If your boss offered you a $5,000 raise for the same amount of work, would you say no?
That fact is that many Canadians are turning this down by not taking advantage of their companies matching of RRSP contributions.
The obvious reason is that money is tight for many people and the idea of having less in your pocket each paycheque can be painful. But the question must be asked: What else are you doing with your money that will return 100% (if there is full employer matching)?”
The answer is very likely “nothing.” Does it really make sense to pay down your mortgage faster when interest rates are 3%, than to take $5,000 and turn it into $10,000 immediately in a tax sheltered investment? Even if you are not paying the mortgage faster, what about borrowing an extra $5,000 or $10,000 from a line of credit to take advantage of pension matching. This is on top of the tax deduction for making a contribution to your retirement plan. I understand that there may be cases where you simply can’t afford it today. That is OK.
However, make sure you understand what you are missing and take a good look at your budget to see if you can somehow find the money for it.
We always recommend maxing out the amount of company contributions you can get. It may be something like 3% of salary contribution from the employee matched fully by 3% of contributions from the company. Sometimes it can be much better, with employer contributions as high as 12% of salary in some quasi-government plans.
Missing out on employer contributions is just one of the major problems. When reviewing Defined Contribution or Group RRSP plans with people, we often find five major mistakes.
1) They aren’t maximizing the contribution from their company/employer.
2) They are far too conservative, often with a meaningful part of their plan in money market.
3) They ignore the plan for years on end, often making a change only when the stock market had a major downturn.
4) They ignore the rest of their financial world when setting up their Group RRSP plan.
5) They have no idea what fees they are being charged.
The main reason we find these five mistakes is that employees are simply not being educated on their plans. They are left to their own reading and decision making on something that they are not always able to understand. They have been essentially abandoned by their employer AND by the company or broker that sold the plan to the company.
In many cases, if someone does ask their HR department questions about the plan, the HR department is either uncertain of the answers or they are afraid of taking any risk around advice, so they often provide less than adequate answers.
Aside from education, why might someone not take the employer contribution in a plan?
Tied to a lack of education is the overly conservative asset mix of many plans. In some cases these plans have a default contribution of new money into money market, and these funds that are returning 1% or less, can become too large a part of the plan.
What many have to realize is that a pension plan is a very long term investment plan – even for those near retirement. If someone is 35, this money will not likely be touched for at least 25 years, but that is only the top of the pile of money. That pile of money is supposed to last until they pass away. If they live until 90, that means that some of those investments will be a 55 year investment.
If some of that amount is left over, then it has an even longer investment horizon as it passes to the next generation. So even if you are near retirement, it isn’t as if you need all of that money the day you retire. Some of that money may still have a 30-year time horizon.
This long time horizon allows you to handle the ups and downs of the stock market, and will usually mean that if invested more aggressively, you will have more money in 30 years than if you invested with a high percentage of money market and bonds. Too many people are leaving too much retirement money on the table because of investing too safely.
Sometimes conversations about Group RRSPs start off with “I haven’t touched this in 10 years.”
This isn’t necessarily a bad thing, if it was set up properly initially. One of the problems is that many plans have expanded or improved their investment offerings, and by not reviewing things for years, you may be missing some opportunities for lower fees, greater diversification, or access to better investment managers.
Another mistake that we see is that people don’t consider their broader financial picture when deciding what to do with their pension plan at work. For example, does a spouse have a defined benefit pension plan that will provide a steady retirement income? If they do, then you should definitely look at being more aggressive with your Group RRSP. On the other hand, if there is little other retirement money being set aside in your household, then you may want to be a little safer with your Group RRSP money, as it may be the key provider of retirement income. What about the amount of net worth in real estate or likely inheritances?
If these are large, and cash flow is tight today, maybe you really are OK not contributing to your Group RRSP plan.
In terms of investment fees, Group RRSPs should have lower fees in general. This is because they can be managed as part of a big plan. The reality is that investment fees on these plans are all over the map.
Keep in mind that the fees are as high as possible to still close the business with a company. That means that if it is a smaller company that hasn’t negotiated well, you may be paying 2%+ in fees on your Group RRSP plan. In cases of very large companies who have negotiated well, the fees could be less than 0.5%.
This information is important, because if you are paying high fees on your Group RRSP plans, you may be able to shift a large portion of your plan to your financial advisor or to manage it yourself. This doesn’t mean giving up on the employer matching benefits. It simply means moving a portion of the plan (your employer can tell you what is able to be transferred) to be managed outside of your Group RRSP plan, and now would either be part of your personal RRSP or into a LIRA (Locked in Retirement Account). You would then have much more freedom on investments and possibly lower fees.
When I think of some of the mistakes that are being made on this very important part of people’s retirement plans, it reminds me that many people need to take some action to learn more. If you can’t get some advice and guidance through work, then ask your financial advisor, and if they don’t help, then you may need to do some more research on your own.
After all, for more and more of us, this is your pension. Show it some love.
Ted can be reached at email@example.com or by phone at 416-733-3292 x221 or 1-888-816-8927 x221
Reproduced from the National Post newspaper article 20st May 2014.