Group Retirement Savings Plan in Canada

Planning for retirement is one of the most important financial decisions Canadians will make in their lifetime. With lengthening life expectancies and rising costs of living, having an adequate retirement nest egg is crucial.

For many, saving independently through individual retirement accounts can be a challenging task. This is where group retirement savings plans come in. Offered by employers, these group plans make saving for retirement simpler through automated payroll deductions and access to institutional pricing.

Whether you are an employer considering adding these plans to employee benefits package or an employee wanting to understand your options better, you’ll find key insights in this detailed overview.

A group retirement savings plan enables employees to contribute directly from their paychecks into a retirement savings account established through their employer. Contributions are automatically deducted from each paycheck and deposited into the group retirement plan.

These plans are referred to as “group” plans because participant assets are pooled together into institutional-level investment funds and accounts. This provides access to lower fees typically only available in large pension plans.

Group retirement savings plans offer a convenient and structured way for employees to build long-term financial security. But how do these plans actually work in practice? Let’s take a closer look at how they work:

• Plan Establishment: The employer partners with a financial provider to establish a group retirement savings plan. The employer determines eligibility rules, contribution matches, investment options, and other plan details.
• Enrollment: The plan provider facilitates employee enrollment in the group plan, often through digital platforms as well as access to advisors. Enrollment is typically voluntary.
• Contributions: Employees select their contribution percentage, which is automatically deducted from each paycheck on a pre-tax basis and deposited into the group savings plan.
• Investments: Contributions are invested based on employee selection or defaulted into standard portfolios. The assets accumulate and grow tax-deferred.
• Oversight: The employer and plan provider jointly oversee the plan. The provider handles administrative tasks, including record-keeping, transactions, and reporting.
• Accessing Funds: Employees can access their retirement funds according to the specific plan rules, typically at retirement or upon leaving the employer. Taxes apply if withdrawn.

Throughout the process, group retirement plans aim to make contributing effortless through automated payroll deductions while minimizing employer administration thanks to third-party plan management.

There are several types of group retirement savings plans offered by Canadian employers. Here is an overview of the most common options:

Group RRSP

A Group Registered Retirement Savings Plan (RRSP) allows pre-tax payroll contributions from employees into a tax-deferred account. Employers can opt to match a portion of these contributions. Unlike individual RRSPs, unused contribution room does not carry forward from year to year. Employees can withdraw funds at any time, though tax will apply.

Employers can choose to match a portion of employee contributions to boost savings. Group RRSPs offer flexibility for both employers and employees in terms of contribution levels and portability of assets.

DPSP

A Deferred Profit Sharing Plan (DPSP) is funded solely by employers based on company profits. DPSPs have vesting schedules where employees must remain with the company for a set period before gaining full entitlement to the funds.

These contributions go into a tax-sheltered account that grows tax-free until withdrawal. Employees cannot contribute to a DPSP themselves – it is entirely employer-funded. DPSPs offer a means for companies to share profits and incentivize their employees.

Registered Pension Plan (RPP)

A Registered Pension Plan is an employer-sponsored pension plan that must be registered with the Canada Revenue Agency. RPPs provide a retirement income to employees based on their length of service and earnings.

Employers are required to make contributions to an RPP on behalf of employees. Employee contributions may also be required. RPP contributions receive tax-deferred investment growth.

RPPs have vesting requirements, and funds are locked in, meaning they can only be accessed once the employee retires and begins drawing retirement income from the plan. RPPs provide a predictable, guaranteed income stream in retirement.

DC Pension Plan

In a defined contribution (DC) pension plan, employees and employers both make fixed contributions based on a percentage of the employee’s earnings.

These contributions are invested, typically selected by the employee, and grow tax-deferred. At retirement, the accumulated value of the DC account determines the retirement benefit. Unlike Group RRSPs, DC plans have locked-in funds that cannot be withdrawn until retirement.

DB Pension Plan

A defined benefit (DB) pension plan provides a set income at retirement, calculated using a formula based on salary and years of service. The employer invests plan assets and is liable for funding the promised pension income.

Employees may also be required to make contributions to the DB plan. The employer is responsible for investing the assets and managing the plan to fund the defined payouts. DB plans provide income certainty in retirement but involve complex administration.

PRPP

A Pooled Registered Pension Plan (PRPP) provides accessible workplace retirement savings options for small businesses or self-employed individuals. Employers simply facilitate payroll deductions while a licensed provider administers the pooled funds.

While employers can contribute to a PRPP, they are not required to do so. This makes PRPPs flexible and cost-effective for businesses, especially small companies or startups lacking benefits programs. PRPPs are portable, so employees can take their plan with them if they change jobs.

Group TFSA

With a Group Tax-Free Savings Account (TFSA), employees make after-tax contributions that grow tax-free. Employers have the option to match a portion of these contributions up to the CRA annual TFSA limit. As an added retirement savings benefit, group TFSAs are typically offered alongside group RRSP plans.

Voluntary Retirement Savings Plan (VRSP)

A Voluntary Retirement Savings Plan is a type of group retirement savings plan available in the province of Quebec. VRSPs are similar to Group RRSPs in other provinces.

Under a VRSP, employees can make pre-tax payroll contributions which grow tax-deferred. Employers can optionally match employee VRSP contributions.

Unlike Group RRSPs, VRSPs have an auto-enrollment feature that automatically enrolls eligible employees, allowing them to then opt out if they choose. VRSPs streamline retirement savings participation.

The table below compares the key features of each type of group retirement plan:

As shown, each type of group retirement savings plan has unique considerations for employers in terms of administration, contributions, and portability for employee

Most group retirement savings plans have the following eligibility requirements for employees:

• Full-time employees are typically eligible once they complete the employer’s probation period (often 3-6 months).
• Part-time employees may also be eligible if they meet minimum hour requirements, which can range from 20 to 30 hours per week.
• Employees must be considered Canadian residents for tax purposes to benefit from the tax advantages.
• There is usually a minimum age requirement of 18 years old.
• Some employers may impose additional eligibility considerations, such as plan tenure or performance requirements.

In most cases, if you are a permanent full-time or part-time employee, you will likely qualify to participate in your employer’s group retirement savings plan after passing the probation period. Check with your HR department for specifics.

Group retirement plans offer compelling advantages, both for employers providing these plans and for employees participating in them.

Benefits for Employers

There are seven reasons for employers to offer group retirement savings plans as part of their benefits package:

• Attract top talent with a competitive and desirable benefit
• Contributions are tax-deductible as an employee benefit expense
• Savings on administrative costs compared to individual plans
• Ability to design plans aligned with company goals and budgets
• Optional matching encourages participation and employee retention
• Flexibility to tie contributions to profits or performance with DPSPs
• Can reduce payroll taxes in some provinces through DPSP contributions

Benefits for Employees

Employees also gain significant advantages by participating in an employer-sponsored group retirement plan:

• Lower investment management fees compared to individual plans
• Convenience of automated contributions conveniently deducted from pay
• Employer matching contributions provide “free money”
• Tax-deferred or tax-free growth potential on savings
• Access to institutional class funds and professional advice
• Forced savings discipline through ongoing contributions
• Ability to take plans with you when changing employers

In summary, group retirement plans create a win-win scenario for employers looking to provide competitive retirement benefits and for employees trying to maximize their savings.

Group retirement savings plans aim to provide access to institutional-level investments at a lower cost by pooling assets. Here are some of the common investment options:

• Mutual funds provide diversified exposure to stocks, bonds, and other asset classes based on your risk tolerance.
• Target-date funds become more conservative as you near retirement. They provide a hands-off approach to investing based on your time horizon.
• Guaranteed investment certificates (GICs) offer guaranteed returns over a fixed period for low-risk investors.
• Exchange-traded funds (ETFs) provide index-based investing with lower fees.
• Self-directed brokerage windows allow experienced investors to select individual stocks and bonds.

Your employer’s chosen plan provider determines the specific investment offerings. The default option is typically a managed portfolio or target-date fund aligned with your projected retirement date, until you select your own investments.

There are six strategic reasons for employers to take on the responsibility of facilitating group retirement savings plans:

Attract Talent

A robust benefits package, including retirement plans, gives employers a competitive edge in attracting skilled talent. Access to group retirement plans is consistently rated as one of the most valued benefits by workers.

Retain Employees

Employers who fund retirement plans and match employee contributions have higher talent retention. Employees are incentivized to stay with the company to maximize the value of their retirement funds.

Tax Advantages

Contributions made by employers into group retirement savings plans are tax-deductible as employee benefit expenses. This provides significant tax savings and advantages over simply providing increased taxable compensation.

Lower Administrative Burden

Group retirement plans involve significantly less administration, compliance, and fiduciary obligations compared to overseeing individual accounts or managing a pension plan.

Flexibility

Group retirement plans offer flexibility in annual employer contribution amounts, vesting schedules, and investment options. This allows customization to meet company goals.

Reinforce Cultural Values

Providing retirement benefits conveys that the company cares about employees’ financial well-being. This boosts loyalty, morale, and productivity.

If you leave your employer, you have options to continue benefiting from your group retirement plan savings:

• Group RRSPs and TFSAs allow you to transfer assets directly into your own personal RRSP or TFSA without tax penalties.
• DC pension plans can be moved into a locked-in retirement account (LIRA) or life income fund (LIF) to maintain the tax-sheltering until retirement.
• With DB plans, you may be able to collect a pension later or transfer the commuted (lump sum) value to an approved locked-in plan.
• DPSP funds are yours to transfer once vested. If not vested, you lose unvested employer contributions.
• Consider consolidating multiple plans with a single provider for easier ongoing management.

The portability, tax advantages, and continued growth potential make group retirement savings plans well worth keeping, even after a job change.

Group retirement savings plans offer a compelling option for both employers looking to provide competitive benefits and for employees aiming to secure their financial futures.

With unmatched convenience through payroll deductions and the potential for employer-matching contributions, group plans make building your retirement savings straightforward. Lower fees, flexible savings options, and tax advantages further enhance your returns.

With longevity on the rise and retirement often lasting decades, having an adequate nest egg is more crucial than ever. By starting group retirement savings early and maximizing employer-sponsored plans, Canadians can rest assured knowing their futures are financially secure.

Article Sources:

• What is a group retirement savings plan? – policyadvisor.com
• What is a Group Registered Retirement Savings Plan – openaccessltd.com