Employer-sponsored savings plans come in several flavours. Most people are familiar with employer pension plans. Working for a company that offers a workplace pension plan is a great way to save for your retirement without much effort on your part.
The two most common employee pension plans are defined benefit plans (DB) and defined contribution (DC) plans. With DB plans, employees know what their pension income will be after they retire. With DC plans, employees know what they will be contributing each month to their pension, but not the amount of their pension following retirement.
Let's look at employee-sponsored savings plans in more detail:
- Defined benefit pension: Your employer pays you a monthly income for life after retirement. This income is fixed or "defined" before you retire. It's based on the number of years you work and your salary, or on a negotiated formula. Your income is not dependent on the pension fund's investment performance over time. DB plans provide disability and death benefits, as well as flexible options for retirement dates. These pensions are sometimes indexed to inflation.
- Defined contribution pension: Employees contribute a defined amount (through payroll deductions) to a pension fund and employers match that contribution based on a formula. Your pension income is based on both these contributions as well as the investment income generated by the pension fund over time. Because it's impossible to predict how the fund's investments will perform, you'll have to wait until you retire to know exactly how much your pension will be.
- Group RRSP, TFSA or non-registered Savings Plans: Employers administer these group savings plans on behalf of their employees, who contribute via a payroll deduction. Often, employers also contribute, thereby enhancing their employees' savings.
- Stock Options/Stock Purchase: Some employers offer stock options for employees in addition to a paycheck, similar to a bonus. For employees, stock options provide a great way to reap the benefits of your company's growth. They allow you to buy a certain number of shares at a future date (the exercise date) for a specified amount set today (the grant price). As your company's shares increase in value, you have the advantage of buying them at a discounted price.
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