As the old adage goes, investing is simple, but not easy. It’s simple because all you need to do is save, diversify, keep your costs low and stick to a plan. But it’s not easy because we’re human, and we’re not hardwired to do any of those things. If you’re fortunate enough to have a retirement savings plan at work, however, then investing could be simpler and easier than you think.
Most employer-sponsored plans allow you to save painlessly through payroll deductions—often with a top-up from your company. Your money then gets invested automatically and your portfolio even gets rebalanced regularly. It’s the ultimate Couch Potato solution, requiring zero maintenance. Here’s how you can make the most of yours.
Understand your plan.
Employer retirement savings plans are usually administered by an insurance company such as SunLife, Standard Life, Manulife, Great West Life and others. They vary a lot, so the first step is understanding how yours is structured.
Many companies offer a defined contribution (DC) pension plan, which is similar to an RRSP, although it’s less flexible. Unlike a traditional pension, a DC plan requires you to choose the specific investments: You’ll be given a menu of mutual funds from which to assemble your portfolio. Other companies offer a simple RRSP, with both your contributions and your employer’s top-up going into the same account. Or you may be offered a combination of a regular RRSP and a deferred profit-sharing plan (DPSP). Any employer contributions would go into the DPSP, where they take up to two years to become vested. After that date, if you move to another job or retire, you can roll the money into a regular RRSP.
Meet your match.
You should never leave money on the table if your employer tops up your contributions. For example, a typical group plan allows you to contribute up to 6% of your salary and the company will kick in an additional 3%.
If you think you can’t afford to contribute that much, consider this: If you earn $50,000, 6% is $3,000, or $115 per biweekly paycheque, but only about $80 after taxes. Maxing out your plan saves you about $1,000 in tax annually and would net you an additional $1,500 from your employer, which is entirely tax-deductible. So it would cost you only $2,000 or so in after-tax income to boost your RRSP balance by $4,500. You can’t afford not to do that.
The variety and cost of the mutual funds in group plans are all over the map, because they depend on how generous your employer is. A big company might choose to pay all of the plan’s overhead, in which case you may be offered funds with management fees close to zero. In other cases, usually at smaller firms, employers bear the brunt of the plan’s costs and fund fees approach 2%.
If you’re lucky enough to have access to super-cheap index funds, you should contribute as much as you can to your work plan. This is cheaper—and certainly more convenient—than making these contributions to a self-directed RRSP and building a portfolio of ETFs.
On the other hand, if your plan offers only high-cost funds, it’s not so clear. If your employer isn’t topping up your contributions, you should probably opt out of the plan altogether and set up a self-directed RRSP using a lower-cost option. If the company does match your contributions, then it still makes sense to participate in your workplace plan: The free money will more than offset the higher fund fees. But once or twice a year you may want to transfer your RRSP assets into your discount brokerage account and reinvest it in ETFs.
Integrate your work and personal plans.
If you also hold investments elsewhere, set up all of your accounts so they follow a similar strategy. Let’s say you have a traditional Couch Potato portfolio at a discount brokerage, with 40% in a bond ETF and 60% in Canadian, U.S. and international equity ETFs. See if your workplace plan offers index funds covering these same asset classes. Then instruct your administrator to put all current and future contributions (both your own and the employer’s top-up) into these funds in the same proportion. you can probably do this online.
In addition to individual index funds (or instead of them) many plans offer “target date” funds, such as BlackRock’s LifePath family or Great West Life’s Cadence series. A fund with a target retirement date of 2035 might hold about 30% in bonds and the rest in a globally diversified mix of equity index funds. Every few years the fund will get more conservative by increasing the allocation to bonds. These funds can’t be customized, but if their costs are low they can be a good way to get broad diversification with low maintenance.
The quality of employer-sponsored retirement plans varies, but most offer plenty of opportunity to support your investment plan. Your assignment for the new year is to take full advantage.