DCPP vs Group RRSP: A Guide for Employers

Savvy employers know that a well-designed retirement plan can help you attract and retain top talent. In today’s uncertain world, feeling financially secure matters greatly to employees. In fact, 68% of workers would take a job with good benefits over a position that pays more but offers no benefits at all.

The big question is, which retirement plan should you offer in that benefits package?

If you weren’t already overwhelmed by talk of The Great Resignation, choosing a retirement benefit plan and provider can feel like you’re staring at enough acronyms to fill a bowl of alphabet soup.

In this article, we’ll keep it simple and focus on two kinds of plans, Defined Contribution Pension Plans and Group Registered Retirement Savings Plans (DCPPs vs Group RRSPs). We’ll cover:

• The definition of a Group RRSP and a DCPP

• The main differences between the two, plus pros and cons of each

• How to decide which type of plan is right for your employees

• How to switch from one plan to the other

• How to get your team excited about whichever offering you choose

Get ready for a crash course. 

What is a Group RRSP?

A Group RRSP (or GRSP) has similar benefits to an individual registered retirement savings plan, but gives your staff a few additional perks. These include immediate tax savings, convenience of automatic contributions and the potential to receive contributions from you as the employer. Group RRSPs are typically managed by a plan provider, which can offer important resources and support to both you and your employees. 

What is a DCPP?

A DCPP in Canada is a type of registered retirement savings plan that offers a benefit based on contribution levels before retirement. Unlike a Group RRSP, you usually need to manage your company’s DCPP instead of handing it off to an external plan provider. These plans also tend to be less flexible, as DCPP withdrawal rules in Canada mean the funds are often locked in and intended only for retirement.

DCPP vs RRSP: How these plans stack up

There are a few similarities between the two types of retirement plans:

• Each is a registered retirement savings plan, and contributions are tax deductible

• Both types of plans are valuable when recruiting and hiring

• Assets are pooled across the group, typically lowering fees 

• Contributions to both plans lower RRSP room

• Employees have freedom to choose how their contributions are invested, from a menu of funds selected by the employer

• Both types of plans require employees to take on the risk of investing funds

• The amount paid out in retirement can vary depending on multiple factors including amount invested, time to retirement, how the funds are invested, and fees paid

Dig deeper, though, and you’ll notice some big differences in a few critical categories: 

1. Eligibility

Typically, an employee can join a DCPP on the first of the month following an established period of service (falling under provincial legislation). 

An employee can join a Group RRSP simply by filling out an application, and beginning contributions to the plan once the appropriate steps are taken by the organization’s payroll department. 

2. Contributions and deadlines

Different rules govern contributions to each type of plan. With a DCPP, you as the employer must contribute at least 1% of an employee’s compensation to the plan.

With a Group RRSP, you can choose to make contributions or not, and what amount. These contributions are tax-deductible for employers, but the CRA considers them salary when paid out. This distinction bumps up the salary, increasing the amount of Canada Pension Plan contributions and possibly the employment insurance premiums you’ll need to pay (depending on if your plan is restricted or unrestricted).

The rules for a DCPP in Canada dictate that plan members can contribute until December 31 of any year. However, Group RRSP members have until 60 days after the end of the calendar year to contribute. 

3. Investment choices for plan contributions

With a DCPP, either the employer, the plan member, or both can make investment selections within the plan. In contrast, a professional will manage the plan and choose the portfolios and funds with a Group RRSP. No need to play Wolf of Wall Street.

4. Transfer of funds/cash withdrawals out of accounts

DCPP withdrawal rules in Canada guide what’s allowed and what’s not. Employees are only allowed to withdraw or transfer funds out of their plan when they leave the company. In that case, they can transfer locked-in funds to other locked-in retirement funds.

Group RRSPs offer greater flexibility. Members can withdraw funds from most plans in cash or transfer them to another registered product (though withdrawing any portion can carry tax implications). Keep in mind that some restricted RRSPs do limit this kind of transaction while your employees are still employed with your company.

5. Tax reporting

With a DCPP, you as the employer will need to report specific pension amounts on an employee’s T4. Alternatively, Group RRSP providers will usually issue RRSP receipts. Cheers to less paperwork for you! 

6. Vesting

Vesting refers to an employee’s right to the funds in their plan, should they terminate their employment with your company. For DCPPs, the waiting period varies by provincial legislation, though some provinces have moved to immediate vesting. With a Group RRSP, employees are immediately vested in their plans. 

7. Retirement income options

DCPPs offer several options for retirement income: life annuity or joint-life annuity, Prescribed Registered Retirement Income Fund in Saskatchewan, or life income fund or locked-in retirement account, where allowed, in other provinces.

With a Group RRSP, your options for retirement income include annuity, Registered Retirement Income Fund, cash, or a combination of any of these.

8. Death benefits

The death benefit of a DCPP equals the cash value of an employee’s account. Each staff member must declare their spouse as the plan’s beneficiary unless a waiver is signed saying otherwise. 

With a Group RRSP, employees can declare anyone a beneficiary. 

In both cases, if a spouse inherits funds, they can roll the money over into another retirement account in their name. If an employee has no spouse, the death benefit will be paid to a designated beneficiary or the employee’s estate.

9. Flexibility

DCPPs don’t come with much flexibility baked in. On the other hand, Group RRSPs offer some appealing flex options for your workforce. Depending on where they are in life, the following options may be enormously valuable to your employees, helping them build a strong financial foundation for themselves and their families. 

These options include: 

• Spousal plans where contributions can be made to a spousal plan (within CRA limits)

• Home Buyer’s Plan, which enables eligible employees to withdraw funds to build or buy a home

• Lifelong Learning Plan, which supports eligible employees by allowing them to withdraw up to $20,000 to help fund education costs

What are the pros and cons for employers?

Group RRSP 

Pros: 

• Straightforward to administer once the plan is set up 

• Employees are more familiar with the RRSP concept, so buy-in is easier

• Offers lots of flexibility to appeal to diverse teams

• No minimum contribution rate

• Contributions are tax-deductible

Cons: 

• You may not end up funding your employees’ retirements as much as you’d hoped due to flexible withdrawal options

• Requires some administration time

• Your staff may expect you to match their contribution, which can create disappointment if you choose not to

• No vesting options

DCPP 

Pros: 

• Investment risk is transferred to the employee

• Contributions are guaranteed to bolster retirement savings

• Can help increase loyalty among staff members focused on retirement

Cons: 

• The lack of flexibility might make this package less appealing to a younger workforce

• Filing fees may apply when setting up the program

• Employers don’t have a choice when it comes to contributing

• More paperwork to include pension amounts on an employee T4s

What are the pros and cons for your employees?

Group RRSP 

Pros: 

• Can be easier to use and understand, since most are already familiar with individual RRSPs

• Flexibility of withdrawals — employees can choose how and when to use funds

• An investment professional manages the portfolio, easing pressure on your team

• If an employee leaves the company, they can transfer or withdraw funds to use as they please

Cons: 

• Temptation to withdraw may impact value at retirement 

• Withdrawals are taxed as income, unless taken out under the Home Buyer’s Plan or Lifelong Learning Plan

• It counts as salary and is a taxable benefit for employees

DCPP 

Pros: 

• Provides an attractive benefit that helps employees prepare specifically for retirement

• Employer contributions aren’t counted as salary at tax time (meaning contributions won’t impact their tax rate)

Cons: 

• Funds are typically locked in without much flexibility

• Upon leaving the company, funds can only be transferred to another locked-in account but not withdrawn

How to decide whether a DCPP vs RRSP is right for your employees

Try reviewing the pros and cons of each plan again, but this time, specifically with your team members in mind. A recent Ipsos survey shows 54% of Canadians do not have a financial plan for retirement. What could a DCPP add to their financial foundation? What could a Group RRSP offer them instead?

See if you can assess which plan seems most impactful for your team. Are many of your employees in life stages where they’ll need flexibility? Are they more established and focused on retirement? This analysis may help swing you to one side or the other.

Once you decide which plan is best for your employees, it’s a good idea to explore how much a GRSP costs employers compared to how much a DCPP typically costs. 

How to switch from one plan to the other

If your company is looking to switch from a DCPP to a Group RRSP or vice versa, you’ll need to pay attention to the requirements and legislation that govern each type of plan. 

For example, you’ll need to communicate to employees that funds in a DCPP can only be transferred to a locked-in product that has similar rules to ensure the funds are used only for retirement. However, a plan balance in a Group RRSP can typically be moved into other registered retirement products as long as an employee is still within personal limits. 

If you’re hoping to transfer from one type of plan to the other with the same provider you’re already using, you can just reach out to your representative to let them know. They’ll handle everything once you sign off on the transfer and you can focus on communication updates to your team. 

Instead, if you’d like to switch to a new provider, you’ll need to provide a letter of termination to your current plan provider. From there, the new provider will take over the transfer and you can get rolling on your communications.

How to get employees on board

Once you choose between a DCPP vs RRSP, you need to get your team enrolled. It’s time to engage them with the right information and lean on your group retirement provider for enrollment support. 

1. Get your team excited about your group retirement plan

Ditching financial worries and envisioning a sun-soaked retirement complete with umbrella drinks is exciting — when you draw a clear road map to get there. Focus on how the plan supports your team and the value it offers them in the long-term. 

2. Keep communication clear and consistent 

Empower your staff with plenty of information about the plan to encourage higher enrollment. 

Offer support for any steps that fall on their shoulders. Set up a resource hub on your website, send out emails, and ensure they have a contact to help them.

3. Set enrollment expectations

Boost enrollment numbers by working with your provider to show value to your workforce. You can also encourage employees to enroll by offering inclusive options such as socially responsible investing and Halal portfolios.

Time to explore your options and start building your employees’ financial futures. At Wealthsimple, we can help you choose the right plan for your company and support you through setup, transition, and onboarding.

Written By

Katie McGrath

Katie works with organziations across Canada who are interested in learning more about Group Retirement programs, sharing industry benchmarks, GRSP best practices, and the opportunity to start a new GRSP plan or transfer a legacy one into the Wealthsimple ecosystem.