By Sheryl Smolkin
Read this article and comments at Moneyville.ca
During RRSP season we are bombarded with stories about why you should open an RRSP and how you should invest your contributions. But if your employer has a defined contribution pension plan or a group RRSP, you should max contributions to the company plan before worrying about putting money in an individual RRSP.
1. Employer matching: Employers generally make some kind of contributions on behalf of members. For example, if you put in 5 per cent of your income your company may contribute up to the same amount. It’s free, but you don’t get it unless you enrol and contribute.
2. Lower fees: The average management expense ratio for a retail mutual fund may be from 2.3 to 2.6 per cent depending on the asset class. In contrast, a company-sponsored plan administered through an insurance carrier can typically negotiate fees as low as .5-1.5 per cent. According to Michelle Loder a senior pension consultant at Towers Watson, that could be the difference between retiring at age 62 instead of age 66!
3. Payroll deduction: Payroll deduction promotes disciplined savings. Also, taxes withheld from the rest of your pay are reduced. It’s like getting your refund through the year, instead of when you file your tax return in April.
4. The pros manage your money: The people who manage group insurance plans are usually the same people who manage other pension plans. They tend to be long-term investors and so are less likely to react impulsively to short term events.
5. Available retirement planning services: Most employer-sponsored programs offer full retirement planning services and information specific to you. These features are largely unavailable to an individual investor. Free in-house retirement education sessions are often included.
6. Transfer of other retirement savings: Your employer may allow you to transfer RRSP or pension money from other accounts into the company plan. Loder says there is a huge advantage to aggregating your money in one account instead of having pots of money in multiple places. “It’s much easier to develop an investment strategy if the money is under one umbrella,” she says. “Also, the more assets there are in the plan, the lower the fees for everyone.”
7. Locking-in: If you can’t get your hands on the money easily when you want a new HD television or a new car, chances are better that you will have a bigger balance at retirement. A registered pension fund must generally lock-in your money until your early retirement date. Money in Group RRSPs cannot be formally locked-in, but your employer may discourage you from withdrawing funds by suspending the company match for some period of time when you do so.
8. Post-retirement options: When you retire, you will have to transfer the money in your DC pension plan or Group RRSP into personal accounts with financial institutions. If your company plans are with insurance carriers, some of them have established Group RRIFs available only to former members of group plans they manage for clients. While investment fees in these Group RRIFs may not be as low as in the original employer plans, they will generally not be as high as retail fees charged to individuals.