Since becoming more diligent about our personal finances, I’ve realized it’s not enough to assume things will be taken care of and that includes our defined contribution (DC) pension plan from work. When I started my job at my current employer, I was offered a choice for my pension plan – defined contribution (DC) or defined benefit (DB). I chose DB since under this structure my pension would resemble some relationship (a percentage) to the amount of money I was earning until retirement. When my wife started her job she was offered the same choice and chose instead the DC plan (based on advice from her Investors Group Financial Advisor).
With my defined benefit approach, I know in advance how much pension I will have when I retire. It is based on a formula that factors in my total years of service and my consecutive years of highest annualized earnings. My wife’s pension on the other hand is a little less of a benefit – she is forced to invest in mutual funds our company has chosen and is fully dependent upon the performance of those products.
Until a few years ago, we didn’t think much about my wife’s defined contribution pension plan. Markets before the spring of 2008 were flying high – everyone made money on their mutual funds. Only after things started to slide in 2008; understanding the mutual fund industry and the cyclical nature of the stock market along the way, did we start taking a serious look at my wife’s holdings. I was surprised (and maybe I shouldn’t have been…) to find our Investors Group Financial Advisor “friend” selected five out of a possible eight funds for my wife’s pension portfolio. Many of these funds had moderately high management expense fees (MERs), four out of the five were over 2%! In doing some quick math, we realized these fees, the poor performance of these funds and her out-of-whack asset allocation were all conspiring against my wife to reduce her pension plan – even after contributions were made every two weeks. Needless to say, change was required and has been made.
The remedy was pretty simple 1) fix my wife’s asset allocation to reduce her portfolio risk, 2) get my wife out of high-MER, risky funds and replace those risky (pesky) funds with two available index products offered by our company’s plan.
Over the last two years, things have improved. While the market remains off its all-time high, it’s creeping upwards and so has my wife’s DC pension plan. Why?
1. Contributions are no longer lost thanks to an improved asset allocation. Over 40% of her portfolio is tracking the bond index – providing pension stability and paying minuscule management fees in the process.
2. For her equity portion, my wife is almost guaranteed to get market returns with her equity index fund – she won’t be trying to chase or catch-up to equity market performance like before.
I share this story about our defined contribution pension plan, because it’s one that’s likely being lived or will be lived again by any number of employees in any number of organizations across Canada. Just because you have a pension plan doesn’t mean it’s a plan for success. Treat your DC pension plan with at least the same scrutiny as any personal investment account, after all, it is and will be your money. Our former Investors Group Financial Advisor “friend” probably tried to do the right thing but it wasn’t. We’ve lived the dream and small nightmare with my wife’s DC pension plan and because of it, we’re smarter, wiser and better for it. We hope our story helps others learn from our experience. Sometimes, learning from experience is the only way 🙂