Since we’ve started this blog, we’ve been asked by a number of people if they should invest into their work pension plan. Although there isn’t one straight forward answer, we are hoping that this post will help direct you in the right direction.
The first question that we ask is what kind of pension or RRSP program do you have at work? There are so many different kinds and some are better than others. Let’s break them down:
Defined Benefits Plan (DBP) is a type of pension the employer will pay the employee after they are retired based on a predetermined formula. This takes into consideration a number of things; earning history, age and tenure in your company. Why it is so great is because you can potentially get a very good pension for the rest of your life if you worked at the same company for a long time. In the past, a lot of companies offered DBP pensions however because of the costs, most of them got rid of them. You mostly only see them in the public sector.
At a high level, most argue that this is the best type of pension plan to be enrolled in and if you have this type of plan, HOLD ON TO IT. Grasp it like Lindsey grasps her Starbucks after a rough night with our daughter Emily.
Defined Contributions Plan (DCP) is a type of pension that both the employer and employee make contributions to the retirement plan. Your retirement income is based on how much you and the employer contribute each month and how good the investments do over time. It isn’t a guaranteed amount for the rest of your life like the Defined Benefits Plan. If you do have a pension plan offered at work, it is most likely a DCP plan.
So the question is: Should you take part in your company’s DCP pension plan? The quick answer is yes but let us explain why we would recommend it:
- If your company matches or contributes to the plan
It’s FREE money. Let’s say you picked really bad stocks to invest in and your investments don’t grow at all. However, in the DCP because your employer matched your contributions you still doubled your money. Anything your company contributes is free money. Even if they will only match 20% of what you put in, that is still a 20% return on your money without doing anything.
- Lower or no fees to manage your retirement portfolio
Most DCP’s have lower management fees than other investment items, like a Mutual Fund. Over the long term, those fees could add up to a LOT of dollars. Any savings helps.
- It provides you with a detailed plan that forces you to save
If anything else, it forces you to put money away that you might not otherwise would. Companies like Sun Life or Manulife that might be administering the pension will also provide you great tools to track your pension and its performance.
There are some cons with going into a plan like this, such as:
- Limited things to invest your money in
Let’s say your company’s pension is managed by Sunlife. When you open up your pension account, you will be limited to invest in only items that company carries. So if they only have mutual funds, that’s all you can invest in.
- Investing early is crucial
To be able to have enough money to retire comfortable with a DCP, you need to start early and contribute as much as possible to ensure that the pension grows enough by the time you retire. Otherwise you won’t be able to hit your goal. So start early so this isn’t a con for you.
If you wanted to compare the two, here is a great website to show you the differences.
At the end of the day, we feel like the pros outweigh the cons and think it is a good idea to join the company’s Defined Contribution pension plan if they offer one. If you feel like the pension plan isn’t working for you or you leave your company, you can always withdraw your funds from the pension and transfer it into your own RRSP and manage the funds yourself.
Overall, look at what your company offers and educate yourself on what you think would work best for you. A bit of time now could save you years of grief when you get to retirement.