Canadians often ignore ‘free money’
Billions in employers’ matching pension contributions go untouched
While federal and provincial policymakers continue to offer up new tools to push Canadians to better prepare for retirement, workers are still failing to take advantage of hundred of millions of dollars of “free money” for retirement offered by the country’s employers.
Sun Life Financial Inc. estimates that Canadians are turning their backs on as much as $3 billion that could go into their retirement coffers if they took full advantage of corporate pension plans and their contribution-matching programs.
“It’s kind of a staggering number,” said Tom Reid, senior vicepresident of group retirement services at Sun Life Financial.
Many company defined-contribution pension plans top up employee contributions as they roll in with matching funds. The employee makes a contribution, and the company matches it, often up to between three per cent and six per cent of earnings. If there’s no contribution, however, there’s no bonus match, while a partial contribution only yields a partial match.
“I don’t think some (people) even know they’re leaving money on the table,” said Sue Reibel, senior vicepresident of business development at Manulife Financial.
About one million Canadians are now relying on defined-contribution (DC) pension plans, which provide retirement income based on market returns rather than the guaranteed payout of a definedbenefit (DB) plan, according to Statistics Canada.
As a perk, many of these DC plans — which are increasingly popular with companies who are loath to make pension promises they might not be able to keep — have employer-funded matching programs. Some match what an employee contributes dollar for dollar, while others kick in 50 cents for every dollar contributed by an employee, and some have the option of additional matched contributions.
Pension experts are puzzled that so many people fail to take advantage of matching funds from their employers, given that the returns of a 100-per-cent or even a 50-percent match would be hard to replicate elsewhere.
Group pension plans also tend to cost less to administer than an individual would pay in private investment fees. And because they’re deducted from payroll, pension contributions reduce taxable income, where other investments are made after tax.
Reid said simple inertia could be keeping many workers from taking advantage of these workplace plans.
Reibel cited one Canadian multinational that redesigned its plan so employees in the pension plan were automatically enrolled at the maximum optional contribution level, and were required to opt out. Before the change, only 40 per cent of employees made optional contributions.
After the redesign, 55 per cent stayed with the maximum optional contribution. A further 20 per cent of workers switched to smaller optional contributions where the employer still kicked in.
“It’s a totally behavioural-based outcome,” Reibel said.
Governments have been fixated on the fact that Canadians aren’t saving enough money for retirement and have been seeking policy-based solutions, particularly as defined benefit plans grow scarcer.