Chapter 11: Employer Retirement Plan
There are many ways employers compete to attract talented employees to work with them. The most obvious method is paying them through hourly wages or annual salaries. In addition, health and dental insurance, wellness plans, paid vacation, parental leave and retirement plans can help attract and retain talent. Many employers offer retirement plans to help their employees save for the future. We’ll briefly discuss the different ways these plans can be designed before going in depth on some of the most common options.
Plan Designs
Employers can offer retirement plans that use either an RRSP or TFSA as the foundation. They can also use a Registered Pension Plan (RPP), which is a specific account type available to employers. Aside from the account type used, there are two distinct types of pension plans: defined benefit and defined contribution.
Defined benefit plans specify how much you’ll receive in the future. This amount is typically based on the number of years you work at the company and your salary leading up to retirement.
Defined contribution plans don’t specify future payments. Instead, they depend on the contributions made and performance of the investments. Defined contribution plans are more common these days. One benefit for the employer is that they reduce risk by removing the need to guarantee future payments. Unfortunately for the employee, they add uncertainty to retirement earnings and make it more important than ever to plan.
Several other considerations for employer retirement plans include:
whether you’re required or able to contribute yourself
whether there’s a waiting period before you can join
what investments are available
whether there’s a vesting period before you have full claim to the money
With the nuances of employer plans covered, let’s discuss the most common plans. You may currently have access to one of these plans or could see them in the future.
Common Plans
The first is a defined contribution pension plan, where the employer matches 100% of your contributions up to a maximum percentage of your salary. The maximum matching might start out at 2% and grow to 5% based on your tenure with the company. Let’s see how this plan would work for you if your yearly income was $60,000.
In the first year of signing up, you’d contribute the maximum matching of 2%. You’d set aside $1,200, and your employer would match it with an additional $1,200. Assuming you’re paid every two weeks, you’d set aside just $46 a paycheque. At the end of the year, you’d have $2,400 in savings. This 100% matching is the equivalent of a 100% return on your investment the moment you set the money aside. Even at 7% annual returns, it would take just over ten years to reach 100%. This demonstrates why employer plans can be so valuable to your retirement savings.
Another plan is a group RRSP where your employer matches 50% of your contributions to a set maximum. In this case, the employer may match your contributions up to 6% of your salary. Assuming the same salary and pay cycle as above, you’d set aside $138 a paycheque. By year end, you’d have contributed $3,600 to your account. Your employer’s 50% matching would add $1,800, resulting in $5,400 total. If you continue for twenty-five years and your investments grew at an average annual rate of 6%, you’d have $296,300.
Speak to Your Employer
The first step is to find out if your employer provides a group retirement or pension plan. Not all employers offer them since, as we saw before, it’s one of many factors that they consider. There’s an alphabet soup of different names for employer retirement plans. Whether it’s an RPP, Group RRSP or TFSA, Employee Share Plan (ESP), Deferred Profit Sharing Plan (DPSP) or another option, your HR team should know what’s available.
The next step is to find out whether your employer makes contributions to the account. If the employer doesn’t make contributions, there’s less value in signing up. However, if they make contributions, there’s a great deal of value in signing up. Your employer may only deposit if you make contributions as well, or they may contribute without you needing to do anything. Either way, employer contributions are part of your total compensation package, and it’s important to take advantage. The final step is to make sure you’re contributing as much as you need to max out any matching from your employer.
Choosing Your Investment Fund
Once you’ve signed up and determined the amount you’ll contribute, it’s time to decide how you’ll invest. As we discussed in Chapter 4, you’ll want to consider the length of time you have until retirement. By taking on an appropriate amount of risk, you can help your savings grow and reach what you’ll need for retirement.
A common investment option in employer plans is a target date fund. These funds automatically rebalance your investments over time to reduce the level of risk as you approach retirement. We saw this process in Chapter 4 when Katelyn gradually switched from 10% low risk to 50% as she approached retirement.
Depending on your plan, you may also have access to the usual investment options discussed throughout this blog. Important things to consider include:
Your level of involvement
Funds and professional advisors offer the option to be more hands-off.
The fees you’re paying
Funds and professional advisors charge a fee that can significantly impact your growth if it’s too high.
The risk you’re taking
Saving for retirement usually provides a long period of time, providing the opportunity to take on more risk.
Additional Benefits
One major benefit of employer plans is that the money is taken off your paycheque at the source. This automates the process and makes saving less painful. In addition, it’s easier to leave this money out of sight and out of mind. As we mentioned before, it’s important not to try to time the market or fret over the ups and downs, and these plans help with that. Employer matching, the automated process and a less accessible account make these plans excellent for retirement savings.
If you leave your employer before retirement, which is becoming more common, you can transfer your plan in several different ways. Depending on your circumstances and the value of the plan, you may be able to:
transfer it to a plan with a new employer
transfer to a Locked-In Retirement Account (LIRA) or other registered account
take a cash disbursement
Final Thoughts
As we mentioned in Chapter 1, start where you’re comfortable and increase your contributions gradually. The sooner you contribute the maximum your employer will match, the better. 50% or 100% returns are the equivalent of saving you six or ten years of growth instantly. It’s the easiest way to catch up if you’re starting to save later than you’d like and a great way to get ahead if you’re early in your career.
Key Takeaways
Find out from your employer if they offer retirement plans and whether they make contributions.
Deposit enough to the plan to get the full matching from your employer.
Payroll deductions let you get to your money first, automate the process and keep your money out of sight.
This blog is a duplicate of the recently self-published book The Snowman’s Guide to Personal Finance available for purchase here.