By Sheryl Smolkin
One of the best ways to ensure you retire with the pile of money you need to live on is to join your company pension plan. The Saskatchewan Pension Plan offers individual and business plans for employers to use as part of their employee compensation plans.
Since maximum annual SPP contributions are $2,500 per year, some participating employers also offer group registered retirement savings plans or defined contribution pension plans for RRSP contributions over the maximum SPP limit.
Here’s why saving for retirement at work can help you retire sooner with more money:
- Employer matching: Employers generally make some kind of contributions on behalf of members. SPP offers several forms of matching options in their business plans:
- Dollar for dollar match: For every $1 an employee contributes, the employer contributes $1 up to the $2,500 maximum.
- Annual match: A set amount, for example $500 per year if the employee contributes a minimum of the same amount.
- A start-up plan where the employer contributes a one-time start up amount like $1,000 when the plan is set up.
- A performance plan: Employer contributions can be tied to a variety of different criteria, such as meeting sales targets, length of service and yearly performance.
- Other customized matching plans can be developed.
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 much lower fees. In 2013 SPP had a management expense ratio of 1%.
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.
SPP hires independent money managers to invest member funds. The Plan’s Board of Trustees establishes the Investment Policy and then delegates investment decision making responsibility to the fund managers. The Board monitors investment performance quarterly and reviews the investment policy at least annually.
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. There is a huge advantage to aggregating your money in one account instead of having pots of money in multiple places. That’s because it’s much easier to develop an investment strategy if the money is under one umbrella. Also, the more assets there are in the plan, the lower the fees for everyone. SPP allows you to transfer-in $10,000 from your RRSP.
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 and the SPP is subject to the same rules. 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.
SPP members have several options for dealing with the funds in their account when they retire. One option is the simplicity of SPP annuities, through which your funds stay invested in SPP while you receive a fixed monthly pension for your lifetime no matter where you live.
Ten Things You Need to Know About Your Company Pension Plan…, Rob Carrick, June 9, 2012
Income that lasts a lifetime – MoneySense, Sarah Efron, April 2nd, 2012