How employees can utilize their DC pension plans

Wealth advisor reveals ways employees can make the most out of their plans

How employees can utilize their DC pension plans

Defined contribution pension plans (DC plans) are one of the two common types of employer pension in Canada, the other one being defined benefit pension plans (DB plans). In an interview with Peace Arch News, Dave Lee, senior wealth advisor at Scotia Wealth Management, outlines the ways employees can incorporate an employer pension into their retirement plans.

 

Defined benefit vs defined contribution

DB plans ensure that the pension an employee receives in their retirement is based on the income and number of years they have worked in a company. These plans were considered to be much more common in workplaces within the government and the public sector.

In contrast, DC plans allow employers to contribute a percentage of an employee’s salary into an account and provides the employee with the opportunity to decide how that money will be invested.

Employees are also able to contribute some of their own money to that account, which makes it so that there is no specified amount for the total pension an employee will get as it also depends on the performance of their investments. Such arrangements are commonly used by employees working in the private sector.

DB plans were now being less preferred by employers as they were expensive and less appreciated by employees in terms of their value in contrast to DC plans.

 

Making the most out of DC pension plans

Lee noted that there were misconceptions that surrounded pension plans, one of them being the assumption that the amount of contribution set by an employer will be enough to last them through retirement.

“Consider a plan where the employee and employer each contribute 5%. That’s 10% in total, which means it will take a decade to set aside one year’s income. DC plan investment returns need to be very strong to securely retire at the same age as those with DB plans typically retire,” he explained.

Lee also said that the investment selection that an employer made may not perfectly suit the needs of an employee.

“Many people decide to leave their pension in the default investment set up by their employer. But if that investment has a low rate of return, they may end up with much less money in retirement than those who are proactive and make wiser choices.”

Lee suggested that employees should take a more active role when it comes to planning for retirement which can be through creating their own budgeting, conducting their own research, consulting with a financial advisor, and figuring out how much they need to save.

He also said that employees with DC plans should decide the ideal age where they can start their retirement as they have to consider things like the total amount in their pension, the savings and performance of their other investments, as well as the expenses they expect to incur in their retirement.

“Seek out professional advice, optimize your investments and learn as much as you can. With knowledge and discipline, you can build your own safety net,” said Lee.