Defined Contribution Plans: Why Opting Out Shouldn’t Be An Option

Many employers who provide pension plans have shifted from the traditional defined benefit (DB) plan, where the employer takes on most of the risk of providing fixed retirement benefits, to defined contribution (DC) plans, where the employee bears all of the risks.

Related: Have we seen the last of the gold-plated pension?

Although employers commonly enrol all eligible employees in DB plans, most DC plans are optional. Employees choose whether or not to participate.

A typical plan might allow you to contribute 3 – 5% of your salary, which would then be matched (up to 100%) by the employer.  This is like getting an enhanced compound growth rate.

For example, if an employer matches 50 cents for every $1 contributed, that’s an automatic 50% return.


A Great West Life study showed that participation is around 80% in DC plans and 60% in Group RRSPs, with only 12% choosing to contribute the maximum allowable.

This leaves 20 – 40% of eligible employees not participating.

Why is that?  You wouldn’t turn down a bonus, so why would someone leave this guaranteed money on the table?

Focus on present needs

Research has shown that lower income workers are less likely to participate in pension plans.  Part-time workers and those who feel their positions are temporary often opt out.

Too many fund options

Your employer will offer you a variety of investment funds to choose from.  You are responsible for making the choice.

Related: Why options mean freedom when it comes to retirement

In the past DC members were limited to very traditional and conservative investments – GICs, money market funds, fixed income options.  It was not possible to achieve optimal diversification.

Now, plans have become much more diverse with many more options.  The pension plan at one of my former places of employment had 110 funds to choose from.

When shown such a list, with only a brief description and past performance results, many employees become overwhelmed.  They can’t make a decision and then ignore the whole process.

Not enough advice

Many employees are not confident they can make a good investment decision on their own because they have no support or advice.

A brochure about the products and a questionnaire to help assess risk tolerance is just not enough.

Final thoughts

With defined contribution pension plans and group RRSPs becoming more the norm, employers need to make participation in these plans mandatory for all eligible full-time employees.

Related: Decoding your company pension plan

Retirement income will depend on the account balance at retirement and the performance of an investment will always carry some uncertainty.  The final value is not guaranteed.

Employers must:

  • Encourage early enrolment
  • Promote meaningful contributions
  • Provide appropriate investment choices

It is up to the employer to ensure employees have the necessary advice, support and education to make informed decisions.  Most successful plans are ones with fewer investment options.

Related: Why investors should embrace simple solutions

Employees should be equipped with the tools they need to create the desired outcome – a retirement with adequate income.

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  1. debs@debtdebs on August 27, 2014 at 8:56 am

    Very puzzling. Why people don’t get the free money from company match is dumbfounding.

    • Boomer on August 27, 2014 at 2:51 pm

      @debs: Let’s see – procrastination, confusion over choices (that big package can be intimidating), not trusting the markets, and not understanding that the employer is actually giving you money.

      Even putting your contribution into a money market fund or DISA is better than doing nothing.

  2. Alicia on August 27, 2014 at 10:30 am

    I have a Defined Contribution Plan where I put in 5% and they put in 7.5%. Yet it isn’t mandatory for the first year. After 12 months they automatically enrol you, but until then it’s your own prerogative to signup. Um, they’re giving me a 150% return just by putting my 5% in… why on earth would I not do that?!

    • Boomer on August 27, 2014 at 2:54 pm

      @Alicia: That sounds like a pretty sweet deal. Don’t quit that job 🙂

      I just don’t understand why they would make it optional for the first year.

      • Cashinstinct on August 28, 2014 at 8:14 am

        Maybe they want to make sure you will stay for a while in the company ?

        They could have a high turnover and not want to invest the contributions for someone who does not plan to stay / does not fit…

        At least they make the move after 1 year to enroll employees.

  3. Justin on August 27, 2014 at 3:40 pm

    I disagree. I think that the responsibility for all aspects of retirement planning falls entirely on the employee. They are free to use the services of a fee-only advisor should they need help selecting investments, etc.

    The employer only offers pensions/Group RRSPs as a tool to attract and retain talent. If an employee is foolish enough to not take advantage of the program, the employer saves by not having to make their share of the contributions.

    • Boomer on August 27, 2014 at 6:50 pm

      @Justin: I believe people should take responsibility for their actions and I am not suggesting that employers bear the brunt of paying into pension funds, but this issue goes way beyond that.

      It’s shortsighted to believe that we will not all ultimately pay the price.

  4. Stephen Weyman on August 28, 2014 at 9:33 am

    Opting out should probably still be an option because people need to be able to control their own finances as Justin says, but I think it shouldn’t be the default.

    The default should be that you will be enrolled and if you really don’t want to do it then you have to take action to prevent it.

    Letting all that free money slip through your fingers just sucks, especially if you were somehow unaware of it.

  5. Kevin on September 27, 2014 at 7:26 am

    My company offers a DCPP plan (administered through SunLife) and they do a 50% match up to $3K. So it sounds like a good deal. But when I tried to find out if my contributions would result in a tax credit (similar to if I had made an RSP contribution), virtually nobody associated with the plan was able to answer this most basic and important question.

    I finally got a straight answer from s RRIF specialist at Sunlife, who told me that my contributions would show up on my T4 as a “pension contribution” and I could deduct this from my income, just like an RSP contribution.

    So far, so good. And the rules for withdrawals from the DCPP are the same as an RSP, they count as income on your T4 and tax is deducted at source.

    So my question is, if the DCPP behaves the same as an RSP, why did my employer not just go ahead and offer me an RSP plan to begin with, rather than the DCPP? I expect it’s because they get some sort of tax break !

  6. Matt Ingle on September 15, 2015 at 11:18 am

    I feel people asking the question “Why would you leave free money on the table?” are ignoring a basic consideration. My job takes out 11.5% of my salary in a defined contribution plan. Well this puts me below my monthly expenses, even pared to the bone. The reason people don’t contribute may very simply be they cannot afford it.

  7. Tom on August 6, 2017 at 6:46 am

    I’m enrolled in my company’s DCPP. I contribute 5% of my income and the company matches it. Free money! However, the problem I have with the plan is the employer portion and how it’s invested. While I have the power to choose the investment, I only have mutual funds to choose from (Blackrock, SunLife’s own funds). The average MER is > 1%. I have been tracking the values for the last three years and, if it weren’t for the bi-monthly contributions, it doesn’t appear to gain at all.

    If the risk is bore by the employee, I think we should have the power to invest in whatever we want (I.e. equities, bonds, ETFs). The only fortunate part of it is that my contributions are to an RSP, which I transfer to my bank and invest as I see fit. However, that’s small consolation when half of what you’re working for is just seemingly sitting there as ‘cash’ if there are no tangible gains realized.

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