Starting a new job can be a nerve-wracking and yet exciting experience.
The transition to a new workplace, however, brings with it many challenges and opportunities. It also introduces a whole new set of compensation options and savings programs as added enticement for you to stay on with the company.
Your new firm may have health and dental benefits, a group RRSP, deferred profit sharing plan (DPSP), a company share purchase plan, and other non-registered savings plans. One of the most popular plans for employers to offer is the company pension. It is also one of the most confusing.
There has been a trend for many employers to shift from a defined benefit plan to a defined contribution plan. This is because the employer takes on the risk of maintaining a defined benefit plan to ensure it remains fully funded to meet its obligations. The more popular defined contribution plan leaves the onus on the employee to ensure the funds are invested appropriately to ensure sufficient savings are available to fund their individual retirement plans. Regardless of which type of pension your company offers, there is a fair amount of money contributed by them to your long-term savings.
Many retirement plans (outside of defined benefit plans) allow you to decide how much you would like to contribute to the plan and then your company will match your contributions up to a set limit. For example, your company may match your contributions up to 5% of your gross salary. If you are earning $50,000 per year, they will contribute $2,500 if you contribute $2,500. If you contribute less, so will they. If you decide to contribute more than $2,500, they will still only contribute $2,500.
The dilemma most people face, especially when they are starting their first job, is they want to maximize their take-home pay and, after deductions for taxes, CPP and Employment Insurance, the bottom line doesn't look as rosy. Contributing to a pension is only going to reduce the bottom line further.
If you have sufficient cash flow to meet your needs, it is hard to imagine a scenario where you would not want to contribute to the company pension to the max. After all, this is "free money" to you.
The biggest drawback to a defined contribution plan or employer-sponsored group RRSP is when they leave the investment decisions solely up to the employee. Take advantage of all advice that is available from the sponsor. If you still are not sure, ask for the opinion of your financial adviser to ensure your investment choices match up with your overall retirement strategy.
Not everything your employer offers its employees is necessarily in your best interests.
That being said, any time your employer is offering you free money, it's probably a good idea to take advantage of it -- to the max.
- Doug Riding is a senior associate with Investment Planning Counsel