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Trying to understand how one group savings plan compares to another and which plan is best suited to meet your goals can feel like a steep mountain to climb.
But, don’t worry. You aren’t alone on this trek. Think of this article as your friendly mountain guide here to help you get to the top of the retirement plan mountain. Once you’ve finished reading, you’re likely to have a clearer view of which plan is best suited to your goals: a Registered Pension Plan (RPP) or a Group Registered Retirement Savings Plan (Group RRSP).
We’ll break down the differences between an RPP and an RRSP, take a look at the pros and cons of each, and list top considerations to help you decide what’s best for your workforce.
What is a Group RRSP?
A Group Registered Retirement Savings Plan (Group RRSP) or GRSP is one of the most popular employer-sponsored retirement savings plans in Canada. A GRSP is similar to an individual RRSP except it permits employer matching, provides automatic contributions directly from an employee paycheque and immediate tax savings, and typically offers lower management fees due to the pooling of assets.
As the employer, you are responsible for choosing the GRSP administrator, which is typically an insurance company, bank or online financial service provider like Wealthsimple. You also determine which investment options are available to your employees.
In a GRSP, employees contribute pre-tax dollars through payroll deductions. Contributions are tax-deductible and investments are tax-sheltered until the money is withdrawn. You can choose to set up an employer matching program where you kick in a percentage that parallels the employee’s contributions up to a certain amount (usually around 3% to 5% of their annual salary). Or, you can choose to set up a non-matching plan where you don’t contribute anything, but instead provide a convenient way for employees to contribute and build savings.
What is an RPP?
A Registered Pension Plan (RPP) is an employer-established group retirement plan that is registered with the Canadian Revenue Agency (CRA). As the employer, you are responsible for establishing the plan with a financial institution. You also choose how the money is invested and are required to contribute to the plan.
There are two types of RPP: defined benefits RPP and money purchase RPP (also known as defined contribution RPP). A defined benefits RPP specifies a guaranteed pension amount. That amount is established using a formula that considers variables like employee's salary and length of employment. Usually, both you and your employees will contribute to the plan. Employer contributions are adjusted to match this amount and there is no contribution limit.
A defined benefit RPP comes with a level of risk for employers because you are responsible for paying your employees their predetermined pension, regardless of how the investments perform.
A money purchase RPP permits both employer and employees to contribute without setting a specific pension amount. The employee usually acts as the primary funder, contributing a set percentage of their salary up to a maximum (18% of employment income, just like with RRSPs). All employer contributions are exempt from payroll taxes. Upon retirement, it’s up to the employee to use the funds as they see fit; there is no set pension schedule.
A money purchase RPP is typically seen as less risky for employers because no guaranteed pension amount has to be met.
Group RRSP vs RPP: 3 main differences between the two plans
On the surface, the GRSP and RPP might seem quite similar. They are both registered group retirement savings plans that offer tax benefits and share a goal of helping employees to save for their future. However, once you get to know the two plans a little bit better, you will see that there are several important differences between the RPP and GRSP.
A GRSP can be simpler to administer than an RPP because it is less regulated. The RPP is subject to federal and provincial benefits standards legislation. This can mean more hoops to jump through if, for some reason, you had to suspend the pension program. You can read more about the pension rules that apply to your province on the Government of Canada website.
A GRSP offers more flexibility than an RPP. A GRSP gives employees the option to withdraw funds to use in the Home Buyer’s Plan (HBP), the Lifelong Learning Plan (LLP), or for some other personal reason. The RPP does not offer a similar program and RPP plans that are locked-in prevent employees from withdrawing money unless they are terminated, retire, or pass away.
While an RPP, specifically the defined benefits plan, might not provide your employees with the freedom to withdraw money whenever they need it, it does come with the promise of a guaranteed pension for life and, that’s a pretty sweet (and increasingly rare) deal. And both types of RPPs also remove the temptation for employees to dip into retirement funds for other reasons, which means they can be more likely to have these funds available in their harvest years.
Employers pros and cons: Group RRSP vs RPP
There are many pros and cons to consider when deciding between a Group RRSP vs RPP and you want to look at each one to find the best fit for your company goals.
Group RRSP Employer Pros
Simple to administer
The employer can define the contributions and choose to add or remove employer matching at any time
An incentive to attract new talent and retain employees, especially if you offer a matching program
Less regulated than an RPP which can make it easier to suspend if necessary
Less risk since the payout amount is based on investment performance (i.e. not guaranteed)
Group RRSP Employer Cons
Employer contributions require payroll taxes for employment insurance and Canada Pension Plan premiums (visit the CRA for more information)
Employees may be disappointed if the GRSP doesn’t provide matching
Funds can be removed from unrestricted plans and used for something other than retirement
RPP Employer Pros
Contributions are a deductible expense
In some provinces, you can implement a vesting period (if an employee quits before the end of the vesting period, the money goes back to you)
An incentive to attract new talent and retain employees, especially if you offer a defined benefits plan
RPP Employer Cons
Administration costs for defined benefits plans can be high compared to the cost of other group plans
The employer takes on a huge amount of risk if offering a defined benefit RPP because you can’t predict how the investments will perform
Complex to administer due to federal and provincial benefits standards legislation
Employee pros and cons: Group RRSP vs RPP
There are also several pros and cons to consider when deciding if the group RRSP vs RPP will best fit the goals of your employees.
Group RRSP Employee Pros
Easy to invest with automatic payroll deductions
Popular and familiar program that can help employees feel more confident about how the plan works
Up to the employee to decide how much they want to contribute — no minimums
Potential for free money if there is an employer matching program
Lower management fees than individual RRSPs due to pooling of employee assets
Employees have the option to withdraw their funds to use in the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP)
Can make spousal contributions
Group RRSP Employee Cons
The employer can stop matching or cancel the plan at any time
The employer can also limit the employees' ability to withdraw funds
Temptation to withdraw funds earlier than retirement (although fees may apply)
No guarantee of investment performance
RPP Employee Pros
Employers are required to contribute to the plan
Some plans also have a matching program
Heavy provincial and federal regulations make it more difficult for employer to dissolve the pension program
Some RPPs guarantee a set pension amount for life
RPP Employee Cons
Can’t access the money until retirement
Must be a full-time employee to qualify
For some RPPs, there is a contribution limit (18% of employees annual salary)
Contributions to your RPP will likely reduce RRSP contribution limit
Some provinces don’t legislate immediate vesting (meaning if an employee leaves the company before a certain date, those RPP funds could return to the employer)
No opportunity to make spousal contributions
Group RRSP vs RPP: How to decide which plan is right for your employees
The right retirement savings plan will depend on the specific goals for your company and your employees. When trying to decide between the group RRSP vs RPP, consider the following variables.
Size of your business. For small business owners, a GRSP might be a simpler choice because it’s not subject to the same provincial and federal pension legislation as an RPP. This can make the GRSP a more flexible option to work with if you have to make any changes or even suspend the plan.
Risk tolerance. A defined benefit RPP comes with a higher level of employer risk. If you guarantee your employees a set pension then you are responsible to pay for it regardless of how the investments perform.
Age and employee characteristics. Consider talking to your employees to get a sense of their long-term financial goals. Do they want to wait until retirement before they can access this money? Or, do they want a retirement savings plan that offers a bit more flexibility? Depending on the age of your employees and the stage they are at in their lives, they might prefer a plan that provides the opportunity to withdraw their investments to fund a home or continue their education.
Employee retention. While both a Group RRSP and RPP are great plans to attract employees, an RPP plan might provide extra incentive to stick around, specifically if you offer a defined benefits plan. Since the guaranteed pension amount is calculated using the length of employment, the longer an employee stays, the higher their guaranteed pension amount will be.
How to switch from an RPP to a GRSP
It is possible to transfer an RPP to a Group RRSP and vice versa. However, there are a lot of legislative requirements associated with an RPP, which can make switching from an RPP to a GRSP a fairly complicated process.
Instructions for employers
To end your RPP, a partial wind-up (also called a termination) must occur. The first step in this process is to contact your plan administrator. They can begin to walk you through the lengthy wind-up process.
If you decide to end the plan, you will need to notify all of your employees and anyone that might be affected by this process. You are required to create a statement that outlines your employees’ entitlement under the plan as well as other specific information that is outlined in the Pension Benefits Act.
Once the plan is “wound up,” employees have the option of transferring their money to an RSPP or another registered pension plan that accepts transfers. If you have employees who choose to not transfer their money to another registered plan then you have a few options. You can purchase annuities from an insurance company for eligible employees or you can pay all immediate and deferred pensions from the pension plan.
Reach out to an insurance company, bank or online financial service provider like Wealthsimple to set up a GRSP.
Instructions for employees
With an RPP, employees can not initiate a transfer unless they have been terminated, retire, the plan is terminated, or they pass away.
If the employer is terminating the pension plan, then employees 71 years and under can transfer a lump sum amount directly between an RPP and an RRSP providing the money is not in a locked-in fund. In transferring from one registered account to another, they likely won’t have to declare the amount as income. However, there are limits to how much can be transferred from a defined benefit RPP to RRSP. In this scenario, employees also have the option to withdraw their cash. However, this money will be taxed as income.
If the money is in a locked-in fund then it can only be transferred to a Locked-In Retirement Account (LIRA), Life Income Fund (LIF), or a Lock-In Retirement Income Fund (LRIF), where permitted.
If you want to provide your employees with more information on how to transfer their money from an RPP to an RRSP, check out this article.
How to get employees excited about whichever offering you choose
There is no question that the Group RRSP and RPP are both amazing benefits that can help you to attract and retain talent. To get your employees excited about your group plan try implementing the following tips:
1. Focus on the pros
Every benefit plan comes with pros and cons. To engage your employees in your group plan, stay positive by focusing on the pros. What aspects of your plan will help to improve the lives of your employees and their families? If you offer a defined benefits plan, focus on the guaranteed pension that will support your employee and their family into the future. If you choose a GRSP, highlight the flexibility of the plan with the Home Buyers Plan and the Lifelong Learning Plan.
2. Keep it simple
Group benefits programs can be very complex, especially for employees who might only think about once or twice a year. To harness your employees’ interest and engagement, explain your plan in a way that is easy to understand. You can use a combination of visual presentations, written documents, and questions and answer sessions to accommodate different learning styles.
3. Provide reminders
Often when people are faced with something that they don’t understand, they ignore it and then forget about it. It’s not an ideal coping mechanism but it is a common one. To combat this, provide frequent reminders about your group benefits plan, especially during initial enrollment and when onboarding new staff. Also, try to keep conversations about group benefit opportunities going all year round and give employees the opportunity to ask questions.
Group RRSP vs RPP: Which plan is right for you?
Regardless of which option you choose, providing a benefit plan of any kind is a great way to help your employees save for their future. When choosing between the GRSP and RPP consider the complexity of the plan, how much flexibility you want to provide to your employees, and how much risk you are willing to take on.
If you want to ensure that your employees use the plan investments for retirement, then an RPP will provide that assurance. If you would rather give your employees more freedom over how they decide to use their investments, then a GRSP is likely the better choice.
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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