Alex from New Brunswick asks:
I have a few questions about matching contributions made to a group RRSP by my employer. I work for a small software company, which matches an employee’s RRSP contributions up to 2% of their base annual salary. In order to qualify for the match, we sign up for an RRSP using the funds of our choice at a particular bank (which is not the bank I use). Our contributions are taken off the top of our bi-weekly pay and our tax deductions are adjusted accordingly. Deposits are made into the mutual funds at the end of each month. However, the employee match portion is done once a year in February as a lump sum payment rather than being paid monthly. This doesn’t seem right to me because rather than take advantage of dollar-cost averaging and spreading the deposits out over time, the deposit is at the mercy of whatever the market is doing that particular day. Also, if my employment with this company were to end in November or December, I would get no match for that year. Is this common? What are the characteristics of a “good” employee match program? Is 2% competitive? Do you have any recommendations for how I could negotiate a change in the program during an annual review and what I should ask for?
I’ve worked in a few software companies myself and I know friends who have worked in other companies in the Ottawa area. I don’t know much about other industries but at least among small software companies, providing a match to employee contributions is the exception rather than the rule. It’s not clear exactly how much of your contributions are matched by your employer but not taking advantage of the maximum match is like giving up free money. While there are some restrictions in your plan, they are not serious limitations.
Since your employer matches your contribution in a lump sum fashion, you could opt to park the proceeds in a money market fund and periodically invest it on your own. However, many studies have shown that you are better off to invest in a diversified portfolio as soon as you have the cash.
I think your bigger challenge is wisely investing your RRSP. You should take the time to think about your goals for your savings. Are you saving primarily for a retirement that is many decades away? Do you plan to use the funds in your RRSP for a down payment on your first home? Your goals will dictate your asset allocation and how much risk you can take. Once you have an asset allocation, you should invest in low-cost funds, stick to your asset allocation and eschew chasing performance.