Couch Potato works with employer retirement plans

Employer-sponsored plans allow you to build a portfolio of index funds with almost no effort

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From the January 2016 issue of the magazine.

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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.

Compare fees.

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.

4 comments on “Couch Potato works with employer retirement plans

  1. I have a Sunlife Defined Contribution Pension Plan through work and do not like the funds (active with little diversity) and would like to switch them to Vanguard ETFs in a self-directed account. I thought I would have to wait until I retire or quit my job before I could transfer them, but this article might suggests otherwise. I just looked at my Dec. 2015 statement and it says that I am 100% vested with my funds, but that I have 20K in “funds that are not locked in.” I asked Sunlife about this several years ago and received this reply:

    In response to your message, assets that are considered “locked In” are restricted until retirement and cannot be accessed. Assets considered “not locked in” can typically be transferred to a regular RRSP when you are no longer with the company or can be withdrawn in cash at that time. As of right now because you are still an active employee all the assets in the plan are restricted.

    I was left with the impression that I cannot move these funds at all. Is Sunlife correct or can I move unlocked funds to another register account with another company?


    • Your defined benefit pension plan cannot be moved.
      You are 100% vested which means when you leave your employer your funds are your own funds.
      20k in funds that are not locked may be applicable to a portion of Employer Sponsored RRSP portion that you can move to another bank.
      You should have options within your DCPP that are index and if you feel that you are good to invest in them then make the change. Your employer has negotiated low mers for the funds that are used in the DCPP typically around 1%-1.5% and there are always eft options available.


  2. I retired from the Federal Gov’t after 33 years and have a Defined Benefit Pension Plan. I do use the Couch Potato strategy for my RRSP’s however I see in the April 2016 issue of Moneysense, there is a feature on a person in my situation and the experts suggest he put the fixed income portion of his RRSP money into 3 different (Can, USA and Int’l) low volatility ETF’s. The reasoning is that he already has the fixed income portion covered with his guaranteed pension. This seems to make sense and is it something you would recommend?


  3. My husband has just gained access to a new defined contribution pension plan at work and some of your posts have helped enormously in figuring out the options. He contributes 5% and the company contributes You’ve mentioned aligning the pension plan with any existing investments. We currently have our personal investments in e-series funds with about 65% in equities and 35% in fixed income (we are 36 and 38). Two of the index options include the blackrock target date index funds with operating expenses around 0.1%, and TD asset management funds with operating expenses of 0.04%-0.07%. First off, are “operating expenses” the fees that he will pay? These seem very low. Would it make sense to stick with the TDAM funds to align with what we already have, or is there any reason to go with a Target Date fund? I read your post about these being somewhat aggressive. The default plan he is in now is the 2045 which only has 3.1% in fixed income. Thanks.


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