Setting up a Group RRSP
By Julie King | August 31, 2004
Small and medium sized companies are rarely able to match the sophisticated benefit plans offered by large organizations. However, one benefit you can add quite easily is a group registered retirement savings plan (RRSP) that will help both you and your employees put aside money for the future.
Tina Tehrachian, a certified financial planner with Assante Capital Management Ltd., explains that a group plan can be set-up quite easily. They are an excellent option for smaller companies, as you only need a couple of people to get one started. Here is a closer look at steps involved in setting up a group RRSP, as well as some of the pitfalls you should avoid if you decided to set-up a group plan in your company.
Why set-up a group RRSP?
As a business owner one of the first questions you should ask is why should you consider establishing a group plan. While a group RRSP does involve additional administration, it also offers several benefits:
- Group plans offer an effective way to save. Many people walk into their bank just before the annual RRSP deadline to invest in their annual RRSP. This can create a cash strain, and it is often difficult to take advantage of your maximum investment limit when you are making a single, annual payment. A group RRSP creates an easy way to save, as it is often easier to have a small amount of money deducted from each pay cheques than it is to make a large payment once a year.
- Group plans help you select the best investment options. Another advantage to the regular payments into an RRSP is that many plans will include individual consulting to determine the best investment options for each employee. In contrast, many people who invest at the last minute do so at a financial institution they are familiar with, and they select an investment product based on convenience rather than fund performance and their specific investment profile.
- Group plans have immediate tax benefits. The major difference between an individual and group RRSP, says Tehrachian, is that you get an immediate tax benefit with the group RRSP. That's because there is no need to withhold tax at source, which results in an immediate tax benefit for participating employees. Rather than waiting for a refund tax return at the end of the year your employees will immediately stop paying tax on the amount of their pay that is invested in the RRSP.
- Group plans are employee owned. Tehrachian also points out that with a group RRSP there is no question of the ownership of the money. “The portion that the employee contributes is 100 per cent owned by the employee and he or she can do whatever they want with it. They can take it with them if they leave the employer. Most plans also allow a transfer to another RRSP even during the time that the employee is still at the same employer.” There may, however, be some lock-in restrictions or provisions under transfer amounts that are contributed by the employer.
Selecting an investment company
There are three different administrators that offer group RRSPs – mutual fund companies, segregated funds with an insurance company, and self-directed group plans with different trustees. Your first step in setting up a group plan is to decide which option is best for you.
Rather than trying to decide yourself, Tina Tehranchian, a certified financial planner with Assante Capital Management, recommends that you talk to a qualified financial advisor, and preferably a certified financial advisor. This person will have a good understanding of the investment side of the business, and they will also be familiar with the different companies offering group plans.
Tehranchian believes the best option is to go with a self-directed group plan that will give employees company a wide slate of choices. This keeps the administration simple for the company, and makes it easy for them to add incentives such as matching employee contributions. There is also a wide range of choice for the employees, who can invest in mutual funds, stocks, bonds, GICs and a whole array of investment products.
Doug Lamb, a certified financial planner chartered accountant with Cartier Partners Financial, suggests that the investor's best option will be one where they are not locked into any group of funds. While companies that offer group plans may offer an additional financial incentive if you lock into a group of funds, Lamb points out that the cost is not much greater if you opt for individually directed RRSPs.
Tehranchian recommends the Financial Planner Council's website as a good source to find a financial planner. You can search for a certified financial planner in your local area, and most planners have indicated their area of specialty.
Understanding the costs
There are a broad range of costs to set-up a group plan, and this aspect can be quite confusing. Some products have an annual trustee fee. Most companies provide a substantial discount on group plans, and others waive this fee entirely.
In addition to the annual fees, plans have either a front- or back-loaded cost component. This can be selected by each employee individually.
With the front-loaded option you pay an up-front commission fee of anywhere from zero to two per cent. The advantage with this approach is that you can take your money out at any time without paying any penalties for early withdrawal.
However, if you plan to keep the money in your plan for a long time you may prefer the back-loaded option. There are expensive penalty fees of up to five per cent if you take your money out early, but if you keep your money in the plan for a specific time period - usually five to seven years – you don't pay any extra penalties for withdrawals.
How the overall process works
- Select an investment advisor and/or company, and decide on the kind of plan you are going to implement.
- Fill out the paperwork – your investment advisor can help you with this process, which should be very easy to do.
- Communicate information about the new plan to your staff. This is often done using brochures and may include group or individual meetings with the financial planner who has assisted you. Employees may have to meet a minimum monthly investment requirement ranging from $25 - $50 to participate.
- Determine how many people will join the plan and what their contribution levels will be.
- The payroll department will then work out the amount that will be contributed to the plan by the employer and what amount is contributed by the employee.