Spring 2012
The company?s defined benefit plan has been the cornerstone of your retirement plan and a big part of your overall compensation. Lately you have been hearing that the company will be closing down the defined benefit plan and switching to a defined contribution plan. What will this mean for you and your retirement?
If this is happening to you, you certainly aren?t alone. According to Statistics Canada, the number of people who are members of both defined benefit and defined contribution plans, often as a result of this type of conversion, has grown from 40,000 in 2006 to 392,000 by 2010, an 880% increase. Companies are making the change to contain costs and limit their future liability.
Less risk for the employer, more risk for you
A defined benefit plan pays a guaranteed income amount, usually based on years of service and final income, regardless of how the plan?s underlying investments perform, leaving employers on the hook for making up any funding shortfall. In a period of low interest rates, uneven equity returns and greater longevity, funding shortfalls are increasingly common. Under a defined contribution plan the retirement benefit is based on contributions, typically made by the employee with some level of contribution matching from the employer, and investment growth. So by making the switch to a defined contribution plan, all of the risk and more of the cost of a pension plan are shifted from the employer to the employee.
Time for financial re-planning
According to Warren Baldwin, Regional Vice-President at T.E. Wealth, if your company is making the switch, the impact on your retirement plan will depend on how close you are to retirement and the details of the conversion. As Warren explains, ?If you are early in your career and have your best earning years ahead of you, you can adapt to this type of change. But if you are closer to retirement, you may have to alter your plans. Either way, this is the time to crunch the numbers and do what I like to call ?financial re-planning?.?
The terms of the conversion itself will figure into any financial re-planning, so it is important to understand what is being offered. Will your defined benefit plan benefits be frozen, with future contributions going to the new defined contribution plan? Or are the accrued benefits under the defined benefit plan to be transferred to your account balance under the defined contribution plan? Whatever the terms of the conversion, pension legislation requires it be clearly communicated to plan members in advance, providing the opportunity to assess the implications.
?The first step is to conduct a retirement income gap analysis. We compare the income you will need in retirement with what you can expect to receive from all sources. If there is a gap or shortfall, we need to look for ways to address it, either with more savings now or less lifestyle later,? says Warren.
Invest to replace future income
A major concern when changing to a defined contribution plan is how to invest contributions to replace the future guaranteed income stream that was to be provided under the defined benefit plan. As Robert Broad, Vice President and Investment Counsellor with T.E. Investment Counsel, explains, ?You now have to determine how to build the assets, through the defined contribution plan, your RRSP and other savings, that will sustain you in retirement under set assumptions about inflation, lifespan and rate of return.? He says that this means investing like a pension plan ? understanding your time horizon, setting an appropriate asset mix for the long term and regularly rebalancing your portfolio regardless of whether markets are up or down. If you have other investments ? for example, RRSPs and taxable investment accounts, you will want to make sure your overall asset mix is in sync with your needs. Without the guarantees of a defined benefit plan to count on you may need to take on less risk with your investments.
Keep up with your contributions
Warren cautions that when you make the switch to a defined contribution plan, make sure your take-home pay doesn?t go up. ?With a defined benefit plan, your contributions were mandatory. That?s not always the case under a defined contribution plan. If you aren?t making the maximum allowable contribution, you may see your pay deposit increase today at the expense of how much you will have at retirement. What?s more, if your employer matches all or some of your contributions, you?ll be missing out on what is essentially free money.?
According to Robert, contributing to a defined contribution plan is almost always a good deal. Investment management fees are generally lower for pension plans and the employer-matching formula is a form of compensation that you won?t want to miss. ?To get the most out of these plans, make the maximum contribution to fully benefit from any matching by your employer and make sure you invest contributions in keeping with your goals and expectations,? explains Robert.
Understand your options and get objective advice
Often with a defined contribution plan you will only get information about your investment options and not personalized investment advice. If you are offered advice through your employer, make sure it is unbiased and not tied to commissions. Always get a second opinion if you are being encouraged to transfer money out of the plan. Better still, if you have a financial advisor, make a point of discussing your investment options and how this new plan can work with your overall financial plan.
?How T.E. Wealth can help
- Review the terms of conversion and assess the implications.
- Do a retirement income analysis to determine the impact of the change.
- Conduct a ?financial re-planning? to revise your overall financial plan.
- Review your investment policy and target asset mix in keeping with your new reality.
- Adjust your portfolio, if necessary, to account for the change to a defined contribution plan.
steve jobs fbi safehouse brown recluse brown recluse front door alyssa bustamante protandim
No comments:
Post a Comment