Employer-Sponsored Pension Plans
What is a Employer Sponsored Pension Plan (Defined Contribution)
Employer Sponsored Pension Plans are typically set up in two ways, as a defined benefit or defined contribution plan, for this page we will focus on defined contribution plans. Defined benefit plans provide retirement income based on a formula of your years of service, salary, and age at retirement, while a defined contribution plan provides retirement income based on the amount of savings in the plan at retirement. We find these plans are becoming less and less popular with today’s workforce as they normally have very restrictive withdrawal rules and regulations, with long vesting periods. We typically recommend a Group RRSP with a DPSP over a Pension Plan.
These plans can be easy to set up, have a large fund line up, are low cost to you and employees, and when managed by Advantage Pacific, they benefit from our active management program. This program includes one on one meetings anytime the employee wants to talk about their investments, no fee fund switches (rebalancing), semi annual updates in which we will attach a digital copy of their statement and review how their account has performed, outline and explain any changes we are recommending, and provide a general market update.
Why an Employee Sponsored Defined Contribution Pension Plan
- Locked In – When this type of plan is set up, we set it up as a Locked in Retirement Account, rather than an annuity. This means CRA sets very strict rules around the withdrawal of money from the plan.
- Liquidity – These plans are not liquid and cannot be accessed by the employee except in limited circumstanced like a medical emergency or financial hardship situation.
- Forced Savings Plan – Since these plans have restrictive withdrawal limits set by CRA this type of plan acts as a forced long-term savings vehicle as employees will not be able to access the money (except under limited circumstances) until retirement, and even then will be subject to withdrawal limits.
- Contribution Match – – A Group RRSP is at its most valuable to employees when an employer matches their contributions. We normally recommend an employer match any contribution an employee makes to a maximum of 3% to 5% of their total pay.
- Tax Deductible – Contributions to this plan are tax deductible and your contributions grow on a tax deferred basis.
- Better Fees – Think of a Defined Contribution Pension Plan as a common investment, shared between you and your employees. Everyone gets to pick their own investment funds, but everyone benefits from pooling their money together so your advisor can negotiate lower fees for you.
- Plan Administration – Like a Group RRSP these plans are easy to set up and require little effort on the end of the company sponsoring the plan. The admin is limited to calculating the employee contributions and authorizing their signing up for the plan.
Many financial services companies look at group investment plans as “set it and forget it”, but we think people lose out on incredible value when any investment is looked at this way. When your plan is managed by Advantage Pacific, we regularly look at the fund options the employees of your plan have picked and will make recommendations to them of how they can rebalance their portfolio to better fit their risk tolerance, other investing preferences and how they could change their fund line up to earn a better rate of return.
All the plans we set up are customizable by your employees, meaning they get to pick their own fund options. We prefer this as each employee is going to have a different risk tolerance and different investment preferences. As often as your employees would like we will meet with them in person, on the phone, or though Zoom to review and reassess their risk tolerance to ensure they are invested correctly. All of this is no cost to the employee and is covered by the commission the fund company pays to us when you set up your plan.
Transparency is important to us and we are always happy to disclose our fees publicly. Our fees for managing a group investment plan typically range from .10% to 1.5% per year, depending on total assets within the plan, annual contributions, and the number of employees regularly contributing.
If you are interested in finding out more about setting up an employer sponsored Pension Plan please do not hesitate to call and make an appointment with one of our advisors, or follow this link Employer-Sponsored Pension Plans to read more about the rules surrounding these plans.
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