Retirement a distant dream for many Canadians

[Ironhorse]

This is probably going to make me sound stupid, but what is a DB and a DC plan?

[GP_Matt]

Defined Benefit and Defined contribution.
DB means that you are guaranteed a payment level or benefit during retirement.
DC means that you are at the whim of the market and your investment choices. Your employer puts money aside but makes no guarantee as to the future value. (This is typically in the form of RRSP matching)

[bizaro86]

Originally Posted by Slava

Don't get me wrong here; I make a good part of my living dealing with DC plans...but to suggest that they are somehow superior to a DB plan is a tenuous argument at best.

DC plans are superior for labour mobility. Someone who has a half vested DB plan often won't take a better job, even if pays more and they're more suited to it and it would open up their current job for a younger/underemployed person. Someone with a DC plan can switch, because they don't lose anything.

If it's 1954 and you're satisfied to screw bumpers on Chevy's your whole life, fine. But a DC plan is a better fit for the modern economy, where opportunities/industries change more than once in a 40 year career.

[Slava]

Originally Posted by GP_Matt

Defined Benefit and Defined contribution.
DB means that you are guaranteed a payment level or benefit during retirement.
DC means that you are at the whim of the market and your investment choices. Your employer puts money aside but makes no guarantee as to the future value. (This is typically in the form of RRSP matching)

This is true, but often there are other restrictions with Defined Contribution (DC) as well because you have to keep the funds locked-in. There are some plans that don't need that component, but many are governed by this. What that means is that you are limited in how you can access these funds as they are designed to operate like a pension even though they're more flexible in many respects.

[bizaro86]

Originally Posted by Slava

This is true, but often there are other restrictions with Defined Contribution (DC) as well because you have to keep the funds locked-in. There are some plans that don't need that component, but many are governed by this. What that means is that you are limited in how you can access these funds as they are designed to operate like a pension even though they're more flexible in many respects.

Sure. My DC plan can't get used until I hit retirment age, but if I leave my employer I get to keep them in my name.

[Slava]

Originally Posted by bizaro86

Sure. My DC plan can't get used until I hit retirment age, but if I leave my employer I get to keep them in my name.

Yes, there are advantages without question. I'm not saying that DC plans are terrible and should be outlawed (far from it!). I just think that SebC has painted all DB plans with the same brush and is overlooking some of their major advantages.

[bizaro86]

Originally Posted by Slava

Yes, there are advantages without question. I'm not saying that DC plans are terrible and should be outlawed (far from it!). I just think that SebC has painted all DB plans with the same brush and is overlooking some of their major advantages.

Outlawing them isn't the right move. But there needs to be some sort of change where comanies going bankrupt don't stick the public purse (or their employees!) with a huge unfunded pension liability. It's not fair for employees near retirement age to lose benefits they've been counting on (when it's too late to replace them by savings) but it isn't fair for the rest of us to foot the bill either.

Some sort of system has to be worked out that protects both groups in the event of a Nortel type situation.

[GP_Matt]

I have a DC plan that is just RRSP matching. I have full flexibility with the account though which I like. I can transfer all of the funds out into a personal RRSP account and if I really wanted to I could pay the taxes and cash out the whole thing.
I can see where that might be bad for some people but I like that it puts me in control. As a result though, if I retire poor I have only myself to blame.

[Slava]

Originally Posted by bizaro86

Outlawing them isn't the right move. But there needs to be some sort of change where comanies going bankrupt don't stick the public purse (or their employees!) with a huge unfunded pension liability. It's not fair for employees near retirement age to lose benefits they've been counting on (when it's too late to replace them by savings) but it isn't fair for the rest of us to foot the bill either.

Some sort of system has to be worked out that protects both groups in the event of a Nortel type situation.

I definitely agree with that. I have clients who worked for Nortel and really that situation is a disgrace. I just think that the overall benefits of these plans are also far reaching and when they work they provide excellent stability for individuals.

[bizaro86]

Originally Posted by Slava

I definitely agree with that. I have clients who worked for Nortel and really that situation is a disgrace. I just think that the overall benefits of these plans are also far reaching and when they work they provide excellent stability for individuals.

For sure. I have one relative that has a DB plan from an insurance company, and loves the security. There's no need to throw the baby out with the bathwater.

I actually think the best scenario would be a 3rd part DB plan. If insurance/trust companies could market 3rd party DB plans. If I could put in 10k a year with a guaranteed, inflation adjusted monthly payout at a certain age I definitely would consider it. (Assuming the implied return was reasonable) You could keep your DB if you changed jobs, and the company going under wouldn't screw it up.

I would fear that in gov't hands though, since it then becomes political.

[Slava]

Originally Posted by bizaro86

For sure. I have one relative that has a DB plan from an insurance company, and loves the security. There's no need to throw the baby out with the bathwater.

I actually think the best scenario would be a 3rd part DB plan. If insurance/trust companies could market 3rd party DB plans. If I could put in 10k a year with a guaranteed, inflation adjusted monthly payout at a certain age I definitely would consider it. (Assuming the implied return was reasonable) You could keep your DB if you changed jobs, and the company going under wouldn't screw it up.

I would fear that in gov't hands though, since it then becomes political.

There are actually plans like this (or similar) coming into existence now. From a purely personal point of view I want more DC....its good for business! I just know that a lot of them offer poor investment choices while you're a member and once people leave they have no idea what to do with the money (again, awesome for guys like me, but I'm not sure thats great for a society with an aging population).

[Tinordi]

DC can have much higher aggregate costs than DB which is conveniently glossed over by its critics.

I'm not necessarily a DB advocate but self managed DC plans have huge fees going to banks and people like Slava (though not specifically Slava). The impact on retirees is huge, and amounts to billions in lost earnings. So I woudl that DC isn't some savior when compared to DB.

I would favour an Australian style government run DC system where participation is mostly mandatory and funds are pooled and managed to enact economies of scale on transaction costs. This looks like the best retirement program of any of the OECD countries.

[albertGQ]

So what happens to your DB plan if you change employers?

[Slava]

Originally Posted by albertGQ

So what happens to your DB plan if you change employers?

You still have options to transfer funds, if you decide to. There are just considerations to take into account when you make that decision.

[albertGQ]

Originally Posted by Slava

You still have options to transfer funds, if you decide to. There are just considerations to take into account when you make that decision.

If you don't choose to transfer it, where does it stay?
With your employer? With the company your employer uses for the pension plan?

[Slava]

Originally Posted by albertGQ

If you don't choose to transfer it, where does it stay?
With your employer? With the company your employer uses for the pension plan?

It stays as part of the plan and you can get the defined benefit when you're eligible for retirement. This is why you would want to consider the pension benefits you will receive at that time as compared to the funds you can transfer and invest. There are cases where each makes sense and its not a one-size fits all answer. it depends on your age, how much money you can transfer and how much the pension is on retirement.

[albertGQ]

Originally Posted by Slava

It stays as part of the plan and you can get the defined benefit when you're eligible for retirement. This is why you would want to consider the pension benefits you will receive at that time as compared to the funds you can transfer and invest. There are cases where each makes sense and its not a one-size fits all answer. it depends on your age, how much money you can transfer and how much the pension is on retirement.

So when you're elgible, you automatically get it or you have to notify your former employer?

[mrbanffgirl]

Freedom 95!! here we come!!

[Slava]

Originally Posted by albertGQ

So when you're elgible, you automatically get it or you have to notify your former employer?

Well you get it automatically, but they have to be able to find you and such.

[SebC]

Originally Posted by Slava

This seems so strange coming from you.

Why does my dislike of DC seem odd to you? (Did you read my white text? )