Take Advantage of your Employer Retirement Plan

A group of adults sitting around a table with laptops speaking with an instructor.

If your boss offered you a few years’ worth of salary, would you turn it down?

It sounds like a dumb question, but you would be surprised how many people are doing just that. And they may be turning down a lot more than just a few years’ worth of income, too.

Many employers will offer to match, or partially match, contributions you make into a long-term savings plan. This could take the form of a Group RRSP, or an employee share ownership program (ESOP), among other options.

While few people remain at one employer their entire career anymore, if we assume that we always work for an employer that offers to match your contributions to a retirement savings plan dollar-for-dollar, then over a career, just the employer’s contributions could work out to a few hundred of thousand dollars in your retirement nest egg!

The matching generally works like this: for every dollar you put into such a plan, your employer might match that on a dollar-for-dollar basis if they matched at 100%. If they matched at 50%, they would kick in 50 cents for every dollar you contributed. There are usually limits to how much they will match per year, around two to four percent of your income might be eligible for matching, for example.

You might be wondering what the catch is. Free money? All you have to do is save for your own retirement, and they’ll help? Yep. This type of employee benefit is designed as part of the overall compensation package, and a means to encourage people to stay.

But if you don’t take advantage of it, then the money they would have contributed for the matching is lost. They don’t just give you the money, or other form of compensation in lieu. So, use it or lose it!

An even better retirement savings plan, the defined “benefit” pension plan, is becoming less popular. That’s because this type of retirement plan would provide a defined monthly payment to you in retirement until you died, no matter if you died five years after retirement, or 30. A defined monthly benefit means that you would have a predictable monthly income for as long as you lived. That’s great for peace of mind for you, but those defined benefit plans could be costly to employers. There is a risk that they underfund those plans, and if their workforce lived longer on average, and their pension plan investments underperformed, that would leave them on the hook for what they promised you.

These defined “benefit”, or DB, plans have been replaced by more defined “contribution”, or DC, plans. What is defined is only the contribution, not the benefit. You grow a pot of money, and hope you can make it last for your entire retirement. The risk has shifted to you.

So these defined contribution plans are more and more popular with employers, and many will provide contribution matching as an employee benefit. It’s less risky for them to boost your contributions, but not be on the hook if the funds don’t last as long as you do!

While they may not be as desirable as the defined benefit plans, it’s still an employee benefit to get matching into a defined contribution plan. Make sure not to turn away the free money. You should aim to maximize the amount your employer is will to chip in. Remember, use it or lose it!