How can Canadian small business owners set up a GRSP or Pension Plan?
With an increasingly competitive market for talent, more organizations are looking for ways to stand out as employers. One way of gaining a competitive edge is by offering employees access to a group retirement plan. This benefit has been shown to have wide appeal among Millennials and Baby boomers alike. And considering the mounting challenges Canadians face to save enough money to fund lengthier retirements, it is imperative that more and more employers offer group retirement plans.
Retirement Plan Options
This brings up the question of what kind of plan should be set up. Fortunately, there are multiple options available that address different priorities for both employees as well as employers.
Registered Retirement Savings Plan (RRSP)
Group RRSPs (or GRSPs as they are sometimes called) have become the most popular option for small businesses in Canada. This is because they are straightforward to implement, do not require a plan text and trust agreement, and provide plan members with some measure of flexibility on how to use their savings.
With an RRSP, an employee can borrow up to $25,000 tax-free to fund the purchase of a home as part of the Home Buyer’s Plan (HBP). This feature is particularly appealing to Millennials struggling to enter a hot housing market. Tax-free borrowing is also allowed to fund continuing education under the Lifelong Learning Plan (LLP).
Yet the flexibility afforded by RRSPs also proves to be their Achilles’ heel. Whereas the two withdrawal options mentioned above can indirectly contribute to better retirement outcomes for plan members, group RRSPs enable employees to withdraw funds from their nest egg at any point in time. Unlike the case with the HBP and LLP, all such withdrawals are taxable.
As many plan sponsors can attest, the tax penalty is rarely sufficient to discourage employees from raiding their RRSP savings. This is why some organizations have implemented withdrawal penalties whereby company match would be withheld for a set amount of time whenever an employee withdrew money from their RRSP account.
Deferred Profit Sharing Plan (DPSP)
Some employers utilize Deferred Profit Sharing Plans as an alternative or supplement to RRSPs. Employees do not contribute to a DPSP since it is comprised of contributions employers make from a company’s pre-tax profit. This is why DPSPs are often paired with RRSPs, whereby the latter would be comprised of employee only contributions. The fact that DPSP contributions do not attract payroll taxes has led to a growth in the popularity of this combination.
Unlike an RRSP, the funds contributed to a DPSP do not vest immediately and employers have the option of setting up a vesting period of up to two years. This means that the employer could retain the DPSP contributions if an employee leaves the company before two years had passed. Many organizations use this feature as a retention incentive.
Employers also have the ability to prevent employees from withdrawing from the DPSP so long as they are employed with the organization. This applies beyond the two year vesting period and is perhaps one of the key advantages DPSPs hold over RRSPs as a savings tool. However, should an employee move to a different organization after the vesting period, they are free to withdraw from the funds.
Defined Contribution Pension Plan (DCPP)
For more outcome-oriented employers, DCPPs are perhaps the best option to ensure employees have enough money saved for retirement. Unlike RRSPs and DPSPs, DCPPs do not permit any kind of withdrawal. Employees who leave an organization offering a DCPP must either transfer the funds to another DCPP or to a Locked-In Retirement Account (LIRA). Thus, any contributions that go into a DCPP are intended to service no other purpose other than to fund a plan member in retirement.
Being fully-fledged pension plans, DCPPs require a plan text and trust agreement. Should a DCPP grow in size to reach $3,000,000 in Assets under Management (AUM), yearly audits are required. This factor has perhaps restricted the popularity of this plan type among smaller organizations. Some employers also prefer to give their employees the options of using the HBP and LLP offered by an RRSP. But as mentioned above, RRSP flexibility can undermine the effort to prepare employees for retirement. One solution to this dilemma is to supplement a DCPP with a voluntary (only employees contributing) RRSP.
Defined Benefit Pension Plan (DBPP)
For the sake of thoroughness, we have included Defined Benefit plans in the mix. Without a doubt, DBPPs are the favored choice among employees due to the guaranteed retirement income they offer plan members. Rather than relying on the performance of their portfolios, employees in a DBPP would receive monthly payouts for life based on a preset formula.
Under a DBPP, it falls to the employer to ensure that there are enough funds in the plan to meet the obligations towards retiring employees. This substantial fiscal liability was a major factor behind the decline of DB plans over the past thirty years.
Today, DBPPs have been largely replaced by Defined Contribution plans among all but public sector employers.
Regardless of what plan type an employer chooses, determining the design is a crucial step in setting up a retirement plan. The following are some of the considerations that should be determined before moving to the implementation process:
Desired goal: This precedes all other considerations as it is imperative that plan sponsors clearly define what they wish to achieve by offering their employees a retirement plan. Do you wish to ensure that your employees will be ready for retirement or is your goal mainly to offer a flexible retirement savings vehicle?
Flexibility: How much freedom do you which to offer employees to withdraw funds? More paternalistic (or outcome-oriented) employers may wish to opt for a DCPP or an RRSP with strict withdrawal penalties.
Eligibility: Will all employees have access to the plan? Would new employees be automatically eligible upon being hired or only after a probation period? Defining and clearly communicating eligibility requirements is an essential part of plan design.
Employer contributions: Contributions can either be made as a percentage of salary or up to a fixed dollar amount. A very popular arrangement is to have a tiered percentage match which rises with seniority. Some employers provide these contributions independent of what an employee contributes whereas others offer it as a matching contribution.
Costing: Before implementing a plan, it is important to forecast the cost. This requires taking into account several variables such as the number of employees expected to participate, average salaries and seniority, and of course any administrative costs that may be forthcoming.
Group retirement plan implementation
Once the plan design had been established, employers can move on towards implementation. This process can be broken down into the following steps:
Select a provider and identify the joint resources that will be dedicated to the project.
Identify and execute the documents required to establish a new plan.
Announce the new plan to staff through written and electronic communication.
Request employee booklets and plan member presentations from the provider.
Hold enrollment meetings for employees.
Finalize onboarding requirements such as Investor Profiles and remittance details.
How can Open Access help
As a plan provider, Open Access offers turnkey solutions whereby we project manage the entire process from start to finish. We recognize that setting up a plan can raise many questions, and this is why we offer our support and guidance through plan design and implementation. If you would like to learn more about this, please fill the contact form here and one of my colleagues will be happy to reach out to you.
As a group retirement plan provider, Open Access is changing the way retirement plans are run by unburdening employees from the need to make investment decisions on their own and instead managing portfolios on their behalf. We do this as a fiduciary, meaning no proprietary products, zero conflicts of interest, and no hidden fees.