by Andre Domise

“Welcome to the plan!” says the cover of your group investments package, a Bible-thick assemblage of loose flyers, tax forms, and mutual fund descriptions.  Among the blizzard of Balanced Growth portfolios and T-2033 forms, there has to be some simple explanation of how this whole thing works.  You flip from 3% base and 50% matched contributions to flex benefits spillover, and by the time any comprehension finally starts to sink in, the phone is ringing, your co-worker is tapping you on the shoulder to ask if you got his e-mail, and the weighty package gets stashed in a drawer (probably never to be seen again).  It makes you wonder why the people in all the promo flyers were smiling, and not ripping their hair out.

It’s okay. Everybody knows they’re supposed to read these things through, but it’s rare that anyone actually does.

If you’re working, and have a group pension/investments plan of any kind, consider yourself lucky.  Only 38.6-percent of Canadians participate in a Registered Pension Plan (RPP), most of them women.  44-percent say they are unprepared for retirement; and, just over 50-percent have any plan for retirement at all.  By no means should a group investment plan be your only nest egg, but they do give you a great head-start.  In my next few columns I’ll explain the ins and outs of group investment plans, but I highly recommend you contact your benefits provider to be crystal-clear before you sign your name to anything.

Matching
Most group investment plans operate with a matching principle. That is, if you contribute to the investment plan, your employer will pitch in as well.  There’s no rule as to how much they’re required to put in. Depending on how generous your employer is, they may even contribute a base amount, usually between 2% to 5% of your salary, without you having to pitch in at all. Most of the time, you’ll need to kick in a portion of your salary in order to get a match from your employer. That match is usually capped at a certain percentage of your salary. For example, if your salary and bonuses average $55,000 per year, and you receive a 50% match up to 5% of your gross salary, the formula will probably look something like this:

Your contribution: $55,000 x 5% = $2750, divided by 26 bi-weekly paycheques = $105.77 per paycheque

Employer’s contribution: $105.77 x 50% = $52.88 per paycheque

So, you would see roughly $158.65 contributed to your group investment plan every other week. Consider that, with every payment into your nest egg boosted by 50% in this scenario, it makes far more sense to make regular payments into a group plan, than your personal RRSP.  A smart investing strategy would be to max out contributions into the group plan, before putting money into your personal plan.

Vesting
If you’re thinking of leaving your plan, or moving to a different company, what happens to the money your employer put in?  To find the answer, you definitely want to ask your benefits provider about the “vesting” period.  In most provinces, as long as you’re in the group savings plan for two years, you get to keep all of the money.  Each company is different, and may choose a shorter vesting period, say one year, or even immediate vesting.  In Québec, however, vesting happens immediately.

Next time, I’ll look at different types of savings plans, and which ones may be the most appropriate for you.

by Andre Domise

I understand that sussing out the differences between workplace-sponsored retirement plans can feel like a pain.  I’ve been in the financial industry for the better part of 10 years, and even I get my definitions crossed at times. However, the effort is worthwhile, as some of these plans can be used to build a hefty nest-egg and even help you buy a home or retire early.

The Defined Contribution Pension Plan (DCPP) is the most common plan for private-sector, non-union employers. It’s called “defined contribution,” because the amount of money you’ll deposit into the plan is known ahead of time. Contained somewhere in the acres of paperwork and informational material, you should be able to find out the contribution and matching formula that determines how much you’ll pitch in, and how much your employer will match.  If this is difficult to locate or understand, just call your benefits provider and have a customer service representative explain it to you. They’re often very helpful – they want your business, after all.

In these plans, there is usually a base contribution you’re expected to make (ie. 2% of your gross salary), and your employer will likely match that amount dollar-for-dollar. Then, you might be able to kick in an optional amount that will also be matched (ie. up to 3% more of your gross salary, matched at 50% by the employer). Using the formula for a company I deal with fairly regularly, here is an example of how DCPP contributions work:

Employee gross salary: $75,000
Employer base contribution: 4% of gross salary
Employee base contribution: 2% of gross salary
Employee optional contribution: Up to 10%
Employer matched contribution: 100% of optional employee contributions
matched, up to 3%

Given that an amount equal to 6% of this employee’s salary is already being deposited into the DCPP (4% from the employer, 2% from the employee), she’s off to a good start. That’s $4,500 in the bank each year (or approximately $173 per paycheque – about $58 from the employee and $115 from the employer). If she decides to bump up her contributions by another 3% (because it’s matched by the employer), that’s an additional 6%, or $9000 per year and only $144 per paycheque coming from the employee.

Let’s say our employee is 40 years old, and plans on retiring at 65. Let’s also assume she made some smart investment choices, and averaged 6% growth per year. Her pension account would be worth over $520,000 by the time she’s ready to retire. Not bad!

When you’re ready to retire or leave your company, DCPP assets are usually moved into an account called a Locked-In Retirement Account, or LIRA (some provinces use a Locked-In RRSP or LRRSP, but they’re not much different). At this point, no more money can be added to the plan, and nothing can be withdrawn. You can choose the investments in the plan, but it’s otherwise off-limits. When you’re ready to collect an income from these locked-in accounts, they’re usually converted into a Life Income Fund, or LIF (Locked-In RRSPs are converted to Locked-In Retirement Income Funds, or LRIFs.  Again, not much different). The only downside for these pension plans is that pension varies by province.  For example, each province has a different retirement age (e.g. age 50 in Alberta, age 55 in Ontario), and different rules as to what can be done with this money at retirement. For
example, in Ontario, when you convert your LIRA into a LIF, 50% of those assets can be moved into a registered, non-locked-in account (ie. RRSP, RRIF) to be used as you wish, while in British Columbia, all of the DCPP assets stay locked-in (even if you are experiencing financial hardship).

That said, the downside of locking-in provisions is far exceeded by the upside of the tax deduction you receive for making the contributions, as well as the fact that employer money helping you grow your nest egg is free money. And by the way, only yourcontributions can be deducted; your employer’s contributions didn’t come out of your pocket, hence no deduction.

Next time around, we’ll look at Deferred Profit Sharing Plans.