Wealthsimple Work provides employers with a modern financial wellness benefit for employees.
Talking group retirement can sometimes feel like a completely unfamiliar language.
And no wonder that’s the case! The group retirement space is riddled with acronyms, codes, and words you’re not hearing everyday. It can leave somebody trying to understand their retirement options entirely confused.
But not anymore. This article will go over every term you need to know about retirement — you’ll be speaking the language in no time.
A benefits broker is a professional that specializes in employee benefits. This person would work with an employer to help them build out a benefits package. They know what benefits are available in today’s market, the vendors that provide them, and help to break down pricing.
A Defined Benefits Pension Plan (DBPP) is a type of pension plan that involves your employer promising a specific pension amount. This is a specific amount of money an employee receives for retirement, and the amount in a DBPP can vary between employees. The amount is typically determined by a formula that takes into account earning history, how long they have been with the company, and age.
In Canada, a Defined Contribution Pension Plan (DCPP) is a retirement savings plan that offers benefits to employees based on their contribution levels before retirement. The amount of money you put into a DCPP is defined, but the final amount you receive at retirement age is not.
If you want to read more about DCPPs, you can click here.
A Deferred Profit Sharing Plan (DPSP) is an employee-sponsored retirement plan. This plan needs to be registered with the Canadian Revenue Agency (CRA). An employer would use a DPSP to share company profits with employees — either the entire employee base or just a select group of employees. Employers are the only ones allowed to contribute to DPSPs. Contributions are paid into a trust fund, established by a trustee (a bank, insurance company, or other financial service provider).
The max contribution limit for employers is 18%, and years where the company does not make a profit do not require any contributions to be made. Since a DPSP is an employee-only plan, company stakeholders, relatives or spouses of owners, or anything with more than a 10% stake in the company cannot participate.
If you want to read more about DPSPs, you can click here.
An employee contribution is the amount the employee chooses to contribute to a savings or retirement plan through a Group Retirement Savings Plan (GRSP).
Let’s look at an example. Imagine an employer offers a GRSP for their employees. The employee contributes $50 to the account each pay period. That $50 is the employee contribution.
An employer contribution is the amount the employer has to contribute or chooses to contribute to a savings or retirement plan for their employees.
Let’s look at that same example. Imagine an employer offers a GRSP for their employees. The employer contributes $50 to the account each pay period. That $50 is the employer contribution.
A fiduciary is a person or organization, who, acting in the best interests or another person or organization, is charged with managing assets on behalf of that individual or organizational client. A fiduciary is ethically, and likely legally, bound to make recommendations that are in the best interests of those to whom they have a fiduciary obligation.
A fiduciary duty arises when a person or an organization places their trust in another exercise its expertise and fulfill a certain obligation or mandate. In the example of Wealthsimple, our Portfolio Managers are licensed fiduciaries, meaning that our clients’ interest always precedes that of Wealthsimple.
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A Group Retirement Savings Plan (GRSP) is often also referred to as a Group RRSP (Registered Retirement Savings Plan). It’s nearly identical to an individual RRSP, but members receive benefits through being in a group plan.
Employees are able to contribute to their GRSP with pre-tax dollars through payroll deductions — it comes right off their pay cheque and goes directly into the account. Contributions are then invested into a basket of investments by the plan administrator. The administrator is typically an insurance company, bank, or financial services provider like Wealthsimple.
If you want to read more about GRSPs, you can click here.
A matching plan is a type of GRSP where employers match the contributions put in by employees. A typical matching plan means employers do not contribute unless employees do — but that means their contributions are like free money for employees! Employers typically only match up to a certain percentage of the employee’s salary.
Let’s look at the same example as before. Imagine an employer offers a matching plan as part of their GRSP. If an employee contributes $50 to their GRSP per pay period, the employer will also contribute $50. The employee’s account is now at $100 and they only contributed $50!
A management expense ratio (MER) fee is the cost of investing in an investment vehicle, whether it’s a mutual fund or an exchange-traded fund (ETF).
If you want to learn more about MER fees and Wealthsimple, you can click here.
A provider is the secondary organization that provides the GRSP. This is typically an insurance company, bank, or other financial service provider.
A Pooled Registered Pension Plan (PRPP) is a group retirement option that is offered outside the traditional workplace. The Pooled Registered Pension Plan (PRPP) is a retirement plan available for individuals, including individuals who are self-employed.
With a PRPP, contributions are put into a larger, pooled, pension plan. Members of a PRPP get the benefits of a group retirement plan this way — this includes lower administrative costs. A PRPP is also flexible and moves with members from job to job.
A Registered Pension Plan (RPP) is an employer-established group retirement plan that is registered with the Canadian Revenue Agency (CRA). Employers are responsible for establishing the RPP with a financial institution and choosing how the money is invested. Employers are also required to contribute.
There are two types of RPPs:
Defined Benefits RPP: This plan specifies a guaranteed pension amount for employers. The amount is determined based on a formula that considers individual employee salary and length of employment. Both employer and employee contribute to this plan. No matter how the investments in an RPP perform, an employer is required to pay out the predetermined pension amount to employees upon retirement.
Money Purchase RPP: This type of RPP allows both employer and employee to contribute to the plan without a specific pension amount set. Employee is typically the primary funder, and they contribute a set percentage of their salary.
If you want to read more about RPPs, you can click here.
A sponsor is the organization that promotes or brings in a retirement savings program to a workplace. In most cases, the sponsor is the employer or organization.
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TFSA (individual vs group)
A Tax Free Savings Account (TFSA) is an account that allows Canadians over 18 to set money aside tax-free. There is a contribution limit on a TFSA, but it is a roll over amount. This means that unused contributions roll over every year from your 18th birthday (or 2009 — whichever came second!).
There are both individual and group plans available for TFSAs. A Group TFSA is typically managed through a workplace, where an individual TFSA is managed by the individual.
It’s important to note that the contribution limit for your TFSA and Group TFSA is shared. The annual limit is $6,000/year. Assuming you maxed out your contributions every year previously, you would only be able to contribute $6,000 total between the two accounts — not $6,000 per account.
With these definitions in your pocket, you'll be comparing RPP and GRSPs (and everything in between) with no issues!
Katie oversees all things content for the Wealthsimple Work team, creating resources that helps employers big and small encourage financial wellness within their own teams.
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