One of the best benefits that employers can provide for their employees is access to a group RRSP savings plan. The fact is, defined benefit pension plans are disappearing in the private sector and being replaced with a defined contribution or Group RRSP plans. However, not all Group RRSPs are created equal and here’s what you need to know beforehand.
About Group RRSPs and How They Work
In a Group RRSP, both the employer and employee can contribute to the plan. The employer oversees the plan, but the portfolio belongs to the employee who then gets to decide how to invest the money from a list of options.
Since it’s the employee’s money to invest, he or she takes on the risk. Unlike a traditionally defined benefit pension plan – which pays beneficiaries for life and where the plan administrator (e.g. the employer) assumes all the risk and has to make up for any shortfall – a Group RRSP or defined contribution plan offers no such guarantee. Your portfolio will rise and fall with the market and it’s your responsibility to ensure you’ve adequately saved enough for retirement.
Group RRSP vs. Defined Contribution Pension
The difference between a Group RRSP plan and a defined contribution pension plan comes down to pension legislation. Defined contribution plans have legislated “lock-in” restrictions against taking the money out prior to normal retirement age, whereas Group RRSPs don’t have those restrictions. This article will focus on Group RRSP plans.
Benefits of a Group RRSP
The main benefit of setting up a Group RRSP plan as an employer is to enhance your overall benefits package. In some cases, a Group RRSP can also provide incentives for employees in the form of matching RRSP contributions. For an employee, the main benefit of contributing to a Group RRSP plan is to receive those matching benefits. For every dollar you contribute, your employer puts in a matching dollar, typically up to a certain percentage of your salary, which may also be capped at a certain dollar amount.
RRSP contributions reduce your net income for the tax year in which you made the contribution. For example, say you make $60,000 per year and contribute $3,000 to your RRSP. Your net income for tax filing would be $57,000 – which should generate a tax refund.
Now let’s say you belong to a Group RRSP plan and your employer matches your RRSP contributions up to 5% of your salary (or $3,000). Take your $3,000 contribution, add your employer’s $3,000 contribution, and you have a $6,000 contribution to your RRSP which essentially represents an easy 100% return on your initial investment.
Yes, your employer’s matching contributions do count towards your RRSP deduction limit! A good reason why this is such an attractive option when it comes to saving for retirement.
Beware of Investment Choices Inside Your Group RRSP
Not all Group RRSP plans are created equal. Years ago, I worked for a hospitality company that set up a Group RRSP plan and offered to match employee RRSP contributions up to 5% of their salary if they invested with one particular bank. So I eagerly opened an account and started regular monthly contributions – even adding any bonus money that I received so I could max out the company match.
What I was naïve to (and later discovered) was that I was contributing to a very expensive global mutual fund that charged a management expense ratio (MER) of 2.76%. Later when I left the company, I transferred the full balance of my Group RRSP into a discount brokerage and began my DIY investing journey.
I should mention that it was still beneficial to contribute to my Group RRSP plan even though the investment options inside the plan weren’t the greatest. That’s because the only way to qualify for the employer matching was to contribute to this plan. A 100% matching contribution is still worth paying 2% or more in mutual fund fees. You can always transfer the funds out of your expensive portfolio and into a self-directed investing account down the road.
Fortunately, plan administrators have come around and have started to include lower-cost mutual funds, index funds, and ETFs in their menu of investment options.
Nest Wealth at Work
One of the leading Group RRSP plans – arguably the best plan – in Canada is Nest Wealth’s Group RRSP. In fact, I recommended this option to a new local not-for-profit organization (I’m on the Board) that was looking to offer a retirement benefits package to their small team of employees.
Nest Wealth at Work is free for employers. That means there’s no cost to set up the plan and no admin fees to maintain the plan. As an employer, you choose if you want to contribute to your employees’ RRSP through a company match program. Either way, you help your employees save. Setting up the company on Nest Wealth takes as little as three minutes to go through their digital onboarding. Invite employees by email, and use payroll integration to seamlessly administer the plan.
For employees, Nest Wealth at Work offers the lowest cost Group RRSP in Canada. Sign-up and get a personalized and customizable portfolio of index funds and target date funds designed with your preferences in mind. Plan members can choose investments to help them maximize their wealth at retirement, no matter what their investment knowledge looks like. Members can choose from simple solutions to fully customized solutions—it’s entirely up to the individual! The flexible plan also allows users to withdraw funds when they need access (such as to purchase a home, pay for tuition, or any other reason) but users should be mindful of the potential tax implications of such withdrawals. Users can manage and monitor their plans online to see portfolio performance and to project their fund growth to retirement.
How Your Money is Invested Within Nest Wealth at Work
Employees can also completely customize their investment portfolio by choosing from a menu of Vanguard target date funds. Each of the funds invests in Vanguard’s broadest index funds, giving employees access to thousands of U.S. and international stocks and bonds. A target date fund means its composition automatically shifts to fewer stocks and more bonds as the employee nears retirement.
The Vanguard funds available through Nest Wealth at Work include the following asset classes:
- Canadian Equities
- US Equities
- Global Equities
- International Equities
- Canadian Bonds
- International Bonds
- Money Market
As defined benefit pension plans vanish from the private sector, employers have turned to Group RRSPs to enhance their overall benefits package and attract top talent. For employees, access to a Group RRSP can make all the difference between saving enough and not saving at all for retirement.
When it comes to setting up a Group RRSP, look no further than Nest Wealth at Work. It gives small business owners access to a professional platform at no cost or hassle, plus offers the lowest cost Group RRSP in Canada to help them save for the future.
*This post was sponsored by Nest Wealth Group. The views and opinions expressed in this blog, however, are purely my own.