Should You Join Your Company Group Savings Plan?
Question. I just started a new job recently, and have to make a decision about signing up for the company savings plan. In my last job, I was a member of a pension plan, and didn’t really have any decisions to make. But now, I have the option to enrol in a Group RRSP and a Deferred Profit Sharing Plan (DPSP). I already have my own RRSP and TFSA, so I’m not really sure what the differences are, and if I should join. Do you have any advice for me?
Answer. It’s great that you have a job where your employer is encouraging retirement savings. Outside of the public sector, registered pensions are nearing extinction, but many proactive and progressive employers have opted instead to use other plans, such as DPSPs and Group RRSPs, to help their employees prepare for retirement.
Perhaps the main reasons for this move away from pensions and toward other group savings plans, such as Group RRSPs and DPSPs, is increased flexibility, and decreased costs. Registered pension plans are governed by the Pension Benefits Standards Act, and as such, have very stringent funding requirements. Furthermore, pension plans are typically quite costly to administer, with significant overheard and reporting requirements. Many employers have therefore moved away from pensions, and toward other forms of retirement savings plans.
Unlike a registered pension plan, Group RRSP and DPSP contributions by the employer are not mandatory. This gives the employer added flexibility to suspend contributions for a period of time if the company is experiencing financial difficulty. While that’s an advantage to the employer, it is a potential disadvantage to the employee.
Let’s take a closer look at your plans and how they work.
A group Registered Retirement Savings Plan (RRSP) is similar to an individual RRSP. The main differences with a group RRSP are the administration and method of contribution. A Group RRSP is typically set up by the employer, and also administered by the employer on a group basis.
For your individual RRSP, you might set up a regular monthly contribution, or make a lump sum contribution on an annual basis (for example, just before the RRSP deadline), or some combination of both. However, with a group RRSP, contributions are made by payroll deduction, and on a pre-tax basis.
In most Group RRSP structures, the employer matches the employee’s contributions, at some specified rate and up to a maximum. This is the key reason to participate in your group plan – to get the matching contributions from your employer. For example, an employer might match an employee’s contributions up to 5% of salary. So in this case, if you were making $100,000 and contributed $5,000 to your group RRSP, your employer would also contribute $5,000.
Deferred Profit Sharing Plan – DPSP
The first thing to note is that only the employer can contribute to a DPSP – employee contributions to a DPSP are not permitted. Typically, the employee has the exact same investment choices in the DPSP as in the Group RRSP.
Sometimes, the employer also contributes the matching portion directly to the employee’s Group RRSP. However, in many situations, the employer’s matching contribution goes into a DPSP rather than directly to the employee’s Group RRSP.
Why would an employer do this? Why not just put the matching contribution into the Group RRSP?
Any money contributed to the Group RRSP account, whether it comes from the employee or the employer, immediately belongs to the employee. That is, it is immediately vested, and if they employee quits, the money still belongs to the employee. But with a DPSP, the employer can place a short-term restriction on the ownership of the employer’s contributions.
In this context, the vesting period refers to the period of time before the money in the DPSP is unconditionally owned by the employee. If the employee quits or is terminated before the end of the vesting period, the money in the DPSP reverts back to the employer.
This is the key reason why some employers use a DPSP in addition to Group RRSP. While the Group RRSP cannot have a vesting period, an employer can impose a vesting period up to a maximum of 2 years with a DPSP. In general, employers do this in order to retain employees and reduce turnover.
For example, if the DPSP had a 2 year vesting period, and the employee quit after only 1 year with the company, the employee would forfeit the money in the DPSP – those contributions would go back to the employer.
Note that the amount that the employee contributed to the Group RRSP always belongs to the employee. It is only the amount contributed by the employer in the DPSP that is subject to the vesting period.
PA – Pension Adjustment
It’s important to note that contributions made by the employer to your DPSP result in a pension adjustment. A pension adjustment simply means that your RRSP contribution limit is reduced by DPSP contributions.
While there is no limit to the number of RRSP accounts you can own, there is a limit to the amount you can contribute. And this limit is all encompassing, for RRSPs, Group RRSPs, and DPSPs as well.
To illustrate, consider the following:
- Salary of $100,000
- Group RRSP and DPSP
- Employer matches contributions up to 5% of salary
In this case, if the employee contributes 5%, to the Group RRSP, which is $5,000, the employer would also contribute $5,000 to the DPSP. Recall that the total RRSP contribution limit is 18%. So in this example, 18% of $100,000 is $18,000. Since $10,000 was already contributed to the Group RRSP and DPSP, the employee can contribute only $8,000 more to an individual RRSP (or Group RRSP) before the year’s limit is reached.
Group Savings Bottom Line
In general, if there is an employer matching contribution, it makes good sense to join your group plan. Furthermore, it also makes good sense to contribute at least the amount required to receive the maximum possible contribution from your employer. Otherwise, you’d be leaving “free money” on the table.
Are you faced with a decision regarding your group savings plan or pension? If you want to speak with a professional advisor, or if you have any other questions about pensions, retirement, or any of our services at ModernAdvisor, just contact us.