Why Offer Employees a Group Savings Plan?

Over the last two decades, employer group savings plans have grown in popularity.

Why is that? A group savings plan can deliver compensation more tax efficiently than salary alone and transform the financial security of employees.

Let’s explore why Canadian employers should consider them and how they work.

Attraction and retention

New hire candidates often compare benefits packages between potential employers, and a group savings plan, just like other benefits, is a competitive edge in hiring. And once hired, employees generally do not want to move from an employer with a retirement plan to one without! This makes staff more loyal, reducing turnover and its costs associated with replacing and retraining staff.

A tax-efficient compensation tool

Group savings accounts, such as a DPSP or DCPP, are a non-taxable benefit, allowing

organizations to use them as a compensation tool without incurring payroll taxes

normally incurred through regular pay. This includes Employment Insurance,

Canada Pension Plan contributions, Employer Health Tax and Workers’ Safety (WSIB).

Furthermore, employers can apply a vesting period to certain group savings accounts.

For example, a 2-year vesting period means that a member must have a minimum of

two years of employment to keep the employer contributions.

Complimenting public pensions and organizational stability

The two main government retirement programs, the Canada Pension Plan and Old Age Security, typically cover up to half of an individual’s retirement income needs. Across Canada today, group savings plans already play a vital role for millions of Canadians in filling the gap between government programs and what they need in retirement income.

The extra financial stability resulting from a group savings plan helps reduce employees’ financial stress, improving morale, focus, and productivity at work. Moreover, helping aging employees retire opens up opportunities for the current workforce to advance.

Structured savings and investing

The best way for anyone to reach a financial goal is to save regularly and invest those

savings, preferably without high fees. A group savings plan addresses these areas

perfectly. First, payroll contributions are automatic once set up, meaning once an

employee enrolls, they will automatically save each pay period.

Second, group savings plans typically offer “target date” funds, which continually adjust

the investment mix according to the member’s age, i.e. automatic diversification.

This level of hands-off investing, similar to driving an automatic vehicle, means

employees don’t need to be experts to invest properly.

For those wanting more hands-on investing, additional options can include US,

Canadian and international equities, bond funds, and guaranteed interest funds. Our

clients’ group savings plans commonly contain institutional-grade funds with fees

lower than retail, which are typically inaccessible to most Canadians on their own.

A significant benefit of payroll contributions to tax-deferred accounts, such as

RRSPs, is that members receive tax refunds immediately through their pay, rather

than waiting until the following year when filing taxes to receive the tax refund.

In short, group savings plans make it easy, efficient, and low-cost for members to

save and invest.

What are the options for Canadian employers?

The most common approach used by for-profit companies is a combination of RRSP

and DPSP accounts for employee and employer contributions, respectively. Not-for-

profit organizations can consider an RRSP or a Defined Contribution Pension

Plan (DCPP).

Many employers add a TFSA for additional voluntary employee

contributions. Each account type has its pros and cons in terms of administration,

cost savings and suitability for an organization’s salary census and size.

Employers typically use a “matching contribution” formula. An example of this is

letting employees contribute up to 3% of their pay for a 100% employer-matching

contribution. Most group savings plans allow Individuals to contribute additional

unmatched contributions if their CRA limits (e.g., RRSP room) allow for it.

Next Steps

If your organization does not have a retirement savings plan, talk to us about what’s

involved. We can model different contribution formulas to project the costs and

discuss potential investment fund lineups to make available to members.

We believe that a group savings plans makes an organization better and improves

the financial lives of its employees. Our mission is to help you find a cost-effective

way to implement and run a program.