Employers who are committed to the success of their business understand the importance of looking after their team.
Financial wellness, including saving for retirement, is a top concern for many workers today. One of the best ways to support your team, while encouraging smart financial decisions, is by offering a well-structured Group RRSP.
A Group Registered Retirement Savings Plan (Group RRSP) is a retirement savings plan sponsored by the employer. In general, Group RRSPs are easy to set up and maintain and are a popular perk offered by many small businesses in Alberta. Interestingly, despite the economic challenges of the pandemic, household savings rates in Canada are still at a record high, recorded at nearly 15% in the third quarter of 2020.
Unlike employee benefit plans, there is no annual renewal for Group RRSPs. Nevertheless, it is important to revisit these plans on a regular basis to ensure that they continue to be in line with your business culture, values, and objectives. Here are a few practical tips for business leaders to think about:
1. Direct the employer’s contribution to a DPSP (Deferred Profit-Sharing Plan)
We often see plans where the employer contributions go into their employee’s RRSPs. The problem with this approach is that the employer’s contribution is immediately vested with the employee. This means that if the employee leaves the company, they take the employer’s contributions with them.
A better strategy is for employers to direct their contributions into a Deferred Profit Sharing Plan (DPSP). Similar to an RRSP, a DPSP is an employer-sponsored profit-sharing plan used for retirement savings among employees. The reason we recommend setting this up is that a DPSP will give the employer the ability to add a vesting period. A vesting period will protect your business in case an employee leaves your company within the first two years of employment. In this situation, the employer can take company contributions back. This is a good way of not only protecting your business but also provides an incentive for team members to stay longer with the organization and to reward loyalty.
2. Set up tiers based on years of service
Another way to encourage employee loyalty with Group RRSPs is to set up tiers based on years of service. Typically, employer contributions range between 3-5%. Rather than offering the same contribution of say 3% to everyone, consider different amounts based on years of service. For example, employees that have been with the company less than 3 years would receive a 3% maximum employer contribution. For those that have been on your team longer than 3 years, increase the contributions to a higher percentage (4% or 5%.) This strategy sends the message that as the employer, you value loyalty and longevity.
3. Avoid unmatched contributions
A common mistake when it comes to Group RRSPs is choosing not to match your workers’ contributions. In other words, a plan is set up where employees have the option to contribute to a Group RRSP but there is no equivalent contribution from the employer. Unfortunately, this type of plan is likely to fail. A matching employer contribution acts as a strong incentive for staff to participate in the plan.
Another mistake of Group RRSPs is the opposite problem: the employer pays a flat amount regardless of whether employees contribute or not. We do not recommend that businesses do this either. If an employee cares about saving for retirement, they will participate. For employers that want to be efficient with their investments, don’t give money to people who don’t value saving and investing. An employer’s money is better spent on people who appreciate it.
Lastly, don’t forget to promote your Group RRSP Plan
Speaking of appreciation, Group RRSPs are a benefit that needs to be promoted continuously in order to be valued. Education and awareness are key. Employers should constantly be telling employees that a Group RRSP is there for them while sharing practical information about retirement planning and saving in general. Don’t have the time or resources to promote your Group RRSP plan? Bring your benefits advisor in to help. At Cornerstone Benefits, this is something that we love to do for our clients.
When employees come to understand that the matching contribution from their employer is giving them a 100% rate of return, they begin to see it as an invaluable benefit.
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This article is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to specific situations. Always consult with professional advisors.