Wealthsimple Work provides employers with a modern financial wellness benefit for employees.
We’ve come a long way in the last 60 years, but the RRSP remains a Canadian tradition and a savings mechanism that continues to stand the test of time. In 2019, over 5.9 million Canadians collectively contributed $44.3 billion to RRSPs.
One of the ways the RRSP has become accessible to a wider swath of people is the Group Retirement Savings Plan (GRSP), a collection of individual RRSP accounts that a company sponsors for its employees. The plan is usually administered by a third-party insurance company, bank, or brokerage. Employees choose their individual contributions and have them deducted straight from their pay cheque into a range of pre-selected investments, often with the employer matching RRSP contributions.
GRSPs have become a valuable perk that employers use to attract, retain, and compensate their employees. And employees benefit by getting a leg up on saving for retirement (or other milestones like buying a house or going back to school) in a convenient and financially rewarding way.
Let’s break down how GRSPs work and what employers and employees stand to gain from them.
How Does a GRSP work?
Contributing to a GRSP has virtually the same features and benefits as adding funds to an individual RRSP:
An employee may deduct their contributions against their income to reduce what they pay in annual taxes
The growth of the RRSP investments is tax-deferred until the employee reaches retirement age, when their tax bracket will likely be lower
The same annual contribution limits apply (18% of the previous year’s income, up to a max of $27,830 — as of 2021).
GRSP contributions are typically made by payroll deduction on a pre-tax basis, i.e. an employee may choose to direct a percentage of their pre-tax salary directly into their GRSP account.
Most GRSPs offer a mix of actively managed asset class funds like Canadian or U.S. equity mutual funds and target-date funds. Wealthsimple Work’s GRSP offers globally diversified portfolios that are concentrated in ETFs, which typically have lower fees than mutual funds. Through these various portfolios, employees should be able to select a combination of investments that will be automatically rebalanced.
How Does Group RRSP Employer Matching Work?
Some GRSP plans involve employer RRSP matching contributions, usually between 3% to 6% of an employee’s salary. (In non-matching plans, an employer sets up a convenient, lower-fee way for employees to save with their own contributions.) Employer deposits are considered part of an employee’s salary, so they will be taxed. But once the money is in the GRSP, it’s tax-sheltered in the same way RRSP contributions are.
If an employee makes $120,000 and contributes $12,000 (10%) into the GRSP per year, the employer could contribute 3% ($3,600), 5% ($6,000), 6% ($7,200), etc.
Some companies use RRSP employer matching contributions as a retention or incentive program, increasing the percentage of matched contributions depending on factors like an employee’s length of service, performance, or position in the company. For example, an employer could match 0.5% per year up to 5 years and then add 1% for every year beyond that.
GRSPs: What’s in it for employers?
What does a company get for employer RRSP matching contributions?
A lot, actually.
In a competitive job market that’s now being called the Great Resignation, employers are increasingly challenged to offer even more meaningful and valuable perks to appeal to high-quality employees. And the GRSP has long been part of a first-class compensation package.
Here are some of the possible benefits of offering a GRSP.
1. Attract and retain talent
In the wake of a pandemic that disrupted industries, knocked the economy on its side, and sent unemployment numbers skyrocketing, employees are thinking about ways to recover from lost income. In fact, 1 in 4 Canadians say they are less prepared for retirement because of COVID-19.
An employer that offers a way to help these workers save for the future as part of its compensation package, particularly if they offer a matching program, will be an attractive option for talent that has their pick of jobs in the current market.In fact, the majority of Canadians would take a job with good benefits over one that pays more but offers no benefits, according to a 2021 Workplace Survey by Ipsos for RBC Insurance.
2. Increase employee productivity
Few things are more worrying in life than concerns about whether or not you’ll have enough money to live in retirement. In fact, 80% of employers say that employee financial issues affect their job performance.
Employers can help reduce this distracting unease by offering a GRSP program so employees can feel confident that funds are being set aside for their future every time they get paid.
With a diminished fear of the future comes the opportunity for employees to focus on the present, including looking for ways to advance themselves in their careers. Employers that offer increased matching contributions for years of service and/or performance could further incentivize increased productivity and long-term relationships with staff.
3. Better brand perception
What company doesn’t want to have a reputation for being fair and benevolent to its employees? When workers feel that they’re compensated fairly, they are valuable ambassadors for the organization.
Lists like Canada’s Top 100 Employers rate compensation, including GRSPs, as part of its criteria. Companies that make the list may even see benefits from positive PR and branding that could help boost sales and attract customers and employees alike.
4. Tax deduction
Did you know that there’s a financial benefit to offering a GRSP? Many businesses can claim a deduction, which can lower your tax burden.
When employers contribute to a GRSP (especially as a lump-sum bonus at the end of the fiscal year), you’re using profits to invest into your employees. The profit you choose to invest into your employee GRSPs would otherwise be taxed.
GRSPs: What’s in it for employees?
Employees also have a lot to gain from participating in a GRSP. Allocating a percentage of income to investing vehicles designed for long-term growth is a wise way to prepare for the future.
Benefits for them include:
1. Free money from Employers who match contributions
Socking away an additional 3 to 6% of your income into a GRSP is an undeniable bonus in a compensation package. For someone who makes $100,000/year, that adds up $3,000 to $6,000 a year (that’s $15,000 to $30,000 over 5 years) that goes directly into investments built for growth.
2. A hassle-free way to save
Retirement planning can be stressful and putting away money for the future is hard when you’ve got other priorities in the present. A GRSP allows employees to set their savings on auto-pilot by assigning a portion of their income before it even hits their bank account. Saving in smaller amounts, as a line item on a pay stub, is a lot easier to stomach than transferring larger sums at the end of every year. It also helps employees reduce income tax on every pay cheque vs. waiting for a tax time reimbursement.
3. Access to investing at lower fees
GRSPs take advantage of economies of scale by offering lower management fees than are available through individual RRSPs. Group retirement plans typically carry fees in the 1.5% to 2.5% range. (Wealthsimple charges a management fee of 0.4–0.5%). Portfolios that are heavily concentrated in mutual funds will carry the most fees; those with ETFs will be lower.
4. Access to a digital platform, expert advisors, financial education
Depending on the GRSP provider you choose, employees can benefit from a number of helpful services. For example, Wealthsimple Work has a digital platform that allows employees to manage their account online — from choosing their portfolio to setting their contribution amounts to checking on how their GRSP is performing. We also provide on-call financial experts that offer 1:1 investing advice and human-friendly resources like retirement and finance guides to help make decisions about the future.
When it comes to compensating and rewarding employees, employers have long turned to GRSPs as a simple, cost-effective measure. And employees are responding. When they find a company that cares about their financial future (almost) as much as they do — and shows it with employer RRSP matching — it says a lot about what it would be like to work for them. GRSPs may be one of the rare win-win situations in the workplace.
Because no matter which side of the desk you’re sitting on, every dollar counts.
The tax benefits of GRSPs may differ based on individual circumstances. Therefore, you should consult a tax professional to ensure you are making the best decision based on your overall financial circumstances.
Diana leads the business development team where they help educate and share ideas on how a financial wellness program can help organizations stay competitive and engage existing employees.
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