Does it ever make sense not to join DC pension?

Question

Background

I have always contributed the maximum possible amount to my RRSP (and TFSA for that matter). My portfolio is comprised of a diverse mix of low-cost ETFs in a self-directed account. In my perfect world, I plan to retire semi early around 55-57 provided things go my way.

I may be joining a company in the near future that offers a defined contribution pension. The employer match is 5%, but group RRSP rules apply (i.e., locked in to certain age, vesting period, etc.). I also believe the IMF for such plans is typically rather high (to be confirmed, but initial research suggests often around 1.5% which is much higher than my current average MER of 0.23%).

NOTE: I have also always filed a T-1213 to reduce taxes at the source; many sites list the immediate tax reduction of a DC pension as a plus, but that is moot since you can achieve that regardless...

Question

Are there any circumstances where is makes sense to pass on the employer match (5%) to maintain full control of ones retirement portfolio? Does an employer match always offset most/all negatives of higher cost/restrictions of a group RRSP?

Answer 1

Think about it this way: you are considering giving up a 100% guaranteed return [contribute 5% of your salary, get 5% for free from your employer] to avoid a 1.5% management fee. You would be giving up a net return of 98.8% above your current investing mechanisms.

So now consider that 98.8% against the non-financial factors: lack of control, vesting, etc.. As a general principle, it may be wise for you to retain some control - but you likely have some ability to adjust your investment mix within your DC plan anyway. And you also have the ability to invest outside of it. The returns you are considering giving up are high enough that you should consider taking the DC plan restrictions as a given, and adjusting your external investments accordingly.

eg: if your DC plan only allows you to invest in index funds, then sell all your index funds in your external investments, and use that money to invest in a way that meets your overall desired investment mix. If your DC plan is only bonds, then sell all your other bonds, and invest outside the DC plan in stocks-only, etc.. If you are extremely concerned about liquidity, then shift your external investments to have a high-degree of short term bonds, or other highly liquid assets. You should be doing whatever it takes in your other investments, to allow your DC plan to make 'sense' for your goals.

If you had no ability to invest outside the DC plan, I would say yes, it may make sense to minimize your contributions there, because the funds are locked in, and this could prevent you from, for example, buying a house [especially using the First Time Home Buyer's RRSP withdrawal, if applicable to you], or making other big life decisions due to liquidity problems. But it seems you already have a healthy set of investments outside of the plan, and it also seems that you have sufficient income to invest both inside and outside of the plan.

To answer your direct question, on whether avoiding contributions to a matched Defined Contribution Pension Plan ever makes sense: Yes, but only if you have absolutely no cash to afford any investing at all. The limitations on liquidity are not so severe, unless you have a specific near-term need for that cash [if you can see that you want to take a year off to travel in 6 months, and that you'll need the 5% of your salary to pay for it, then yes, immediate liquidity would be a primary conern]. Outside of that immediate time window of knowing you will need the cash, the returns are so great that you should work to create liquidity outside of the plan, just to afford the matching within the plan.