Canadians leaving billions on the table each year

An actuarial expert wonders why they're not doing a better job -- or, in fact, their advisors.

Canadians leaving billions on the table each year
Actuarial expert wonders why we’re not doing a better job.

A recent Sun Life study suggests Canadians are letting as much as $3 billion slide through the cracks each year. Morneau Shepell chief actuary Fred Vettese discussed some of the reasons why in Friday’s Globe and Mail.

The main problem it seems are matching contributions.

We’re not taking full advantage of these gifts when it comes to defined contribution pension plans; as a result Canadian employees are losing a real opportunity to grow their retirement savings.

In recent months WPs written about several different surveys and studies that found Canadians aren’t exactly ready for retirement. A big reason for this unpreparedness is a lack of financial literacy amongst all age groups but especially the youngest in our society.

Vettese finds three reasons account for this failure to act on behalf of employees:

First, some employees don’t trust their employers or feel the matching 3 or 4 percent of salary by their employer is too good to be true. This, says Vettese, is pure poppycock.

Secondly, an employee mistakenly feels he or she could do better within a personal RRSP. Well, that’s unlikely but even if you could, you miss out on the match as a result. A 3% match on a $50,000 salary is $1,500 less in annual contributions.

Third, some just want to spend the money in the here and now rather than wait to retirement. Again, the match makes this line of thinking a losing proposition.

But, lest you think we’re picking on DC plans, the same mistakes occur within group RRSPs and 401(k)s. According to the U.S. Bureau of Labor, 30 percent of eligible 401(k) participants fail to contribute enough to obtain a match from their employer. Chicago financial planner Kevin Meehan echoes Vettese’s sentiments stating in U.S. News, “You are essentially leaving money on the table if you don’t take advantage of the matching contribution.”

Interestingly, Carleton University professor Ian Lee makes one of the better arguments why matching contributions aren’t where they should be.

In a December article in the Toronto Star talking about the Ontario Retirement Pension Plan, Lee asserts that younger people are choosing housing over RRSPs because they know they can’t have both. Of course, those same young people could buy a smaller house or condo using the difference to ensure they maximize their employer’s matching contribution.

After all, if somebody came up to you on the street and offered you $100 and all you had to do to earn it was flash $100 of your own, you’d run to the bank immediately.

The pitfalls of financial illiteracy reveal themselves once more.