A surprisingly high number of people seem not to have read the memo about how precious a workplace pension plan is.
These individuals are not contributing fully or at all to their company’s defined-contribution (DC) pension, which means they’re passing up matching contributions from their employer.
Insurer Sun Life Financial Inc. recently took a look at the DC pensions it administers to see how much money is being passed up by members. “Right now, we would estimate the total to be somewhere between $3- and $4-billion across the country per year,” said Tom Reid, senior vice-president of group retirement services at Sun Life Financial. “It’s a massive amount of employer match being left on the table.”
Personal finance so often veers into tips for saving a tiny bit of money here and there in hopes of accumulating into something significant over time. Getting full value from your company’s pension plan is a way to accumulate lots of money over time.
DC pensions plus group registered retirement savings plans and tax-free savings accounts operate on this principle: Employees and employers contribute money to various investment funds each payday to create a source of money for retirement. Unlike defined-benefit (DB) pensions and their predictable monthly payments for life, DC plan members end up with a bunch of money they have to manage themselves.
Sun Life numbers provided for this column that show participation rates for the DC pensions and other group savings plans it administers tend to be in the 60-per-cent range, with two-thirds of plans being voluntary. About 20 per cent to 25 per cent of those who do participate fail to make the maximum contribution and thus don’t receive a full match from their employer. Sun Life has a market share of about 42 per cent in pension administration.
Let’s review the math that makes it so wasteful to not participate in a DC pension plan at work. Contribute a dollar to your company’s plan and get a matching dollar from your employer. “You’re getting a 100 per cent return, just for showing up,” Mr. Reid said.
DC pensions can be fairly criticized in some cases for high fees, limited investment options and other things. But the dollar-for-dollar matching overwhelms a lot of that.
The percentage of workers covered by company pensions of all types has fallen steadily to about 37.5 per cent as of the most recent tally by Statistics Canada, in 2016. Members of the gig economy – temporary workers, in other words – may never see a company pension in their working lives. In this context, it’s understandable if people starting new jobs neglect to ask if their employer has a pension and, if so, how they can squeeze every drop of money out of it.
Companies themselves sometimes make it hard to join the workplace DC pension. They present new employees with a jumble of jargony material to read and then ask them to complete forms and pick investments. “Paper enrollment has almost acted as a barrier,” Mr. Reid said.
Fortunately, help is coming. Mr. Reid says plan administrators such as Sun Life have had success in getting people into group pension plans at work using auto-enrolment, which means signing them up automatically from the day they start their job. While not permitted in some instances due to employment standards legislation, Sun Life has found that auto-enrolment results in 92 per cent to 93 per cent of eligible employees staying in a DC plan and sticking with a default investing option.
Employers are also allowing pension plan administrators to reach out to new hires with personalized invitations to join the pension. Sun Life has a mobile-phone app that lets people enroll in a pension in about four minutes.
There are valid reasons not to contribute to your company’s DC pension. For example, you may have joined the company late in your career and have already built up sufficient retirement savings. But most people should try to max out their pension contributions. It’s easier to adapt to pension contributions deducted from every paycheque than it is to regularly carve out some of your take-home pay for retirement savings.
If you’re still not convinced, consider a company’s match to your pension contributions as an add-on to your paycheque. You wouldn’t say no to part of your salary, would you?
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