I keep on affirming the very same statement; HR are EVIL! You have some doubts? Well, let us see how HR took care of explaining your pension plan when you first got hired
Seriously though, (I don’t think all Human Resource departments are evil… only a few), knowing what lies within your pension plan a year after the worst period stock markets have been through since I was born (ok… since my parents were born ) is pretty important! Especially if you are working for a smaller company, you may want to take a look at these 6 questions to ask about your pension plan:
Is my pension plan in the hole? If so, what will be done to get back on track?
For those who are lucky enough to have a defined pension plan, you may want to know if the math geniuses (read actuaries) did their jobs right.
**A Defined Pension Plan is when the employer has the full responsibility to pay a pension to his employees. The amount of the pension is already determined according to a simple formula. Most of them the get the average of your few last years of income and pay you 2% per year worked for your employer.**
The thing is that since your employer has the responsibility to pay you the pension, they also have the right to “take a break” and not put money in the pot for a while if they did better than expected in the markets and they are “ahead”. The problem is that most pension plans are not “ahead” anymore! Therefore, it is important to know what will be done to fill in the gap (more contributions from your employer…or the employees?).
What is the yield per asset class?
A pension plan is managed as is any other type of investment portfolio. It is important to know what the asset allocation is and the results for each class. If you have a defined contribution pension plan, you may be able to switch fund managers in the hopes of upgrading your yield over a long period of time. You can use track investment apps to follow your funds since your will probably receive your pension plan investment statement only once a year (let just say that they are not too great with investment services ).
**Defined contribution pension plans are offered and managed by the employer. There is a defined contribution from your pay check (usually a percentage of your income) along with an additional contribution from your employer (matching or not your own contribution). At the beginning of the pension plan, you receive a package with a choice of asset allocations and fund managers. You are allowed to pick the funds you want among this list. Hence, defined contribution pension plan are like self-managed RRSPs with an additional contribution from your employer. Therefore, nobody knows how much you will have in your retirement plan at 65. It’s up to you to make the right decisions…**
Who’s in charge?
Then again, many people think they have a defined pension plan while they actually have a defined contribution pension plan. Since the latter allows (requires!) fund selections, it is important to know who is in charge of managing your pension plan. Most pension plans allow changes once a year if you wish to modify your asset allocation. If you have a defined pension plan, you can only ask who manages your money and what is their investment philosophy.
How they manage my money?
It would be interesting to see if your pension plan managers stick to their investment strategies during the recent turmoil or not. Some of them decided to sell their stocks and tried to stop the bleeding mess. However, if they didn’t get back in the market yet, you are missing a great opportunity to recover!
Is my employer contributing?
If you have a “real” pension plan (defined contribution pension plan and defined pension plan), your employer is contributing. However, some HR departments may use the wording retirement plan and you may think it is like a pension plan. A retirement plan is like a regular RRSP account. Therefore, it is really important to know if your employer adds money to the pot or not. If he doesn’t, he is simply accommodating you by taking the money directly from your pay check and offering you a mutual fund package. In my opinion, you would be better off with a good financial advisor or on even on your own ;-). There are no advantages to contributing to a retirement plan if your employer doesn’t.
What is next?
What is the future of your pension plan? Will contributions will be increased to compensate for any actuarial gaps? Will the employer continue his contributions? Increase them? Decrease them? Does the company have enough liquidity to pursue its business while contributing to the pension plan?
These questions are really important as they will enlighten your decision to continue your contribution to your pension plan versus starting your own self-managed RRSP.
Since your pension plan health will determine what your retirement will look like, I think it is crucial you ask the questions and get as much information as possible.
image source: Fred Dhennin
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