DPSP vs RRSP: Which Group Plan is Right for Your Employees?
If you’re trying to decide if a DPSP or a Group RRSP is right for your employees, you’ve come to the right place.
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Group plans are a great way for you to attract and retain amazing talent, while your employees get some help achieving their financial goals faster. In your search for the right plan, you’ve likely come across the group registered retirement savings plan (Group RRSP or GRSP) and the deferred profit sharing plan (DPSP). When you compare DPSP vs Group RRSP, it’s clear they share many of the same benefits. But there are also some important differences between the two.
If you’re stuck trying to determine which group plan is right for your employees, you’ve come to the right place.
This article will walk through what each plan has to offer, the main differences between the DPSP vs Group RRSP, and the pros and cons of each, so you can make an informed decision about which plan is right for your employees.
What is a DPSP?
A deferred profit sharing plan (DPSP) is an employer-sponsored plan that is registered with the Canadian Revenue Agency (CRA). A DPSP allows you to share company profits with your employees. You can decide if you want to set up a DPSP for all employees or a select group.
Only you, the employer (also known as the plan sponsor), can contribute to the plan. Employees are not able to invest. Contributions are paid into a trust fund which is established by a trustee—this can be a bank, insurance company, or other financial services provider. The trustee is responsible for operating the plan and ensuring the payment of benefits are made to employees.
Employers can contribute up to the maximum contribution limit, which is 18% of the employee’s annual earned income or half of the money purchase (mp) limit, whichever is less. In years with no profit, no contributions are required. All contributions are tax-deductible for the employer and contributions grow tax-free for your employees. Employees are only taxed on contributions when they make a withdrawal.
Employees can use a DPSP in combination with other retirement savings plan options. However, employee RRSP contribution room is reduced by the DPSP contributions received in the previous year. For instance, if you contribute $1,000 to your employees DPSP, this will reduce their RRSP contribution room by $1,000 in the following year.
Since the DPSP is an employee-only plan, this means no company owners, relatives or spouses of owners, or anyone with more than a 10% stake in the company can participate. For instance, as the employer, your spouse or child could not participate in the DPSP plan. Some senior executives and leaders who have a high stake in the company may also be excluded.
What is a Group RRSP?
A Group RRSP is an employer-sponsored retirement savings plan. It’s exactly like an individual RRSP but is set up on a group basis, which provides a number of benefits.
Employees contribute to the GRSP with pre-tax dollars through payroll deductions. Contributions are invested into a basket of preselected investments by the GRSP administrator, typically an insurance company, bank or online financial services provider like Wealthsimple.
You can decide if you want to set up a matching plan where you match employee contributions (usually up to 3%–5% of their annual salary). You can also set up a flat employer contribution plan where you contribute a predetermined amount of money regardless of whether the employee participates. Or, you can establish a non-matching plan where the employee contributes what they want, and you don’t contribute anything.
Any contributions you make are considered taxable income for the employee. However, employees are able to enjoy tax savings on all contributions immediately, as opposed to waiting until tax time for a reimbursement from the government.
DPSP vs Group RRSP: What’s the difference?
When looking at DPSP vs Group RRSP, it’s clear both are group savings plans that provide opportunities to earn tax-deferred returns. But there are important differences that you’ll need to consider.
First, the DPSP only takes employer contributions. Employees can not contribute. With a GRSP, employees are encouraged to contribute and the employer may do so as well. These contributions happen regularly, usually on every payroll, versus a DPSP which can be monthly, quarterly, yearly, whenever you choose—or skipped when profits are low or in the red.
There are also differences in the ownership of plan contributions. When an employer contributes to a GRSP, the employee immediately owns that money. So, if you make a contribution and your employee quits the following day, they own the money in their GRSP.
With a DPSP, there is a vesting period. This is a hold (as long as two years) between the time you contribute and when the employee takes ownership. If your employee quits or is let go before the end of the vesting period, the money in the DPSP goes back to you.
Employer pros and cons: DPSP vs Group RRSP
There are several pros and cons to note when comparing the DPSP vs GRSP for you and your employees.
DPSP employer pros
Contribute when you want to. It’s up to you to determine when you want to contribute to the DPSP. You can allocate contributions monthly, quarterly, yearly, or whenever you choose.
Take advantage of the tax incentives. DPSP contributions are tax-deductible for the employer and are also exempt from federal and provincial payroll taxes.
Improve employee retention. You can protect DPSP contributions using the vesting period of up to two years. Though there is some academic debate on this topic, a common thought is that the vesting period can help to reduce employee turnover, as employees must forfeit the DPSP if they leave before the vesting period is complete.
Save money. If an employee leaves before the vesting period is over, the funds in the DPSP go back to the employer.
Provide employee incentives. Tying employee performance to profit sharing can be a strong incentive for employees to work hard.
DPSP employer cons
It’s an employee-only plan. Owners, their relatives, spouses, and anyone with a stake of 10% or higher is not allowed to have a DPSP. This can impact how you might reward senior-level leaders, especially if there’s a lot of extra profit.
Non-profit companies can’t participate. Since the DPSP is about profit sharing, only for-profit companies can participate.
May not be as appealing to talent. Both new and existing talent may look at the two-year vesting period and irregular payouts unfavourably, as an aspect of their compensation they can’t actually count on.
GRSP employer pros
Contribute what you want. You can decide if you want to match employee contributions, by how much, and, if need be, you can suspend the employer match at any time. You can also choose to have a non-matching program.
Can help to attract and retain employees. This is especially true if you offer a matching program.
Can move funds to other RRSP accounts. If you choose an unrestricted group plan, employees can move funds to other RRSP accounts (e.g. individual, trade).
More employee pros. Since there are many employee pros (see below), it may be easier to get employees excited and engaged with the plan—as well as new talent you’re looking to hire.
GRSP employer cons
No vesting period. Unlike a DPSP, there is no vesting with a GRSP. As a result, employees might not feel obligated to stay at the company in order to collect their rewards. In theory, this could reduce employee retention, though there is ongoing debate on this topic.
Subject to payroll taxes. Most employer contributions require payroll taxes for EI and CPP. Visit the CRA for more information.
Employee pros and cons: DPSP vs Group RRSP
Each plan also offers many benefits and some things to consider when it comes to your employees.
DPSP employee pros
Employer funded. Employees don’t have to contribute anything to receive full employer contributions. This means free money for the employee.
Short vesting period. The maximum two-year vesting period is a relatively short time. Meaning, employees only have to stay at the company for a maximum of two years. Some companies offer even shorter vesting periods or automatic vesting (no waiting period).
Immediate access. There is no waiting until retirement. Employees can withdraw funds whenever they want. However, they will be taxed at their current tax rate and will have to pay withholding taxes.
DPSP employee cons
Contributions can be unpredictable. Employers aren’t required to contribute when there are low or no annual profits, which means it’s difficult to rely on this as a retirement plan.
Reduces employee RRSP contribution room. Contributions to their DPSP reduces the RRSP contribution room.
GRSP employee pros
Simplicity. Payroll deductions make investing so easy. The entire process is automated and the money is extracted from employee paycheques before they even have a chance to see it (or spend it)!
Employee awareness. Employees are usually familiar with the RRSP which can help to limit confusion around how the plan works.
No minimum contribution. Employees decide how much or how little they want to contribute.
Lower management fees. Fees tend to be lower than individual RRSPs due to the pooling of employee assets.
Professionally managed. This is helpful for those who don’t feel confident about investing on their own.
Employer matching. Employees can take advantage of “free money” if employers choose to offer a matching plan.
Reduced income tax. Any money employees invest in their GRSP is immediately tax deductible, effectively lowering their taxable income.
No vesting period. GRSPs do not have a vesting period. This means, you own the money as soon as a contribution is made.
Versatile. Funds can be used for the Home Buyer’s Plan (HBP) or the Lifelong Learning Plan (LLP).
GRSP employee cons
Withdrawal limits. If the employer sets up a restricted plan, they can limit the employee’s ability to withdraw funds while they are actively employed with the company.
Limited options. Group plans can have more limited investment options than DPSPs.
Plan cancellation. The employer can cancel the GRSP at any time.
DPSP vs Group RRSP: How to decide which plan is right for your employees
If you’re still trying to decide which group plan is right for your employees, take some time to think about what you want to achieve. What is your main goal in offering a group plan? Do you want to help your employees save for retirement? Do you want to provide incentives to attract the best talent? Are you concerned about employee retention?
When determining what you want to achieve with your group plan, you can also consider the following questions:
Do you want your employees to be able to contribute to the plan? If yes, then go with the GRSP.
Do you want to contribute to your employee’s plan only if the company turns a profit? If yes, go with the DPSP.
Do you want company contributions to be vested to your employees immediately? If yes, then go with the GRSP.
Both plans have pros and cons. At the end of the day, it all depends on what you as the employer want to do with the benefit offering: help employees save for retirement and other life goals (GRSPs) or provide collective performance incentives (DPSPs).
How to switch from a DPSP to a GRSP (or vice versa)
Instructions for employers
It is possible to switch from one registered plan to another, including the DPSP and the RRSP.
The first thing you will need to do is determine which group plan you want to switch to and what plan provider (bank, online financial institution) you want to use.
Contact your current plan provider and connect them to your new provider. That new provider should do the heavy lifting for the transfer.
Be sure to communicate the switch with your employees, sharing the benefits of the new plan and your reasons behind switching. Give them adequate time to ask questions and decide what they want to do with their investments before making the change. When switching between plans, employees can cash out their DPSP or RRSP instead of transferring the money. However, the money must be reported as annual income and taxed accordingly.
Instructions for employees
You can assure your employees that if they don’t want to make the switch from one group plan to another, they also have the option to invest their money in an individual plan. A group DPSP and a GRSP can easily be switched to an individual RRSP providing the employee is 71 years or younger at the end of the year in which the transfer is made. For additional detail, you can refer them to this help article.
How to get employees excited about group benefits
Believe it or not, group retirement plans will not be top of mind for all of your employees. With retirement so far away, younger employees might not see the importance of retirement savings. Other employees may have had negative experiences with past group benefits plans that left them feeling confused or intimidated.
To engage your employees and get them excited about your group benefits plan, consider the following three tips:
1. Keep it simple
Before your employees can engage with a program, they need to be able to understand it. Help them out by creating an ongoing education program that outlines your company’s benefits in plain language. A government of Canada study also found that providing simplified versions of sign-up forms and providing verbal encouragement (referred to as a verbal “nudge") increased employee participation by 17%.
2. Focus on the benefits
When you present your plan, focus on the specific advantages. Why should employees be excited? What does this plan do for them? How will it make their life and the life of their family better? If you offer a company match, be sure to highlight this and explain how it can help your employees achieve their retirement goals faster.
3. Consider auto-enroll for new hires
Auto-enrollment of new employees into a company retirement program can also help to increase participation. A Vanguard research study found that new-hire plans that used auto-enrollment features had a 93% enrollment rate, compared to a 47% for voluntary enrollment plans. Humans are hardwired to follow the path of least resistance. This is why people are always looking for the easiest way to do something. Auto-renewal removes a barrier and simplifies the group plan enrollment process. Instead of giving employees the option to opt-in, you give them the option to opt-out.
DPSP vs RRSP: Which plan will you choose?
The group plan that is right for you and your employees ultimately depends on what you are hoping to achieve.
If you want a simple way to encourage your employees to save for retirement or the purchase of their first home, then the GRSP is a great fit. If your goal is to incentivize employees to stick around for a few years and you only want to contribute when you turn a profit, then the DSPS might be the way to go.
The bottom line is the DPSP and group RRSP both offer benefits that can help you to attract talent and assist your employees in reaching their financial goals faster.
Gren leads the marketing efforts for Wealthsimple Work, showcasing the amazing work our customers do to bring innovative benefits and employee experiences to their organizations.
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