Alex from New Brunswick asks:

I have a few questions about matching contributions made to a group RRSP by my employer. I work for a small software company, which matches an employee’s RRSP contributions up to 2% of their base annual salary. In order to qualify for the match, we sign up for an RRSP using the funds of our choice at a particular bank (which is not the bank I use). Our contributions are taken off the top of our bi-weekly pay and our tax deductions are adjusted accordingly. Deposits are made into the mutual funds at the end of each month. However, the employee match portion is done once a year in February as a lump sum payment rather than being paid monthly. This doesn’t seem right to me because rather than take advantage of dollar-cost averaging and spreading the deposits out over time, the deposit is at the mercy of whatever the market is doing that particular day. Also, if my employment with this company were to end in November or December, I would get no match for that year. Is this common? What are the characteristics of a “good” employee match program? Is 2% competitive? Do you have any recommendations for how I could negotiate a change in the program during an annual review and what I should ask for?

I’ve worked in a few software companies myself and I know friends who have worked in other companies in the Ottawa area. I don’t know much about other industries but at least among small software companies, providing a match to employee contributions is the exception rather than the rule. It’s not clear exactly how much of your contributions are matched by your employer but not taking advantage of the maximum match is like giving up free money. While there are some restrictions in your plan, they are not serious limitations.

Since your employer matches your contribution in a lump sum fashion, you could opt to park the proceeds in a money market fund and periodically invest it on your own. However, many studies have shown that you are better off to invest in a diversified portfolio as soon as you have the cash.

I think your bigger challenge is wisely investing your RRSP. You should take the time to think about your goals for your savings. Are you saving primarily for a retirement that is many decades away? Do you plan to use the funds in your RRSP for a down payment on your first home? Your goals will dictate your asset allocation and how much risk you can take. Once you have an asset allocation, you should invest in low-cost funds, stick to your asset allocation and eschew chasing performance.

This article has 9 comments

  1. As someone who’s “real” job is working in HR, I would suspect that the reader does not have much of a choice in terms of negotiating the way the employer match is set up. There may be “plan documents” that are legislated that cannot change. However, this is not always the case so you can certainly ask the question.

    In terms of a good match from employers, the matches vary greatly. It also depends on what is being matched – some companies have a match on a pension plan as well as a savings plan (RSP or otherwise). In the oil and gas business, both of these matches are usually the case. The matches on the pension plan vary from about 2% to 10%, usually depending on years of service. On the savings plans, the matches I see tend to be around 5%. I have never in my experience seen a company match at the end of the year however. Our matches come each month when contributions are made. The oil and gas industry is a bit unique on this front.

  2. Interesting post and good advice CC.

    Alek – 2% is 2% – just do the contribution and take the money.

    Mike

  3. Canadian Capitalist

    Dividend Guy: Thanks for your input. I didn’t know you worked in HR. It’s nice to get some inside info 🙂

  4. The part I don’t like in particular is that if his employment “ends” part way during the year he does not get any matching for the year. While I understand we don’t want to look a gift horse in the mouth – they are providing some bonus savings for you – that “clause” just makes being in their employ not as appealing as the more run of the mill Group RRSPs out there.

  5. Our company has a great RRSP matching program, except for the last part: 100% match of up to 5% of our salary, but payable the following year… Contribution period started this month, so this actually means anything I contribute now will be matched in September 2009, ie: one year from the end of the current period.
    Like I said, it’s that last step that’s a doozy. I’m contributing my maximum, but two years is a long time to wait.

  6. Yes it seems these vesting periods and delayed matchings are just attempts to increase employee retention. In the end, I wonder if it is worth it as there must be as many people who are turned off by these provisos as there are who stay a bit longer just to take advantage….? In the end, perhaps a zero-sum game…

    I don’t remember the last time I heard of someone taking an “exit poll” when they leave their employer and further to that any questions about pension plan vesting periods being part of that decision – so it’s all academic at the end of the day… 🙂

  7. Though I contribute to my 401k twice a amonth, the matched money is only deposited twice a year. The same goes for the pension deposit (defined contribution). It seems to be the standard in the US.

  8. The lump sum payments are basically free money regardless of whether you can dollar cost average it, anyway so you are getting a good return. Of course it is a retention thing! We have a group RRSP plan but the company does not contribute to it at all so I do not participate. My company (US based) has a DC pension plan in which I pay 4% of my monthly salary and the company pays 4%. After 5 years their portion of contributions increases to 5% while I remain at 4%.

  9. Are there rules surrounding the RRSP Match? Is there a government web page that details these rules. I work for a software provider to the construction industry in Canada and am trying to determine the requirements that surrounds this benefit. Any information would be greatly appreciated.

    Thank you.