Incorporating Company Pension Plans into My Dividend Portfolio

Written by The Dividend Guy on November 4, 2007

Pension Plans

In one of my more recent posts, I gave a description of the various accounts I hold and where they fit into my overall portfolio. A big part of my account is my Sun Life Pension Plan that I get as a result of working for my employer. In this account, my company automatically provides me with a 2% contribution to the plan (i.e. they calculate 2% of my earnings every month and put that amount into my account for investment). I can also contribute 2% of my own money - if I do this they company matches with another 2% - free money in my opinion. This post will describe what type of pension plan this is and how I have structured it to work within my overall portfolio.

There are a couple of different types of pension plans. The first is called a defined benefit pension plan (DBPP), which provides a certain level of income at retirement. The amount of retirement income is calculated using a pre-determined formula. The second type, and the one that is becoming more and more common because of the costs and risks for corporation using DBPPs, is the defined contribution pension plan (DCPP). The DCPP is described as follows on the Sun Life website:

A defined contribution pension plan is also known as a money purchase plan. Employer contributions and employee contributions (if the plan permits them) are directed into an individual account for each employee. Contribution levels are usually expressed using a specific formula related to earnings such as 5% of annual salary. When the employee reaches retirement, the accumulated contributions and investment earnings are used to purchase a pension for the individual. No specific income level can be guaranteed with this type of plan.

In essence, what an individual has in their account at retirement will dictate what level of income they can receive from the plan. Obviously a DBPP is a more stable and may seem like the better option, but I do not have the choice and many companies are no longer offering these types of plans so I work with what I can get!

If you are fortunate enough to receive a pension plan from your organization, then I have some suggestions for how to incorporate these plans into an overall dividend portfolio.

1. Ensure you set up your portfolio and make portfolio decisions by looking at your overall portfolio, including all your separate accounts, as one big portfolio. In other words, if you have an self-directed RSP (or IRA, 401K, etc), a regular brokerage account, and a pension plan, examine them as one big portfolio rather than separate, discrete accounts. The benefits of doing this are that you will ensure better diversification, correct asset allocation, and not doubling up too much on sectors, stocks, or asset classes.

For example, many Canadian pension funds have a large banking component to them so an investor has to ensure that they do not hold too many banks in their non-pension accounts.

2. If possible, select index funds within your pension plan. This entirely depends on what funds an individual can select from in their pension plan as most funds have specific pension funds that they allow an individual to choose from.

In my case, there is only one pension fund that I can choose from - a U.S. index fund. The other funds are all large pension funds run by large investment firms. There are essentially mutual funds. I would probably be more upset about not having other index funds to choose from, but my company pays all MERs and other fees with the plan so all my money goes to work for me. If I had dividend specific choices in my plan, you know I would choose those!

3. Pension plan companies are in the sales game so do your research. A company like Sun Life, who my pension is with, is in the game to sell more pension plans. These companies make a lot of money from companies who use their services to provide benefits to their employees. When you are setting up your pension account with them, be sure to do some research on fund selection and do not just do what they tell you to do outright. I am not saying their suggestions are necessarily bad - just be sure that you get information from sources other than their marketing materials.

Of course, if you have other suggestions for how to incorporate pension plans into an investment account, please use the comments to let me know.

If you would like more information on pension plans and how to use them, the best book I have found is by Bruce Cohen - The Pension Puzzle.

The Pension Puzzle

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4 Comments so far

  1. www.bestretirementadvisor.info » Incorporating Company Pension Plans into My Dividend Portfolio November 5, 2007 12:01 am

    […] The Dividend Guy placed an observative post today on Incorporating Company Pension Plans into My Dividend Portfolio.Here’s a quick excerpt:In other words, if you have an self-directed RSP (or IRA, 401K, etc), a regular brokerage account, and a pension plan, examine them as one big portfolio rather than separate, discrete accounts. The benefits of doing this are that you … […]

  2. Weekly Dividend Investing Roundup - November 16, 2007 November 16, 2007 8:54 am

    […] 2. Carnival of Financial Planning hosted by The Skilled Investor - Incorporating Company Pension Plans into My Dividend Portfolio. […]

  3. Carnival of Financial Planning - November 15 2007 Edition November 21, 2007 6:51 pm

    […] Dividend Guy presents Incorporating Company Pension Plans into My Dividend Portfolio posted at The Dividend Guy […]

  4. Mary Love March 10, 2008 10:32 am

    I am new to investing and just switched to a self directed IRA. I am loving this control I have over the investments I make. I would recommend this to all.
    http://www.assetexchangestrategies.com

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