The characteristics of your defined contribution pension plan

A defined contribution plan is a written contract by which an employer only or an employer and workers are required to make monetary contributions in view of providing the workers with retirement income.

Your retirement income depends on the amounts accumulated in your account

The amount of your retirement income depends, among several factors, mainly on the total amounts accumulated in your account, that is:

  • your own contributions (if you are required to contribute)
  • your employers contributions
  • transferred amounts, if any
  • interest earned by the contributions

The amount that must be contributed is set in advance under the plan. The actual amount of your retirement income is not set in advance.

Defined contribution: who assumes the risk?

How a defined contribution plan works can be compared to the workings of a registered retirement savings plan (RRSP). In addition to the total amount accumulated in your account, your retirement income will depend, among other factors, on the interest rates in effect when a life annuity is purchased or the rates applicable to a life income fund (LIF). A high return on your pension fund's investments combined with high interest rates at the time an annuity is purchased or when your account is transferred to a life income fund (LIF) ensures a higher pension during retirement.

The plan administrator decides how to invest the assets in the plan's pension fund, unless the plan provides that members assume that function, in whole or in part. The risks related to fluctuations in rates of return are assumed by the members. The employer's responsibility is limited to the contribution that he must pay based on the plan provisions.

Makeup of the pension fund

The pension fund is comprised of the employer's contributions and the members' contributions (if they are required to contribute). It can be thought of as the penson plan's "bank account".

What happens when you retire?

A defined contribution plan is not usually used to "pay a retirement pension". Instead, the amount credited to the member's account is used to purchase a life annuity from an insurer or is transferred to a life income fund (LIF), from which a retirement income can be drawn.

If you do not take your retirement immediately, the amount can also be transferred to a locked-in retirement account (LIRA) so that it can be used to pay you a retirement income later, when you retire.

Do you want to find out more about your plan?

Consult your plan summary or contact the plan administrator.

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