Changing employers by force or by desire can make a huge impact on your financial life. I outlined some financial considerations when leaving an employer in a previous video “Switching Employers”. Today I’ll be focusing on what to do with your Defined Contribution Pension Plan when you leave your current employer.
If you need some background information on defined contribution plans and how they work, you can watch my recent video here. When you resign or are let go from a company prior to retirement, you have to make a decision on what you would like to do with your defined contribution pension plan. You will receive a letter from your pension administrator giving you the relevant information to an option. The letter includes a deadline for making a decision and returning the appropriate paperwork, otherwise you’ll be stuck with the default. It’s important to change your address on file if you have left your employer in order to take a job in a different city, so you don’t miss this deadline.
You can keep the defined contribution pension plan with the current provider. This is usually the default option. Your assets won’t be held with the current employer’s plan, but will instead be transferred to a personal plan with the same provider (like Sun Life, Great West Life, and Manulife).
You may be able to transfer your pension to another employer pension plan.
You can transfer your assets out of the plan into an account at your current or a new financial institution. You’ll most likely have to transfer this into a Locked-in Retirement Account (LIRA) unless your accumulated pension is small.
Assuming you don’t withdraw the money in cash and you transfer the current defined contribution plan to a LIRA or RRSP (if allowed) there will be no tax consequences.
If you keep the account at the current plan provider, you’ll likely pay a much higher fee than before since your employer will no longer be subsidizing the plan. Unfortunately, these providers don’t always have the best or widest range of options for investments. You are required to invest in only funds they allow. Their embedded investment fees are typically quite high and ongoing administration fees can be high too.
If you transfer to a new employer plan, you can potentially reduce the fees you pay, but you’ll again be limited to that provider’s investment options and may have little control over your investments. However, everything will be under one plan provider which may be more convenient.
Finally, if you transfer out the assets to your current financial institution, you or your financial advisor are able to choose from a wide range of securities within the account. The LIRA, while there are specific rules around withdrawing the money prior to and in retirement, otherwise acts very similar to an RRSP account in terms of investments. You can purchase individual stocks and bonds, mutual funds, and ETF’s in a LIRA, the same as you could in your RRSP.
I personally suggest moving your Defined Contribution account into a self-directed account or an account with your advisor. This allows you the flexibility to choose which securities are most appropriate for you and their associated fees, rather than being pigeonholed into the products that your current plan provider offers.
