There was once a time when most Canadians could rely on a company pension to get them through retirement. Not so anymore. Less than 40% of working Canadians are covered by workplace pension plans – and for those companies that do offer coverage, it’s often not the same kind of plan you would have participated in years ago.
In the past, many employers paid into a Defined Benefit (DB) plan that basically guaranteed their employees retirement money for life. But those days are largely gone.
Now, most employer-sponsored pension plans are Defined Contribution (DC) plans where both the employer and employee pay into the plans. DC plans do not guarantee the amount of future benefits. The retirement income from the plan depends on the accumulated contributions and investment returns earned by these contributions.
Because (defined contribution) plans rely more on the employee to invest and save, it’s important people make sure they’re using them right.
Make the most out of the match
Because these plans rely more on the employee to invest and save, it’s important people make sure they’re using them right. “If you’re not paying attention to it, you may not be taking full advantage of the plan,” says Todd Sigurdson, Investors Group Director of Tax and Estate Planning.
Only about one-third of employees lucky enough to have access to a workplace pension choose to opt in and that’s a missed opportunity, says Sigurdson. “We find many people don’t join when the opportunity is presented,” he says. “But it’s imperative to participate as soon as possible.”
Most DC plans top up employee contributions with matching funds, typically in the range of 3 percent to 6 percent of earnings. It’s essentially free money, says Sigurdson, so you should try and contribute at least as much as your employer will put in. “Maximize your employer’s contributions,” he says.
If you check the fine print on your plan you may find that if you make additional contributions– up to as much as 9% with some plans – your employer will continue to match your contributions either dollar for dollar or possibly at a reduced rate such as a fifty cent contribution for every one of your contribution dollars. That will give you a big bump in retirement income when the time comes, he says.
Understand the plan
Sigurdson also stresses the need to understand how the plan works. “Read the plan booklet as it will provide details about contributions, investment options and what you can expect to happen when you reach retirement,” he says. “If there’s anything you don’t understand, talk to your plan administrator. And be aware that employers can revise or terminate a plan, but they must give you plenty of notice.”
With a DC plan, employees are tasked with choosing their investments, usually from a list of pre-determined options chosen by the employer. It can include a number of investment options, from GICs and Canadian bond funds to Canadian balanced and equity funds. Some might offer international and segregated funds, too.
Review your investments
Pay close attention to those investments. “Your career could last thirty to forty years and what might have been an optimal choice of investments in the first ten years, may not be so as your career and life progress, and especially as you get closer to retirement,” says Sigurdson. “That’s why you should re-evaluate your pension plan investments periodically over time.”
He also points out that there are two stages to a defined contribution plan. The first is the accumulation phase, while the second is the decumulation phase, which is when you begin using plan money to fund your retirement. Since people are living longer you should consider your plan’s payouts so the money will last longer in retirement.
Follow this advice and your workplace savings should go further.