The Ins and Outs of Group RRSPs...
Group RRSPs are growing because they have far fewer administrative requirements than pension plans and employers can off-load the responsibility to the financial institutions that run them. At the same time, employees appreciate the convenience and immediate tax relief that a group RRSP can bring.
Unlike defined benefit pension plans, group RRSPs don't lock employers into fixed contributions, a potentially heavy burden during economic downturns or recessions.
The majority of group RRSP plans involve employer contributions between 1% and 4% of the employee's annual income. Some employers are very generous, such as one plan where employees contributed 8% of their income to get a 10%
contribution from their employer. Others, mostly smaller companies, set up the plan to help employees benefit from lower management fees, but don't make any contributions themselves.
Employees get several other notable benefits. First, many companies will provide Group RRSP plan members lower management fees as the group is managed as one providing them with the economies of scale, allowing investment
companies to reduce their overhead costs. On average this will save the plan member between 1% to 1.25% in management
fees.
Second, employees who make contributions to a group RRSP can fill out Form T1213 to have their taxable income reduced at source. Rather than receive the tax benefit after filing their income tax returns, these employees get immediate tax savings on every paycheque.
Group RRSPs can also be used as a tool for employers to retain current employees as well as attract new ones. Many employees appreciate that their employer is doing something that forces them to put money aside for their retirement, something they may not do on their own. The reality is many people, if not helped, will end up not having enough money to retire. In some countries like Australia the government now requires employers to provide such plans. In Canada employers could wipe their hands of it, but most employers would like to see their employees succeed and in the end retire comfortable. |
