More Canadians are entering into defined contribution pension plans as employers leave the responsibility of investing to their employees. While that might seem like a terrifying burden, a calculated strategy can help deliver better returns.
Financial advisers say a balance of courage and discipline is the best route to put the focus on long-term investing rather than short-term worries.
Often, that can be the biggest challenge to overcome.
“What we have found is that many employees, especially when they don’t have anybody to talk to for financial planning advice, tend to be overly conservative with how they have their monies invested,” said David Ablett, director of tax and retirement planning with Investors Group.
For many Canadians, that’s the usual financial advice: put aside as much cash as you can, spend with caution and invest smartly. It’s just that sometimes the smartest investments don’t mesh with the “save, save, save” mantra.
The jerk movements of stock markets and commodities tend to leave the less-experienced investors acting on their emotions, or their fears, rather than putting their investments into the context of where they should be headed during the next few decades.
The best way to approach a defined contribution plan requires taking a step back from the situation to gain perspective.
While defined contribution plans put the onus on individual investors, the investment structure also gives them the opportunity to participate in determining their future, rather than leaving it to an pension fund manager hired by their employer.
A defined plan also eliminates the risk of an employee losing their pension, or having it severely reduced, if the employer goes bankrupt or forces them into early retirement.
On the flip side, investors who neglect to plan their financial future could take a major hit from ignoring their defined contributions. To maximize the potential of this structure, be prepared to make it part of the annual assessment of your finances, experts say.
“You should be determining how much money you’re contributing to the plan each year, how much your employer is going to contribute on your behalf, and then do a project based on salary increases,” Ablett said.
Younger people are frequently some of the big offenders when it comes to playing it safe with investments because they’re missing out on opportunities that could emerge over the long period of time before they retire, Ablett added.
“If you’re a fairly young person, you really shouldn’t have your defined contribution plans invested ultra conservatively,” he said.
“Younger individuals have much more time, they can absorb short-term losses in the market.”
One example of less conservative investments include weighing a large portion of your portfolio in equities.
Conversely, if you’re near retirement, you’ll want to seek the advice of a financial adviser on how to balance your portfolio in a way that will maximize returns without taking on big risks, though with a shorter investment time frame you should be prepared to reassess your goals.
“Maybe you’ll have to work a bit longer, maybe you’ll have to work part time, because if you lose money at age 60, you hardly have any time to recover,” said Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc., a firm that focuses on long-term investors.
“You can’t afford to make the mistake at 60 that you can at 30.”
Mastracci suggests that, as a rule, investors should stick to the basics and operate like a pension fund. Pension plans follow long-term strategies that ensure that none of the investments on the books create lasting portfolio damage, he said.
Before talking to a financial adviser, there are also numerous investment profiles questionnaires available online from most major financial institutions that can help determine what approach to take.
“You certainly have to take the initiative,” said Chris Buttigieg, senior manager of wealth planning at BMO’s wealth planning group.
“Today, with reports and articles and online content, there’s certainly the opportunities to enhance the knowledge about investing.”