It is clearer than ever that most Canadians have to fend for themselves when it comes to retirement.
A few decades ago, most working Canadians had access to a Defined Benefit Pension Plan. This meant that when you retired you would receive some form of regular income for the rest of your life. To make sure that all working Canadians had access to this kind of security, the government established the Canada Pension Plan (CPP) in 1966.
For most retired Canadians, the combination of an employer's Defined Benefit Pension Plan, CPP and Old Age Security (OAS) provided them with a secure retirement lifestyle. Back in the "good old days," people didn't have to worry about how their money was being managed. They could work the required number of years, (usually 30 - 35), retire at 65, and live out the rest of their lives without concern about the source of their money.
This is not the case in 2013. Why?
• Increasing changes to old age pensions
• Fewer companies are offering attractive pension plans (or any at all)
• Job-hopping is the new normal
Today, most of you do not have access to employer sponsored Defined Benefit Pension Plans (DBPP). If you're lucky, your employer may contribute to a company Defined Contribution Pension Plan (DCPP) or group RRSP, but even with that, you, as the employee assume the investment risk of that money.
Let's start by outlining some Key Differences between a Defined Benefit VERSUS a Defined Contribution or Group RRSP:
A DBPP means you have no responsibility for the investments of the pension plan and your employer takes on all the risks.
A DCPP or Group RRSP means you assume all of the investment risk and your retirement depends on the choices you make.
2. Time Period of the Investments
With a DBPP, money is coming in and going out at the same time. Any surplus contributions (the difference between what's collected and what's paid out) are invested. It's this surplus amount that's the key. By design, the plans are meant to go on forever, so the investment horizon for the investment managers is extremely long.
With a DCPP or Group RRSP you are managing your own money and most have to be more conservative with their investments, especially in retirement.
3. Pension Plan Management Costs
With a DBPP the investment management costs are calculated into the contributions and stop for the individual when they stop making contributions. If the employer is paying 100 per cent of the pension plan contributions, the investment management cost is totally borne by the employer.
This is not the case with a DCPP or group RRSP. With these plans, the employee pays 100 per cent of the investment management costs. Which leads me to the most important reason I think most of you are set up to fail.
4. Where Your Money is Invested
When employers set up DCPP and group RRSPs they usually make arrangements with a life insurance or a mutual fund company or some other type of "pooled" product, but it's all the same. The costs can be excessive and hidden, and sadly, often chosen by the employer because it seemed like the simplest to administer and the reporting looked pretty.
It has little or nothing to do with what's best for the employees!
If your employer is dumping the investment management risk to you, you would think they would want to give you the best possible chance to succeed. Unfortunately, in most cases it's the exact opposite: they make inferior products and opportunities available to you.
This is a set-up, plain and simple. There are, however, some things you can do about this, and that's a topic I'll cover in my next blog. Stay tuned.