If you own a business, you are constantly faced with choices regarding how you compensate your employees. In the land of human resources, what you are thinking about is often referred to as the total rewards you offer your employees. On top of an employees salary, total rewards include things like recognition, skill development, work-life balance, and the benefits that you offer. One of the key benefit plans that you can offer to your employees is called ‘workplace savings plans’ in general terms. These are plans that you establish to help employees save for retirement. If you are an employer in Ontario, you have a few different options as to how you can provide retirement savings plans to your employees. I thought it might be worthwhile to highlight a few of the more common options so you can compare them to one another to help you figure out which is best for your business.
In This Article:
- Let’s Define The Players
- The Defined Benefit Plan and Some Historical Context
- Plans to Consider for Your Small to Medium-Sized Business
- Defined Contribution Pension Plans
- Group RRSP’s
- Deferred Profit Sharing Plans (DPSPs)
- How to be Strategic with Your Benefit Offering
- The Bottom Line
Let’s Define The Players
To make sure that we’re all on the same page, here are the names and quick descriptions of the workplace savings plan options we are going to talk about:
| Defined Benefit Pension Plan (DB) | A savings plan where there is a formula applied, typically including years of service and earnings, that determines the amount of payment that you will receive as income in retirement. |
| Defined Contribution Pension Plan (DCPP) | A savings plan where there is a formula that outlines how much money will be deposited into the plan by both the employer and the employee. After it is deposited, the individual plan member controls how the money is invested. The deposits plus investment returns are used to generate income in retirement |
| Group RRSP (GRRSP) | A savings plan that is offered via payroll deduction. The employer may contribute to it as well, but this is not required. The employee controls the investment selection and contributions plus growth is used to generate retirement income. |
| Deferred Profit Sharing Plan (DPSP) | A savings plan only contributed to by the employer. Can be set up so that it is linked to the profitability of the business. |
Armed with the knowledge of what types of savings plans we are going to look at, we can delve into which plans make sense for you.
The Defined Benefit Plan and Some Historical Context
Back in the 1970s, starting a job often meant staying for 30 years and retiring with a gold watch. Many people would retire with the security that a defined benefit pension plan provided for them. Today, the rules of work have completely changed; you don’t see this happen nearly as often. People seem less likely to work for a single employer for many years, so that the brass ring of a pension in retirement seems less achievable than ever. Add to this that the risk associated with offering a defined benefit pension plan is simply too much for many employers to provide. Defined benefit pension plans are most often seen today in the public sector; think of jobs in healthcare, education, and municipal or provincial employees as ones that are likely to have this style of pension. Defined benefit plans have a guaranteed income that they generate. For example, if you look at the plan offered to Ontario Municipal Employees via OMERs, the formula is based on your years of credited service in the plan. They also use the income that you earned during the best five consecutive years as a member of the plan. They then apply these two amounts to a formula (you can see it here), and it determines how much income you will get in retirement. This income is guaranteed. The issue for many small- to medium-sized employers is that in this type of plan, all of the risk is on the employer. They need to make sure that the investments backing the plan are able to fund all of the future liabilities of the plan. This is why many small and medium-sized employers simply can’t offer this style of pension. The risk to the business is simply too high.
Plans to Consider for Your Small to Medium-Sized Business
If you are looking at a benefit that can really aid you in attracting and retaining employees to your company, don’t sleep on the idea of workplace savings plans. In 2018, one study estimated that about 69% of Canadian workers said that when choosing a job, they would take one with a group RRSP over one without it. With that motivation for business owners to offer a retirement plan, let’s take a look at the three most common offerings: the defined contribution pension plan, the group RRSP, and the deferred profit sharing plan, and the pros and cons of each.
Defined Contribution Pension Plans
Defined contribution pension plans are the most regulated of the options businesses choose to offer. They are regulated by the Financial Services Regulatory Authority of Ontario and require that you make regular contributions, have access to annual reporting, and have fiduciary oversight of the plan. When you establish a defined contribution pension plan, you determine a contribution formula for the plan. For example, the employee will contribute 3% of their earnings, and the employer will contribute an amount equal to 5% of the employee’s earnings. Each individual employee then has access to the investment options available within the plan to choose one appropriate for their personal goals and risk tolerances. Whatever the funds grow to is the amount of money that is then available to the employee in retirement. Employers like the security of funding a defined contribution plan, where they don’t face the investment risk associated with plans like defined benefit pensions. Employees like that the plans require employer contributions, boosting their savings, and that they have more options during the income drawing phase that gives them more flexibility for their income levels.
| DC Pension Pros | DC Pension Cons |
| Investment control -individual choice allows different plan members to have different goals | Requires engagement from employees. The employee needs to be engaged enough to choose their investment and then make appropriate changes as they approach retirement age. |
| For the employer, there is no investment risk. Your obligation is to fund the plan; since there aren’t guaranteed payout amounts, you do not face any investment risk after contributions are made. | For the employee, the investment risk falls on them. Once the deposits have been made, the employer is done; any growth or losses achieved by the employee are based on the investment selections |
| There is transparency for everyone. Plan members can look at their accounts at any time and see exactly how much money they have. | For the employees, DC Pension plans do not offer guaranteed income. |
Group RRSP’s
These plans are ideal for employers because they are easy to set up, they don’t require employer contributions, and are easy to administer after they are established. Even without the requirement to do so, many employers do offer to make contributions into group RRSP’s for employees. Typically, this is done on a matching basis where the employer can offer a plan with the restriction that they will match what the employee contributes up to a set percentage (say 3%, for example) of the employee’s income. This encourages the employee to participate, because if they don’t, the matching doesn’t happen, and it adds value to the plan for the employer because the employee sees an active investment in their future. When we look at the pros and cons of group RRSPs, we see:
| Group RRSP Pros | Group RRSP Cons |
| The plan is really flexible with options for the employer to contribute to the plan, but no requirement that they do so. | Contributions are immediately vested, and withdrawals are permitted. This means that an employee can remove the funds prior to retirement, including any money that the employer has contributed. |
| There are no annual reporting requirements from regulators, minimizing the work required by office administrators | Similar to DC pension plans, the investment risk falls on the employee |
| Employees get immediate tax savings. Since payroll knows money is going into a tax-deferred registered account, they are able to adjust the withholding tax at source to reflect true taxable income. | Similar to the DC pension again, there is no guaranteed income. The income you get in retirement is based on the amount you contribute and the investment performance of your account. |
Deferred Profit Sharing Plans (DPSPs)
A deferred profit sharing plan is fully funded by employer contributions. The amount that is contributed can be flexible and based on year-to-year profits. It can also be set up to mirror employee contributions into a plan like a group RRSP. One major difference between the DPSP and the other plans is that the employer has the option of including a vesting period. What this means is that they can set a minimum amount of time that an employee must be a member of the DPSP to ‘own’ the contributions. This period can be up to two years long. If there is a two-year vesting period, and an employee chooses to leave and change employers before they have been a DPSP member for two years, the money in their DPSP is forfeited and returned to the employer. Some of the pros and cons of the DPSP are:
| DPSP Pros | DPSP Cons |
| Since it is 100% employer-funded, it is a great way for employers to share profits with their employees | Business owners cannot participate in a DPSP. |
| The ability to have a vesting period encourages employee retention. | Employees may not have heard of DPSPs, so they may perceive less value in them than the more familiar terms of RRSPs and Pension Plans. |
| This is a great complement to the group RRSP. | Since employees can’t make contributions, the DPSP tends to work best when paired with another plan. |
How to be Strategic with Your Benefit Offering
If you want to avoid the higher administration and governance requirements of a defined contribution pension plan, then I may suggest to you the idea of pairing a group RRSP with a DPSP. The pairing works like this. You establish a group RRSP where employer matching is included. But the matching contributions are paid into the DPSP rather than into the group RRSP. This allows you to apply a vesting period to the employer contributions. This strategy allows for increased flexibility as well as motivation for employee retention given the vesting requirements that can be applied to your contributions. As an employer, you get the benefit of providing a retirement plan with the added layer of vesting to encourage employee retention.
The Bottom Line
No matter what option you want to offer your employees, as an employer in an ever more competitive labour market, you need to understand that offering an employer-sponsored retirement plan should be part of the total rewards that you offer employees. When it comes to figuring out which type of plan (or combination of plans) is best for your business, I suggest speaking to a benefits broker like the team at Strata Wellness & Benefits. The advisors there will work with you to find the best fit for your individual business to make sure that you and your employees see the value in the plan that you provide.
