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.
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.
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.