long term resilience, and not just the performance.”