DCPP vs Group RRSP: how to choose a plan for your team

Here's the short version before the deep dive: a Defined Contribution Pension Plan (DCPP) locks employer-funded contributions in for retirement and requires you to contribute at least 1% of pay; a Group Registered Retirement Savings Plan (GRRSP) is voluntary, usually lets employees access funds anytime, and leaves the contribution amount up to you. 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, 69% of Canadians would take a job with a pension over one that doesn’t but pays more— so the real question is which of these two fits your team.

Here, we'll keep things clear and stick to two of the most common workplace plans: the group RRSP and the defined contribution pension plan (DCPP). We'll walk through:

• What a group RRSP and a DCPP actually are

• The key differences, plus the pros and cons of each

• How to pick the right plan for your employees

• How to switch from one to the other

• How to get your team excited about your choice

Get ready for a crash course.

What is a DCPP?

A DCPP is a registered pension plan (RPP) whose payout depends on how much is contributed and how the investments perform before retirement. Unlike a Group RRSP, a DCPP makes you the legal plan administrator — you carry fiduciary responsibility, though an external provider such as an insurer or financial institution typically handles day-to-day operations, investment management, and member communications. 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.

What is a Group RRSP?

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

DCPP vs Group RRSP: how they compare

There are a few similarities between the two types of retirement plans. Dig deeper, though, and you’ll notice some big differences in a few critical categories:

Who's eligible, and is enrollment mandatory?

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.

One key difference: participation in a Group RRSP is always voluntary for employees, whereas a DCPP can be mandatory, depending on the employer’s plan terms and provincial rules.

How much can you contribute, and by when?

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 Canada Revenue Agency (CRA) considers them salary when paid out. This distinction bumps up the salary, increasing the amount of Canada Pension Plan (CPP) 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.

Who chooses the investments?

With a DCPP, either the employer, the plan member, or both can make investment selections within the plan. With a Group RRSP, the member is always responsible for choosing their own investments from the menu of funds the employer and plan provider make available. 

Can employees withdraw or transfer the money?

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.

How are contributions taxed and reported on the T4?

With a DCPP, you as the employer will need to report a pension adjustment on the employee’s T4 (Box 52), and your DCPP contributions are not a taxable benefit. With a Group RRSP, your contributions are a taxable benefit reported on the employee’s T4 (Box 14 and code 40) — not in Box 20 — while the plan provider issues the RRSP contribution receipts employees use to claim the offsetting deduction. Employees’ own payroll-deducted RRSP contributions don’t need to be reported on the T4 — the provider’s receipt covers those.

When do employees become vested?

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.

What are the retirement income options?

What happens to the money if an employee passes away?

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.

How flexible is each plan?

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 make a Group RRSP a helpful part of your employees’ financial foundation, supporting them and their families.

These include:

• Spousal plans where contributions can be made to a spouse or partner’s RRSP (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

• Familiarity makes employee buy-in easier

• Flexibility appeals to diverse teams

• No minimum contribution rate

• Tax-deductible contributions

Cons:

• Requires some administration time

• Matching expectations vs. realities may lead to employee disappointment

• No ability to implement vesting

• For unrestricted plans, employer contributions are a taxable benefit, adding to payroll costs (CPP/QPP, EI, and income tax withholding)

DCPP

Pros:

• Contributions are guaranteed to bolster retirement savings

• Can help increase loyalty among staff members focused on retirement

Cons:

• The lack of flexibility can 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

• Withdrawal flexibility — depending on the plan's rules, employees may be able to access funds during employment (some plans lock the employer's contributions until you leave)

• A plan provider offers a curated menu of funds and ongoing support, though members choose their own investments

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

Cons:

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

• Employer contributions are treated as employment income (a taxable benefit). Because they count like pay, they also increase the CPP/QPP — and, in a plan where the money can be withdrawn, EI — deducted from your pay.

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 or Group 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.

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 suits your employees, it’s a good idea to explore how much a Group RRSP 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. 

If you’re hoping to transfer from one type of plan to the other with the same provider you’re already using, you can 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.

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.

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.

Set enrollment expectations

Boost enrollment numbers by working with your provider to show value to your workforce. You can also encourage sign-ups by offering inclusive options such as socially responsible investing and Halal portfolios. Explore the plan options available to you and consider how each one can support your employees through setup, transition, and onboarding.