Louisbourg Investments: Group savings plans: What employers should consider

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Most employers are trying to find ways of attracting and retaining key staff. One of the leading causes of employees changing their employment is their benefits package. A key part is whether there is a group savings program available and, more importantly, how much the employer is contributing to it. In this article we will focus on the differences between Pensions and Group RRPSs.

The following are the types of savings plans we will discuss in the article:

Defined Benefit Pension Plans (DB)

• The retirement benefit is predetermined based on a formula typically based on member’s salary and years of service.

• Employers are responsible for funding (and potential shortfalls) and managing the plan to ensure there are enough assets to meet the promised benefits.

• Contributions come from both the employer and the employee.

• They provide a guaranteed retirement income for life.

Defined Contribution Pension Plans (DC)

• Contributions are made by both the employer and the employee into individual accounts within the plan.

• The contributions are invested in investment options typically chosen by the plan member.

• The eventual retirement benefit is based on the contributions made and the performance of the investments over the years.

Group RRSPs

• Similar points to the DC plans above but these plans do not carry the same level of regulation.

• A group RRSP is a retirement savings plan sponsored by an employer, where employees can contribute a portion of their pre-tax income.

• Contributions to a Group RRSP are tax-deductible, and investment growth is tax-deferred until withdrawal.

In recent years, there has been a shift in the private sector from DB plans to DC plans due to the cost and risk associated with managing DB plans. However, DB plans are still prevalent in the public sector and some large corporations. DC plans offer more flexibility and control to plan members but expose them to investment risk and longevity risk (outliving their assets). On the other hand, DB plans provide greater retirement income security but place more financial risk on the sponsoring employer. Approximately 6.7 million Canadians are members of a pension plan. This is split approximately 68 per cent in DB plans and 19 per cent in DC plans, according to a Statistics Canada report dated Jan 1, 2022.

All pension plans are regulated by either provincial or federal regulations. This offers a further level of protection for members as the rules are very strict. Many employers may find the administration of these plans too cumbersome, especially for smaller organizations. By contrast, the Group RRSP is very flexible as they are governed by the same rules as individual RRSPs. They also allow for some withdrawals for things like the Home Buyers Plan (HBP). The main downfalls to Group RRSPs from the employer perspective are:

• All Group RRSPs have immediate vesting of employer contributions.

• In a Group RRSP the employer contributions are considered a taxable benefit, which may increase payroll tax for the member and employer.

• Restricting employee withdrawals from the plan while working can be difficult in a group RRSP.

Another option for companies is to combine a Pension and Group RRSP. For example, the employer could deposit their contributions into the DC Pension and the employee contributions to the Group RRSP.

Here are some key considerations to help you choose the right retirement plan:

• Assess your business needs and demographics.

• Research plan options available: DB, DC, Group RRSP, etc.

• Understand plan features: each type of retirement plan has its own features, including contribution limits, tax implications, investment options, and administrative requirements.

• Consider employee preferences: take into account the preferences and needs of your employees.

• Evaluate costs of various plan types (setup fees, administrative fees, investment management fees, and any additional expenses).

• Review legal and regulatory requirements: ensure the retirement plan you choose complies with all relevant legal and regulatory requirements, including those set forth by the Canada Revenue Agency (CRA) and provincial regulators.

Choosing the right plan for your business involves careful consideration of various factors. You should consult with a financial advisor, accountant, or retirement plan specialist who can provide expert advice tailored to your business’s specific situation and goals.

This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.   

Mike Moores CFP® CIM® is a Client Relationship Manager with Louisbourg Investments. You can find more from him on LinkedIn. Comments or questions may be submitted to Mike at Mike.Moores@Louisbourg.net, or he may be reached at (902) 943-3159.