What Your Company Sponsored Retirement Plan Tells You About You

Most companies offer a retirement plan and if you are smart you are participating. Company sponsored plans are always a good deal.

There are three types of company sponsored plan. There is the defined benefit plan, the defined contribution plan, and the group RRSP plan. The defined benefit plan is rarely offered to non-governmental and non-quasi-governmental (teachers, nurses, etc.) employees.

The defined contribution plan and the group RRSP plan are prevalent in the private sector. The standard arrangement is the employee contributes to the plan and the employer matches the contribution up to a maximum. For example, the employee contributes 5% of salary and the company matches. Each year an amount equal to 10% of the employees’ salary is contributed to an account in the employees’ name. This accumulates to substantial savings over a lifetime. Employees should contribute an amount that at least generates maximum employer matching. In the above example, if 5% is the maximum, it is important that the employee contributes 5% of salary. If the employee contributes 3%, the employer matches only 3% and the employee foregoes 2 percentage points of company matching. If the employee contributes 7%, the employer matches only up to the maximum of 5%. Each dollar of employee contribution up to the maximum generates an instant 100% return. 100% instant returns are hard to find.

Typically, with company sponsored plans that are not defined benefit plans, the employee receives a booklet with basic financial planning information and an asset allocation tool. From this, the employee chooses an investment option or options that suit them best. The employee chooses from an array of investment products and contributions from both the employee and employer are invested in the products. The employee does not meet with anyone to receive financial planning and investment advice. A representative from the company or the plan provider, typically an insurance company, may present to interested plan participants in a group setting periodically, but that is about it. Most participants in these plans are quite satisfied. The cost of these plans tend to be significantly lower than investing through a financial advisor.

What do these plans tell you about you? You opened accounts, chose investments, contributed to the plan for years, rebalanced periodically, and potentially managed withdrawing a monthly amount in retirement. You did this with little assistance. In other words, you were successfully your own financial advisor.

Why not open online brokerage accounts and be your own financial advisor with your non-company sponsored plans and cut your cost factor drastically? Many pay over two percentage points investing in products through a financial advisor. The products will most likely underperform their relevant benchmarks by the cost of the product. Don’t forget, the advisor, the advisor’s firm, the product provider, the government and the independent services the product provider must hire all have to eat. You are paying for the food.

The consequence of a two-percentage point cost factor is well stated on the website. Consider this. Someone who saves $10,000 per year for 35 years and earns a 4% average annual return during their lifetime, retires, and withdraws $50,000 per year in retirement runs out of money on the 23rd year of retirement. If they earn 6% and pass away on the 30th year of retirement, they pass away with over $2,000,000 in their account. If they earn 5% and pass away on the 30th year of retirement, they have over $400,000 remaining. The after-cost rate of return matters greatly and therefore cost matters greatly!

Your group account proves you can be your own financial advisor. Cut your cost factor.