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At this time of year, I realize that I am one of the fortunate individuals who works for a company that still provides a good employer share purchase plan as well as matching pension contributions. Although these contributions happen on a monthly basis for me, it is during spring that I am especially glad because it is when bonuses are paid. Never mind the additional cash I receive from the bonus – the best part is that this bonus is subject to the same matching that I receive all year for both the defined contribution pension plan and the employer share savings plan.[ad#tdg-embedded]
As I was thinking about the positive impact this event has had on my investment portfolio in terms of a large additional contribution to both the share purchase plan and the pension plan, I realized there were 5 benefits of an employer share purchase plan (ESPP) and pension plan and 1 downside
The Benefits
1. Free Money – this one is pretty obvious, but I look at the pension matching and ESPP matching as free money. Yes it is part of my overall compensation package, but it is a benefit I would not get unless I was working for the company.
2. Tax Efficient Investing – my pension plan contributions occur with before tax dollars. In other words, it reduces my tax obligations off of my pay cheque which allows me to save and keep more money as opposed to giving it to the government.
3. Simple selection of investments – this one depends on your own pension plan, but my pension plan allows me to buy index funds which I do. I can diversify broadly and without buying mutual funds which have trouble meeting market returns, primarily due to high fees.
4. Restrictive trading – this one can be both a positive and a negative, however I view it more positively. In the pension plan, that money is locked in eliminating the temptation to take the money out for spending. I am “forced” to keep the money invested and working for me. In the ESPP, there are rules about selling – I can sell the shares for free once per year which if managed properly has worked very well. However, it can limit my ability to act quickly on these shares if need be as I have to consider the fees my actions will generate.
The Downside
1. Overweight in employer stock – as months and years go buy, an employee can accumulate a large chunk of employer stock if not managed properly. Think of all those poor souls at Enron who had 75-100% of their investments in the company and ended up losing it all. My rule is to keep no more that 10% of my investment assets in Company stock. This is harder than it sounds but well worth doing. I have high expectations for my employer but anything can happen. It is just sound portfolio management practice.
Overall, I am really lucky to be part of such a good program. Managed correctly, I hope that it will help me to retire very comfortably in the future.
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