Employee Savings Plans…Do you contribute?

Every January we (employees at my financial instituion) are encouraged to review the investment options in our Employee Savings Plans.  Employee Savings Plans are savings options that are sponsored by our employer; our  investments are made through payroll deductions.

I am a huge fan of Employee Savings Plans because they are a form of forced savings. Forced savings means that the investment money is automatically deducted from our pay check before it is deposited into our bank account.

I also love Employee Savings Plans because we have a guaranteed return in the form of our employer contributions. Employee Savings Plans are sponsored by our employer, this means that for every dollar we contribute, our employer also contributes a percentage on our behalf.

I am going to share my Employee Savings Plan options with you, and I would like to know how it compares to other Employee Savings Plans out in the workforce.  If you are self employed, do you offer an Employee Savings Plan? If so, what are the contribution options?

Our first employee savings option is the Pension Plan.  We contribute a mandatory 2% of our annual salary and our employer contributes 6% on our behalf.  This is a new Pension Plan option for 2011; it used to be an equal 2% contribution by both the employee and employer.

There used to be a 2 year waiting period for employees to be eligible to contribute into our Pension Plan.  However, now after 3 months of service, any employee can start contributing into the Pension Plan as of the following January 1.  Our Pension Plan is a Defined Contribution Pension Plan, and contributions are mandatory by all employees.

We have 3 other Employee Savings Plan options available outside of the Pension Plan.  We can tribute up to 8% of our annual income into an optional Retirement Savings Plan, a Non Registered Investment Account, or a Tax Free Savings Account.  For every dollar we contribute into any one of these optional Employee Savings Plans our employer contributes 50%.  Therefore, if we contribute 8%, our employer will contribute 4% on our behalf.  This applies for each and every Employee Savings Plan option.

It is important to fully understand our Employee Savings Plan options as there is usually a vesting period. A vesting period is similar to a holding period before we (employees) are able to access our employer contributions; it can be any amount of time, usually between 6 months and 2 years.  Our employee contributions are always accessible.

The investment options in an Employee Savings Plan can range from individual Stocks to Mutual Funds.  The fees for investments in Employee Savings Plans are usually a lot lower than if we bought the investments as individual investors through a discount or full service broker.

I see Employee Savings Plans as “free money”, otherwise known as a guaranteed return.  Even if the investments from our contributions lose value, we still have the contributions from our employer to invest.  Therefore, Employee Savings Plans are a great way to invest because we earn the guaranteed contributions from our employer, as well as any gains on our investments.

What options do you have for your Employee Savings Plan?