In 2014, Workopolis released a report revealing that between 1990 and 2000 only 16 per cent of people stayed at their job less than two years. Between 2000 and 2014, however, that percentage jumped to 51 per cent. The trend seems to have continued. As recently as 2016, job-hopping among millennials has been reported as “the new normal.”
Changing jobs frequently has been shown to generate faster career advancement and higher pay, but what happens to your employer-sponsored retirement benefits when you switch jobs? Turns out, that largely depends on the type of retirement plan you receive benefits under.
Not all retirement plans are treated equally
In Canada, there are three primary types of employer retirement savings plans.
There’s the traditional Group RSP where an employee pays into the group benefit and their employer will match the contribution 50 to 100 per cent depending on the job, the employer and the individual matching options available.
There’s a Defined Contribution Pension Plan, which is similar to a Group RSP in structure, except in terms of how it’s treated when you retire – it includes both employer and employee contributions at varying levels.
Lastly, there’s the Defined Benefit Pension, which provides a fixed-dollar pension throughout retirement and there’s no investment return related to your future pension benefit like a Defined Contribution Pension.
“How your retirement savings program is treated if you leave a job will depend on the type of pension or savings program offered by your current employer,” says Alexandra Boland, a certified financial planner with Caring for Clients, a fee-only financial planning firm based in Toronto.
“So depending on the program, you receive the value of your contribution – the employee contribution – which you can transfer to a self-managed plan. You also have the opportunity to transfer employer-matched contributions to a self-managed plan provided that the pre-identified vesting period has passed,” she says.
The vesting period is the period of time you will have to work at a company before you are entitled to transfer any employer-matched contributions to your new retirement plan at a new employer.
For example, let’s say your company has a Group RSP and you as the employee contribute five per cent of your gross annual salary and your employer agrees to match 100 per cent of your contribution, which is another five per cent, so a total of 10 per cent of your equivalent gross annual salary goes into that RSP and comes off your paycheque.
In that scenario you are always entitled to transfer whatever you contributed to the group plan to a self-managed plan when you change jobs and you get to take whatever your employer contributed as long as your time with the company surpasses the vesting period.
“What most employers say is you have to have been with the company for at least two years,” says Boland.
How a retirement plan is treated if you leave your employer depends on the plan type because the rules associated with each are different and how much you can transfer out of both your employee contributions and your employer’s contributions will depend on how long you’ve worked at the firm.
Your options with a Defined Benefit Pension
A Defined Benefit Pension is not as common as it used to be.
“It’s too costly for employers these days,” says Boland. This is because a Defined Benefit Pension is wholly provided by your employer, who guarantees they will provide a certain dollar amount for the life of your retirement. This is opposite of the Defined Contribution Pension and the Group RSP where the amount of money you ultimately receive in retirement depends on the strength of how the plan is invested even if your contributions are matched by your employer.
But if you have an employer that does provide a Defined Benefit Plan, how do your defined benefits get transferred?
“You usually have three options: you can take the commuted value where the employer will calculate the present value of your pension and you can transfer that into a self-managed RSP or if the employer you’re going to also has a Defined Benefit Pension, the employee can potentially transfer their old pension into their new pension and continue accumulating from there. The final option is to leave the pension with your previous employer and elect to take the guaranteed benefit you would have received on your retirement,” says Boland.
It should be noted that if you are transferring your pension plan, it is tax-deferred and doesn’t become taxable income until you take the money out to use it.
What happens if you don’t leave your employer by choice?
“If you’ve been fired from your job, you should still be entitled to those same options in terms of what you can do with your pension,” says Alexa Bodel, president and co-founder of Chalten Fee-Only Advisors Ltd. In Vancouver.
However, there may be more risks for you if your employer goes out of business.
“You may be more at risk if you have a Defined Benefit Plan, your employer has filed for bankruptcy and the pension fund may be underfunded,” says Bodel.
She often advises her clients to think about the financial health of their employer when they offer a Defined Benefit Pension.
“If you have the option to take a lump sum payment and manage it yourself in a locked-in account, sometimes that’s the more attractive option because you don’t have to worry about the future financial health of a company 20 years from now when you retire,” says Bodel.
When deciding to transfer your pension into a different plan, especially for Defined Contribution Pensions, you also want to pay attention to the fees you’re paying on your investment.
“The higher the fee, the more you may be better served to transfer your pension into a locked-in account, where you won’t be able to touch it until retirement age, and manage it yourself,” says Bodel.