The Dividend Guy Investment Process Part 4A: Portfolio Building – Maximizing Employer Contributions

If someone is going to give you extra money for doing something you were going to do anyway, you take it. That is my philosophy around my employee pension plan and savings plan. Essentially, if I contribute money to both my pension fund and my savings plan then my employer will at least match that amount. Here is how they work.

Pension Plan

My pension plan is a defined contribution and I automatically receive 2% of my total earnings as a contribution to the plan. In addition, I have the ability to elect to deduct 2% from my pay and direct it to the pension plan. If I do this, then the company gives me another 2% towards the pension plan. In summary, I put in 2% and the company gives me 4%. Easy money. Once I am at the company for 5 years, that first 2% (the automatic 2%) goes to 5% providing me with even more money from the company.

I have a number of choices for investments in my pension plan. Ideally my pension plan provider would have provided me with an all index fund selection, but they don’t. Therefore I am stuck selecting from a limited list of segregated funds to place my money into. Segregated fund are not funds investors can purchase off the street, but are funds run by large (read – huge) money management firms that provide pension funds for organizations. The saving grace on these funds is my employer pays ALL the MERs and other fees charged by the fund managers so all returns in the fund are mine.

My money is allocated to the funds based on my target asset allocation. I place money in a Canadian equity fund, a US equity fund, and International equity fund, and a bond fund. Depending on what my asset allocation looks like at any given time, I will adjust my monthly contributions to the area that needs the most emphasis. I am not able to invest in a REIT fund so I need to do that outside of my pension plan.

Savings Plan

My savings plan is separate from the pension plan and requires that on a monthly basis I purchase shares in the company. Essentially, I tell payroll what percentage of my earnings I want to contribute to the savings plan. The first 5% that I contribute purchases shares in the company. As a result of doing this, the company gives me my 5% back. I can direct this 5% anywhere, even withdrawal and spend it. Being the investment fanatic that I am, I choose to take this 5% and typically deposit it into my RRSP and invest it in whatever asset class is off my target asset allocation.

As I am buying shares in my company every month, I need to ensure I am carefully watching that I am following one of my investment principles (link to first post) to ensure that no one stock holding makes up more than 10% of my overall portfolio. This means that depending on how the stock is done, I may in fact need to sell the stock and direct it to other assets. Remember Enron or Worldcom? I never want to have too much money tied up in the company I work for.

This is the first step in building my portfolio. The next step I will talk about in my investment process is part 4B – Portfolio Building: Dividend Growth Stocks.