Since December 2017, all companies with 10 or more employees are required to offer a Voluntary Retirement Savings Plan (VRSP) to their employees. These companies will have to decide which type of retirement plan is optimal for them. Group RRSP have undoubtedly gained a lot of popularity since 2017.
Many businesses fear the administrative burden associated with the VRSP. There are indeed some irritants, such as the requirement to follow up with employees who opted out of the VRSP to check whether they intend to change their mind. This does not apply to the group RRSP, a much simpler and more flexible plan than the VRSP that also features many other benefits.
Simplicity of a Group RRSP
Administering a group RRSP is extremely simple. As an employer, you only have to advise your employees that they can make payroll contributions to a group RRSP and to collect the contributions. Unlike the VRSP, there is no need to follow up with employees who decide not to contribute.
Flexibility
The group RRSP is most often voluntary, i.e. the employees decide whether they wish to contribute or not. It is also possible to make it mandatory for employees, but this is rather infrequent.
Contributions to a group RRSP can be used to take advantage of the Home Buyers’ Plan (HBP), a very popular program with younger employees.
Withdrawals are also allowed. Thus, even though a withdrawal goes against the goal of saving for retirement, employees are entitled to withdraw amounts from the RRSP for any reason: financial hardship, repaying a loan, etc. However, income tax will be withheld on the withdrawal, thus substantially reducing the net amount. The employer can also apply penalties to restrict withdrawals (for instance, by suspending employer contributions for a specific period of time).
Attractive fees
Anyone holding mutual funds in a RRSP must pay management fees. A group RRSP has the benefit of providing economies of scale. The applicable fees are generally much lower than with an individual RRSP taken out with a credit union or a bank, for example. The fees can also be lower than those of a VRSP. In the long run, lower fees will translate into higher net returns for employees.
Employer contributions are allowed but…
The concept of “employer contribution” is inexistent in a group RRSP. Should the employer wish to make a tax-sheltered deposit into the group RRSP of their employees, this will be considered as additional salary transferred to the group RRSP. The impact will be that both the employer and the employee must pay the applicable payroll taxes (EI, CSST, FSS, QPIP, QPP, etc.) on this additional salary. This will often amount to almost 15% of the additional salary for the employer.
To avoid such payroll taxes, employers frequently contribute to a deferred profit sharing plan (DPSP). This type of retirement plan is very often provided in combination with a group RRSP.
Beware of individual RRSPs offered to a group
Some financial institutions (mainly banks and credit unions) may offer RRSPs to your employees, but these are quite often individual RRSPs rather than a group RRSP. This type of product is often much less attractive, as the financial institution applies fees on an individual basis, i.e. much higher than with a “true” group RRSP. Moreover, as an employer, you will not be able to get consolidated information on the individual RRSPs, making it much harder to monitor the plan.
Offering a retirement plan is a significant benefit for your company and your employees. To guide you towards the type of retirement plan that best meets your needs and help you select the most attractive financial institution, we invite you to speak with one of our experts today.
Jimmy brings overs 20 years of experience in pension plans. After starting his pension career at the Ontario Teachers’ Pension Plan, he worked as DC Consultant for a large actuarial firm and two insurance companies before joining AGA. With his extensive pension experience, he has developed an acute expertise in the selection, the design and the implementation of pension plans. Jimmy provides his clients with both expertise and insight on their employee benefits.