10 Things You Need to Know About Pension Plans in Canada

Maximizing your employer’s retirement offering is the easiest way to make money. For those who are offered a Registered Pension Plan by their employer, these vehicles can go a long way to ensuring you have a stress-free retirement. 

If you think about the steps necessary to achieve a state of financial wellness or financial freedom, certain topics will come to mind like; eliminating debt, reducing unnecessary expenses, and saving for retirement. 

While I think all of those steps (and many more) should be examined on your financial wellness journey, one of the first steps that every Canadian should take is to maximize their employer’s retirement program. 

Matching pension or RRSP plans in Canada are essentially free money for those who take advantage of the program, and taking advantage of free money outweighs other financial priorities such as paying off your mortgage, reducing spending, or travel hacking. 

The only step that should take precedence is paying off high-interest credit card debt (which can be done through a variety of methods).

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Employer-funded retirement programs aren’t as simple as one might think. Here are 10 things you need to know about the retirement landscape in Canada.

1. Pension Plan Risk either lies with you or your employer 

There are two types of pension plans in Canada:

Defined Benefit

In a DB plan, the employer guarantees a specific retirement income based on a formula that considers factors such as years of service and salary history. The benefit amount is pre-determined and usually expressed as a percentage of the employee’s salary at retirement.

The employer is responsible for managing the investments and assumes the investment risks. They contribute to the plan on behalf of the employees and are obligated to fund the promised benefits, regardless of how the investments perform.

DB plans provide a predictable and stable retirement income for employees. The risk of outliving retirement savings is transferred from the employee to the employer.

The investment decisions and management of the pension funds are handled by the employer or a professional investment manager. Employees typically have little control over their investment choices.

DB plans are generally not portable. If an employee leaves the company before retirement, they may receive a commuted value of their accrued pension, which can be transferred to another retirement account or used to purchase an annuity.

Defined Contribution Plan

In a DC plan, both the employer and the employee contribute a fixed amount or a percentage of the employee’s salary to the retirement account. The final retirement benefit depends on the contributions made and the investment performance of the individual account.

DC plans provide employees with the flexibility to choose how their contributions are invested from a range of investment options offered by the plan. This allows for greater individual control and the potential for higher returns, but it also means individuals bear the investment risks.

The retirement benefit in a DC plan is based on the accumulated account balance at retirement, including contributions made, investment gains or losses, and any applicable fees. The final retirement income is not guaranteed and depends on the performance of the investments.

DC plans are typically portable, allowing employees to take their account balance with them when they change jobs. They can roll over the funds into an individual retirement account (IRA) or another employer’s retirement plan.

In DC plans, individuals are responsible for managing their investment choices and making decisions regarding contributions and asset allocation. They assume the investment risk and the risk of outliving their savings.

It’s important to note that the specific features and regulations of DB and DC plans can vary.

2. Pension Plan Economies of Scale

There are certain individuals who elect to forgo their employer-sponsored plan in favour of their personal retirement vehicle. Even if the company match is an extremely low number, I strongly encourage you to go the route of leveraging your employer’s plan first. In most cases, your finance team has leveraged economies of scale to get you and your colleagues lower fees than individual plans (In Canada our fees are outrageous compared to the rest of the world), and even access to funds not available in the individual market. 

If you’re curious as to the fees being charged, feel free to ask your HR department, as they should have that information readily available. 

3. Pension Plan vs TFSA vs RRSP – Know the Vehicle For You

Some employers give you the option of putting your funds in a Registered Retirement Savings Plan (RRSP), DC Pension Plan, or even a Tax-Free Savings Account (TFSA). It’s important to know the vehicle that’s right for you. 

Pension plans are locked in for good, and that may not be right for everybody. Individuals who are purchasing a home for example may find more value in leveraging the RRSP vehicle to take advantage of the first-time home buyers’ withdrawal. 

Read: your complete guide to RRSPs

Read: your complete guide to TFSA’s

Read: your complete guide to RESPs

4. Pension Plan Knowledge – Speak to the Plan Experts If Offered By Your Employer

Most retirement plans in Canada are housed with the big group insurance companies (Manulife, Sun Life, Desjardins, etc). Many of these insurance companies have been around for a long time and provide their members with seasoned plan advisors. 

Please speak to these people. Although it may sound like a horrifically boring ordeal, they will help you set a fund lineup and retirement vehicle that makes sense for you. These reviews should take place every 2 or so years. 

5. Active vs Passive Investors – There are Different Investor Profiles

Some people really like being hands-on with their retirement funds and some people prefer to take a more relaxed, “hands off” approach. 

It 100% does not matter which one of these individuals you are. 

I will note that if you choose to speak to an expert (as was suggested in step 4), they will set your plan up for success. When the market changes, your fund managers (the guys behind the scenes ensuring you don’t lose all of your money), will be ensuring that your fund lineup is responding appropriately. Going in and individually moving funds around may disturb that. In the case of employer-sponsored retirement, I personally take a “set it and forget it” approach. I’ll leave my financial risk-taking to other aspects of my life. 

6. Pension Plan Exit – Know how you’re going to take out your money after retirement 

If you are getting close to retirement, please speak with your plan sponsor about the options available to you in the post-retiree world, whether it be a LIRA or life annuity.

7. Pension Plan Patience: You’re in it For the Long Haul

Over the course of your career, there are going to be ups and downs in the market and that is something that shouldn’t play a factor in encouraging or discouraging your thoughts on retirement readiness. 

Most plans leverage Target Date Funds, which means your plan automatically becomes less risky as you move closer to retirement (if that isn’t the case, you should send an email to your HR department). The system built by these large financial institutions is there to keep your retirement secure. 

The bottom line is…everything will be okay. 

8. Sometimes it May Not Be Enough

If you type “retirement calculator” into Google, you’ll see a number of tools that help show you how much you should be putting away. Find one that’s reputable and Canadian. Simply plug your numbers into it. This will help illustrate how close or far you are away from living the retirement you want. 

If the calculator reveals you are saving as a deficit, you know that alterations will need to be made to other aspects of your life. As mentioned in step 4, this is something that should be completed annually. 

9. About 40% of Canadians Have Access to an Employer Funded Plan

For those who have access to an employer sponsored retirement vehicle, this stat should serve as a reminder to not take things for granted. 

For those who fall in the 60%  do not worry. Sometimes employers choose to give employees extra salary bumps instead of a retirement vehicle, so a lack of a pension plan doesn’t mean your employer is cheap. 

It does however mean you need to take the necessary steps on an individual level to ensure you’ve set yourself and your family up for retirement. 

10. Pension Plan Transitions: You May Leave Jobs

Most people don’t stay in the same job forever. Upon your departure (regardless of the situation), you’ll be presented with a few options as to what to do with your retirement vehicle including: transferring your savings to a new employer’s plan, leaving your current plan with the financial institution or in the case of a group RRSP, transferring to a personal RRSP account. 

Conclusion 

For Canadians who have access to group retirement solutions, it’s imperative that you maximize the value of this offering. The employer contribution is essentially free money. This should be one of the first steps you take on your financial wellness journey 

FAQ

Should I put my remaining savings in a RRSP or a TFSA?

This post outlines a comparison between the benefits of an RRSP (tax deferral), or a TFSA (accessible savings with tax-free growth). Since pension plans are inaccessible until retirement, the majority of Canadians may benefit from the accessibility of a TFSA, but in some circumstances (first-time home buyers), a RRSP may be more beneficial.

Many Canadians will have to choose whether they prefer a traditional or a robo-advisor savings method. 

What is a Robo-Advisor? 

Taken directly from Investopedia: 

In 2014, Betterment launched the world’s first robo-advisor with the aim of serving ordinary individuals who did not have enough assets to interest a skilled financial advisor, many of whom still require an account minimum of five- to six-figures and who charge 1% or more each year in assets under management (AUM). The solution was to take advantage of advances in both technology and market structure to offer low-cost and effective investing with extremely low opening balances. 

On the technology side, the use of algorithmic trading, mobile apps, and digital signatures meant that the account-opening process no longer required reams of paperwork to be signed and that computers could execute trades without error and monitor portfolios continuously, something that financial advisors could never be able to do for more than a handful of accounts at a time. 

On the market side, low-cost exchange-traded funds (ETFs) emerged as the obvious type of securities to gain broad market exposure to various assets classes, such as stocks, bonds, real estate, commodities, and treasuries. ETFs charge very low management fees(now as low as 0.20% (when the average index mutual fund levies fees of 0.75%) and trade throughout the day like stocks, providing greater transparency and liquidity. Moreover, ETF trading has become commission-free at several brokers and clearing firms. All of this allows robo-advisors to manage client money for just 0.25% annually of AUM (on average), and users can open accounts with as little a $5.

Robo-advisors provided easy entrance into the market for many Canadians from 2014 to the present day

Key Takeaways

• Robo-advisors are able to automate investing strategies that optimize the ideal asset class weights in a portfolio for a given risk preference.
• Financial advisors are often more than investment managers, they are communicators, educators, planners, and coaches to their clients.
• Some traditional advisors are now offering robo-advisors-as-a-service as part of the portfolio construction and investment monitoring side of a more holistic financial planning practice

Robo-Advisor vs Traditional Financial Advisors

Benefits of Financial Advisors	Benefits of Robo-Advisors
The human element means you can call someone in case you have a question. The importance of technology is somewhat lessened.	The consumer-facing platforms are much easier to use compared to their traditional counterparts.
Financial advisors tend to offer a portfolio based on face to face meetings rather than an online questionnaire	The fees are much lower than traditional advisors, and the ease of opening a portfolio cannot be stressed enough.
Most financial advisors can answer questions about topics that go beyond investment & retirement portfolios (life insurance, annuities, etc)	The consumer facing platforms are much easier to use compared to their traditional counterparts.

In conclusion, a robo-advisor is best for the following individuals 

• Those who are technologically savvy 
• Those looking to save on investment fees 
• Entry level investors
• Those who use a traditional financial advisor, but do not engage with them on a regular basis

Robo-Advisor Options in Canada

If you have questions about robo-advisors, or if you feel you may benefit by switching to a technology-based solution, I strongly encourage you to check out Wealthsimple. 

It won’t take much research to conclude that Wealthsimple is Canada’s top robo-advisor, and it’s a product I personally use. Wealthsimple is a robo-advisor, but still provides clients with access to human advisors to answer your questions (a best-of-both-worlds situation). Wealthsimple offers an easy-to-use platform and does not require a minimum investment to get started. 

Here is a detailed review of the user experience by Canadian Youtuber Brandon Beavis 

Bottom line….check out Wealthsimple 

Does my employer-funded pension plan affect my CPP?

No, it does not. A private pension plan doesn’t affect payouts from your CPP. 

The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you’ll receive the CPP retirement pension for the rest of your life. To qualify you must:

• be at least 60 years old
• have made at least one valid contribution to the CPP

Valid contributions can be either from work you did in Canada or as the result of receiving credits from a former spouse or former common-law partner at the end of the relationship.

CPP payouts are factored into online retirement calculators. 

How Does Travel Tie Into Personal Finance?

Travel can have significant implications for personal finance, as it often involves various expenses and financial considerations. Here are several ways in which travel ties into personal finance:

• Budgeting:
  • Trip Expenses: Travel involves various costs, including transportation, accommodation, food, activities, and more. Creating a travel budget helps individuals plan and allocate funds for each aspect of their trip, preventing overspending.
  • Emergency Fund: Having an emergency fund is crucial when traveling. Unexpected expenses or emergencies can arise, and having a financial cushion can help cover unforeseen costs without disrupting long-term financial goals.
• Saving for Travel:
  • Financial Goals: Saving for travel can be part of an individual’s financial goals. Setting aside money specifically for trips allows for enjoyable experiences without compromising other financial priorities such as saving for a home, education, or retirement.
• Credit Card Management:
  • Rewards and Points: Many individuals use travel rewards credit cards to accumulate points or miles for free or discounted travel. Properly managing credit card usage is essential to avoid debt and take advantage of the benefits these cards offer.
• Insurance:
  • Travel Insurance: Investing in travel insurance can protect against unexpected events such as trip cancellations, medical emergencies, or lost luggage. While it involves an upfront cost, it can potentially save a significant amount in the event of unforeseen circumstances.
• Impact on Income:
  • Time Off Work: Travel often requires taking time off from work, which can impact income. Planning for this loss of income is important, especially for longer trips or extended vacations.
• Long-Term Financial Goals:
  • Retirement Planning: Excessive spending on travel without considering long-term financial goals like retirement can have implications. Balancing the desire to travel with the need to save for the future is crucial for a secure financial future.
• Cultural Awareness and Financial Education:
  • Currency Exchange: When traveling internationally, understanding currency exchange rates is important to avoid overspending or getting less value for money. Financial education becomes particularly relevant when dealing with different currencies and financial systems.
• Post-Trip Financial Management:
  • Post-Trip Expenses: After returning from a trip, there may be post-trip expenses to address, such as credit card bills, potential currency conversion fees, or unexpected charges. Timely management of these expenses is essential.

In summary, travel is an integral part of personal finance, requiring careful planning, budgeting, and consideration of its impact on both short-term and long-term financial goals. Being mindful of expenses, using financial tools wisely, and integrating travel plans into an overall financial strategy contribute to a healthier financial lifestyle.

4 Tips For Your Financial Wellness Journey 

1. For your group plan, put in the maximum amount that will trigger the maximum employer contribution 
2. With a viable institution, calculate your financial needs at retirement, and determine how close your group plan will get you to that target
3. Set it and forget it. Your employer is paying for a professional institution to manage the funds so you don’t have to
4. Understand the other financial services offered with your group plan, and see if those services can help you on your journey