The types of investments in a pension can widely vary in their diversification, management styles, costs and expected performance. Read on.
Not unlike cars, what’s actually under the hood matters a lot when it comes to pensions. The types of investments in a pension can widely vary in their diversification, management styles, costs, expected performance and more.
All of this is to say that some pensions certainly provide excellent value, but this is not an intrinsic feature of pensions themselves. Let’s break down the basics of common pension plans to help you know where to begin when assessing your own retirement savings. Employee contributions to a DB plan are based on an annual percentage of earned income, to a legislated maximum, and the employer matches these contributions. This can result in a lot of savings over an entire career.
DC plans, meanwhile, focus more on the amount of annual savings going into them, not the resulting retirement income. The retirement benefit is not known in advance with DC plans. Like an RRSP, one can forecast the expected future value of the plan by estimating annual contributions, years invested and rate of return, but these are forecasts, not guarantees.
Employers typically hire an institutional manager to manage the DC plan investments. The funds might all be invested in a common way for all employees, though the employee will only see their respective holdings. Sometimes, the employee may even get some input on their DC investments, such as which “risk level” to set the investments at . In my experience, the details of the underlying portfolio can be fairly opaque and materially vary in management fees, asset diversification and performance.
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