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Defined Contribution Plan - Segment Two - InvestmentPitch.com

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In our first video covering pension plans, we discussed defined benefit pension plans and their advantages and disadvantages and also looked at statistics that showed that both employees and employers are now turning to defined contribution pension plans. In fact, 70% of Fortune 100 companies now offer defined contribution plans, up from 10% in 1998. In this segment, covering the pension landscape in North America, and Canada in particular, we will take a closer look at defined contribution pension plans.

Additional Information:

Company: InvestmentPitch
Website: http://www.investmentpitch.com/
Date Published: Jul 12, 2013
Transcript: Available

Video Transcript:

I’m Samantha Deutscher for InvestmentPitch.com

In our first video covering pension plans, we discussed defined benefit pension plans and their advantages and disadvantages and also looked at statistics that showed that both employees and employers are now turning to defined contribution pension plans.

In fact, 70% of Fortune 100 companies now offer defined contribution plans, up from 10% in 1998. (chart)

In this segment, covering the pension landscape in North America, and Canada in particular, we will take a closer look at defined contribution pension plans.

As the name suggests, with a defined contribution plan an employee’s benefits are not pre-determined, but based on the growth of the total contributions within each individual retirement plan account at the time an employee retires.

Contributions to a pension plan can occur in several different ways.

They can be made by the employer alone, or the employer and the employee, with contributions by both employer and employee being the most common arrangement.

Rules for contributions can vary between plans, and may including matching cash contributions of either dollar amounts or percentages.

In Canada, all pension plan funds are held in trust, separate from the company, which means that once in the plan, the funds cannot be touched by the employer. (bank vault)

Unlike with a defined benefit pension plan, where the funds for all pension plan members are pooled into one investment plan and controlled by a plan administrator, with a defined contribution plan, investment of the funds is generally directed by the employees from a selection of investment options. (stocks bonds)

This is similar to managing a personal RRSP.

Although a defined benefit plan attempts to guarantee the amount an employee will receive upon retirement, we’ve shown you that poorly managed pension funds as well as corporate (Nortel picketers) and even government bankruptcies can result in employees receiving less than the promised amount.

What if an employee’s company is sold or goes out of business? (business for sale)

With a defined benefit plan, the old company will be responsible for paying the pension.

However in most cases the employer may close, or wind up the plan and transfer the funds to a special retirement account.

If the fund was properly funded employees should get everything they have earned, if not, things get quite complicated.

An employee with a defined contribution plan is usually not affected.

With a defined contribution plan, an employee’s future payouts rest solely on the employee’s shoulders, so it is important for each employee to make wise investment choices.

This allows a knowledgeable investor to tailor the plan to suit their own investment goals and tolerance for risk.

For example, a younger employee will prefer equity investments, whereas an employee closer to retirement may place a larger percentage of their assets into fixed income investments.

At retirement, employees will receive all the funds which they contributed, all the funds their employer contributed, as well as all accumulated investment income. (retirement ahead)

They then have the choice of transferring their pension proceeds to a locked-in RRSP, a Life Income Fund or an annuity.

A difference of just 1% in a fund’s performance over an employee’s career can make a significant difference in the monthly payments received upon retirement.

If we assume an employee contributes a total of $12,000 each year to a plan, after 35 years compounded annually at 3%, the plan will have grown to $737,282.

If the fund grows at 4%, the total would be $902,862, an additional $166,000.

At 5% it would grow to $1,112,979, giving the employee another $210,000.

In the current environment of low interest rates, it may even be necessary to delay retirement. (walmart greeter)

As future retirement income will depend on the option or options chosen, it is highly recommended that every employee seek professional advice when make these decisions.

This segment has been sponsored by the BouryClyne Private Wealth Management Division of Raymond James Limited.

If you have any questions about your pension options, please contact Miles Clyne at 604-855-0654 or email miles.clyne@raymondjames.ca

I’m Samantha Deutscher for InvestmentPitch.com