Group retirement plan

A group retirement plan may be offered by your employer and is generally set up as a group Registered Retirement Savings Plan (RRSP) or a deferred profit sharing plan (DPSP). Some employers also may offer group Tax-Free Savings Accounts (TFSAs). Many company group retirement plans are setup where employee contribute a percentage of their salary, which attracts a company match which increases the total contribution amount.

Participation in a group retirement plan makes saving for retirement a bit easier as contributions are deducted directly from your paycheque and the company match increases the savings rate.

All contributions (both yours and your employers) are tax-deductible to you – and all investment earnings are tax-sheltered.

Like an individual RRSP, you decide how your money is invested.

Group RRSPs

Just as the inflexibilities of DB plans prompted a migration to less-risky (for the employer) defined contribution pension plans, rigidities in pension regulation and legislation have sparked a move toward more flexible Group RRSP arrangements.

A Group RRSP is similar to individual RRSP, with a few exceptions. The primary one is that plan members may enjoy lower-cost investing thanks to the buying power of the plan sponsor, despite the fact that monthly contributions by individual plan members may be quite small. Still, these are considered "sticky assets" by the plan's manager, most often a life insurance company, that will stay put until the employee retires. The tradeoff, to keep costs down, is a limited menu of investment options.

Only 18% of group RRSPs have mandatory participation. However, even if participation is voluntary, the employer matching funds makes participation attractive. Other advantages are automated payroll deductions (often with pre-tax dollars), investment options that can be competitive, and access to retirement planning tools.

Investing in a group RRSP

Learning the basics

You will be making investment choices in a group RRSP, so be sure to read about portfolio design and construction, asset allocation, and rebalancing.

Watch the fees

Management fees in group RRSPs are called "Investment Management Fees" (IMFs); this is more or less the same concept as management expense ratios for retail mutual funds, although "fund operating expenses" also sometimes charged on top of the IMF (e.g. ). Fees for different funds in the investment menu of group RRSPs can sometimes be difficult to find, but make sure you understand what you are paying, since you want to keep as much as the investment returns for yourself as possible. If the fees in your plan are too high, or you don't like the investment options, consider contributing only enough to the group RRSP to get the full employer match, and invest other retirement savings in an individual RRSP or TFSA.

One-fund solutions

In many group RRSPs the default option is a target date fund or a balanced fund. With a target date fund, you pick your approximate retirement date and the fund automatically adjusts it's asset allocation as retirement approaches, lowering the proportion of equities and increasing the proportion of fixed income investments. With a balanced fund (a.k.a. "target risk" or "asset allocation" funds), the asset allocation stays constant. These one-fund solutions will appeal to people who want to minimize their work or have little investing knowledge. Be sure to understand what the fees are if you opt for such a product.

Simple portfolios

If you want more control, and perhaps lower fees, consider building a simple index portfolio in your group RRSP using index funds, which should be among the least expensive options in the menu. The following table shows a three fund portfolio using index funds available in the University of Winnipeg Group RRSP:

Asset Class Index fund Amount Domestic stocks TDAM CDN EQUITY INDEX FND 25% Global stocks TDAM GLOBAL EQUITY INDEX 25% Domestic bonds TDAM CDN BOND INDEX FUND 50%

This example has a weighted average cost of 0.30% (December 2016).

In no index funds are available, you can still combine a Canadian bond fund, a Canadian equity fund, a US equity fund and an international equity fund in suitable proportions, choosing the lowest-cost option for each asset class in the fund menu. The international equity and the US equity funds can be replaced by a global equity fund if available.

Leaving your employer

Typical options when leaving your group RRSP are:

• cash out the account (with major tax consequences)
• transfer it to another RRSP plan, either an individual RRSP or the group plan at your new employer
• convert it to a Registered Retirement Income Fund (RRIF)
• purchase an annuity

The last two options are relevant for people who are retiring and want to obtain an income.

Deferred profit sharing plans (DPSPs)

A deferred profit sharing plan (DPSP) is a plan designed to enable an employer to share a portion of profits with arm's length employees. The payments made by the employer must be made to a trustee in trust for the benefit of the employees or former employees of the employer, as provided under subsection 147(1) of the Income Tax Act.

Capital Accumulation Plan (CAP) guidelines

Sponsors and service providers of group RRSPs and DPSPs are expected to follow voluntary guidelines from the Canadian Association of Pension Supervisory Authorities (CAPSA), including:

• Guideline No. 3 - Guideline for Capital Accumulation Plans (2004)

See also

• Pension plan
• Defined benefit pension plan
• Government retirement benefits
• Employee benefit

Further reading

• Financial Wisdom Forum topic: "Group Retirement Plan - Cutting Costs (aka: cost matters)"
• Financial Wisdom Forum topic: "Group RRSP - Questions"
• Financial Wisdom Forum topic: "Employer plans, how to choose funds?" (started November 2, 2015)

External links

• Financial Consumer Agency of Canada, Pillar 3: Employer pension plans
• Ontario Securities Commission, Group RRSPs
• Ontario Securities Commission, Deferred Profit Sharing Plans (DPSPs)
• Service Canada, Profit Sharing Plans including DPSPs
• Jim Yih, Three investment strategies for your Group RRSP plan
• Les Affaires, REER collectif : pesez le pour et le contre