Employer retirement savings plans are likely to be either defined contribution (DC) or defined benefit (DB) pension plans. Multi-employer pension plans (MEPPs) are a third type, a target benefit plan that usually involves one or more unions. In addition, some organizations offer group RRSPs or investment savings plans that may include a share purchase plan.
Employer plans should always be considered as a potential savings vehicle, as the plans often include advantages such as access to investment funds or company shares at reduced fees, plus many have matching contribution programs. Often, if you make a contribution, the company will provide a company match (free money that you would otherwise not receive).
Let’s examine employer DB and DC pension plans in more detail.
Employees who are members of a DC pension plan will own their own registered investment account.
A DB plan specifically defines the amount of retirement benefit payable to each plan member based on a formula. It considers both years of service and earnings. It’s intended to relate a member’s retirement income to pre-retirement earnings.
If you’re in a DB pension plan and retire from the organization, you’ll receive a monthly payment for life-based on your plan’s formula and other factors.
In a DC plan, contributions are made into every plan member’s account. Contributions are predetermined, usually set as a percentage of each member’s earnings. Each contribution and any income earned is recorded and maintained in the member’s account.
Also called money purchase plans, defined contribution plans usually require minimum employer contributions. Some require employees to make contributions. Others allow employees to make voluntary contributions or offer a matching program if voluntary contributions are made.
Investment fund choice is generally provided to the employee who is expected to monitor the account and take on the investment risk. The final dollar value is not known as it depends upon the total amount of contributions and overall investment performance.
Whether you terminate or retire from the organization, the full value of the DC account is available to you as long as you are vested. Vesting is simply meeting the minimum service requirements set out in the pension plan document in order to be entitled to receive the organization’s contributions. Any contributions you’ve made are returned automatically to you. Once vested, all monies in the pension account are locked-in and subject to regulations that restrict access and withdrawals.
Upon retirement or termination, you may have the option of leaving the money in your employer’s plan until you wish to start drawing an income. Alternatively, when you do not wish to start an income stream immediately, you may transfer the account balance or commuted value into a locked-in retirement account (LIRA) or locked-in RRSP (LRRSP). Read more on locked-in retirement savings accounts.
As mentioned above, once you are vested, all amounts in a LRRSP, LIRA or DC plan belong to you. Every plan allows you to name a beneficiary who will receive the account value upon your death. Traditionally, if you have a spouse/partner, you were required to name this person as your beneficiary. Some provinces now allow a non-spouse beneficiary to be named (with the spouse’s written consent).
With the exception of special provisions for dependent children and grandchildren, only a spouse/partner may receive the account on a tax-sheltered basis. For any other beneficiary receiving the funds, the full value would be considered to be de-registered and your estate would pay tax on it. Survivor benefits from a DB pension vary based on legislation and the pension plan document. DB plan members should consult with their HR department for more information.
Many provinces are updating their pension laws and in doing so, they are introducing immediate vesting. Immediate vesting means that whether you have been a member of your company pension plan for 10 years or for 10 days, if you decide that you want to terminate your employment or retire, you’re entitled to all the contributions and investment earnings that have accumulated in your account. Double-check with your human resources department to find out if immediate vesting applies to you.
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