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moneysense.ca, 17/03/08
Should I participate in my employer’s matching program?
Other scenarios
What if you can do periodic transfers of your group retirement money, including matching contributions to a discount broker? In that case the cost savings of the matching investor would be decreased significantly and that would make the company match even more attractive.
What if the MERs of your employer investments are less than the 3% used in the example? Then the employer match account is even better than with the higher MER investments.
What if you contribute at a rate higher than the company matches for? i.e. the company matches 3% of your salary but you contribute 10%. In that case, the contribution that is getting matched (3%) gives you the same benefit as in my example. For the remaining 7%, there is no benefit to contributing it to your company employee plan unless it provides low cost investing options.
Summary
In most cases an employee will be far better off taking advantage of any kind of company matching contribution in their group retirement account regardless of the fees charged in the company plan and regardless of any transfer-out restrictions.
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moneysense.ca, 17/03/08
Thanks Mike!
Great use of links as well. I love when I’m reminded of the T1213 – even better when I’m linked to it.
No problem Telly – would you like me to fill out the form and mail it in for you as well??
Mike
I am not planning on working for 46 years, but I suspect that I may end up doing that anyhow
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I am part of a matching system for up to 6% of my salary (50% kick in) and I simply buy GIC’s with the 50% kick in for now, and low(er) cost Index Funds (SUN Life’s idea of low MER is not as low as I think it should be).
If the company wants to give me free money, who am I to argue?
LOL…but seriously, would you?
I tried modifying the spreadsheet assuming that the company match was only half of the employee contribution. In this case the crossover happens after 29 years, which is getting more into the plausible range. While it seems likely that almost all plausible scenarios will have the company plan outperforming investing on your own, it is possible that a company will offer a plan so bad that an employee planning to stay with the employer for a long time will be better off avoiding the company plan.
Michael – I addressed that scenario in the post. In fact my original spreadsheet had a contribution of $15k by the employee and $3k match by the employer but then it occurred to me that if the employer investing plan had really high fees, why would the employee contribute anything beyond a matching amount, other than for convenience?
Mike
Four Pillars:
My former employers matched only 50% of my contributions up to 6% of my salary (i.e., my 6% was matched with 3%). If I had contributed only 3% of my salary, my employer would have added only 1.5%. I think this is fairly common (the 100% match is common as well).
MJ – Ahhh…good point.
The other scenario I just thought of is when the employee can’t contribute anywhere else. I think in the US a 401k has to be with the employer – u can’t just open one up anywhere although I think they do have other options.
Big Cajun Man:
What is Sun Life’s low(er) cost funds?
[...] was interviewed this week over at My Two Dollars – check it out! I also did a guest post at the Canadian Capitalist recently where I talked about the benefits of getting an employer match in your group [...]
I just came across this article/blog while I was filling out the forms for the RRSP match. Here are some details on the plan. They match 100% of the contributions up to 4% of base salary. With the portfolio I have selected the average MER is 0.97%. Now the question is, should I contribute the maximum match amount of 4% or should I contribute more than that? Is the .97% MER too high?
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