The Art and Science of Retirement Savings

What do Van Gogh and retirement savings plans have in common?

Not so much on the surface, perhaps, but painting is a useful analogy to demystify the seemingly complicated options for employer retirement programs.

“For an artist, the colour palette of paint in essence hasn’t changed for hundreds of years, yet every painting is different. Similarly, the components of a group plan are what they are. How you as a plan sponsor put them together to meet your particular needs is where the art comes in,” says Paul Webber, savings and retirement plan leader at Green Benefits Group Inc., a member of Benefits Alliance.

Plan sponsors can choose to offer a blend of defined contribution registered pension plans (DC RPPs), group registered retirement savings plans (RRSPs), deferred profit-sharing plans (DPSPs), tax-free savings accounts (TFSAs) and, less commonly, registered education savings plans (RESPs). While the acronyms alone may bring to mind more of a painting by Pollock than Van Gogh, Webber always assures plan sponsors that the retirement-savings picture becomes clear once we understand what differentiates each option.

Let’s start with the science of what each offering can accomplish for a plan sponsor, and then move on to the art of assembling the optimal mix to benefit employees.

Defined Contribution Registered Pension Plan (DC RPP)
Like an old-fashioned defined benefit (DB) plan, a defined contribution (DC) plan is a traditional registered pension plan (RPP). Filing requirements and their associated costs may be considered a disadvantage for plan sponsors. On the plus side, money is locked in until retirement even if employees leave the organization. That means plan sponsors can be confident the money they invest in a DC RPP will go towards the specific purpose of helping to finance employees’ retirement, says Webber.

Usually, both employer and employee contribute to a DC RPP. The employer contribution is tax-deductible to the employer and, because it isn’t considered taxable income, it doesn’t attract payroll taxes. The employer treats it as a pension adjustment for employees, which the government in turn applies to the employee’s RRSP contribution room for the following year.

Group Registered Retirement Savings Plan (RRSP)
A group registered retirement savings plan offers more flexibility for both employers and employees. Employers can adjust or suspend their contributions as business conditions change. Employees can access accumulated money before retirement if they need to – though, Webber points out, this may undermine a plan sponsor’s reason for putting the plan in place. Compared to an individual RRSP, a group RRSP gives employees the convenience of payroll deductions and lower fees.

Plan sponsors are not required to contribute to the group RRSP. If they do, those contributions are considered taxable income. The increased payroll could result in additional payroll taxes.

Deferred Profit Sharing Plan (DPSP)
To avoid or reduce an increased payroll for contributions to an RRSP, plan sponsors can contribute to a deferred profit-sharing plan, which can be an excellent complement to an RRSP, says Webber. Employees cannot contribute. Similar to a DC RPP, employer contributions are not taxable income and are treated as a pension adjustment for employees.

A DPSP also gives employers the option of vesting, which improves the attractiveness of the program from a recruiting perspective by enabling an employer to align eligibility with the benefits program, while still protecting the employer if they are experiencing higher turnover. For example, a vesting period of two years means that someone who leaves before two years of employment would not receive any contributed funds. Employees cannot access DPSP savings while employed, similar to a pension plan but without the additional regulatory burden.

Tax-Free Savings Account (TFSA)
Employers can enable employees to contribute to their tax-free savings account through payroll deductions. TFSAs are a voluntary savings option for employees, using after-tax dollars. Employers typically do not contribute, in part because their contributions would be modest since a TFSA’s annual contribution limit is relatively low ($6,000 in 2022, compared to 18% of earned income up to $29,210 for an RRSP in 2022).

TFSAs add flexibility to a plan since employees can withdraw their money (including investment growth) for any purpose, tax-free. From an employer’s perspective, Webber emphasizes, TFSAs can protect registered retirement plan assets by preventing withdrawals by employees before retirement. For unexpected costs such as a new roof or car, they can dip into their TFSA.

Registered Education Savings Plan (RESP)
Not many service providers offer registered education savings plans within employer plans, but some plan sponsors still set them up to demonstrate they care about employees’ children’s post-secondary education. Like RRSPs and TFSAs, RESPs can accept employee contributions through payroll deduction.

Webber often recommends plan sponsors stick with a TFSA, where savings can be used for any purpose, including education, rather than putting an extra plan in place that is usually used by only a small number of employees.

Putting it all together

Webber breaks these plans down into two main buckets:

• DC RPPs and DPSPs are in the employer bucket, providing tax-effective ways to make contributions that support employees’ retirement; and
• RRSPs, TFSAs and RESPs are in the employee bucket, steered by employee contributions.

“The art is to determine, from a plan sponsor’s perspective, what is our purpose, what is our philosophy, why are we putting this plan in place, and how do we use these buckets to best support our objectives,” says Webber.

For example, a company focussed on growth and at the same time mindful of retaining talent, could offer an RRSP and a generous DPSP tied to profits, supplemented by a TFSA, notes Webber, adding that this artistic aspect of multi-faceted retirement programs is where the value of the advisor comes in.

“Your advisor helps make sure you have the right components – the right colours of the painting, so to speak, based on your goals. The right advisor also has the experience to help you communicate the story behind the program, which is critical for employee engagement.”

Quick comparisons between DCPPs, RRSPs and DPSPs

	Defined contribution pension plans	Registered retirement savings plans	Deferred profit-sharing plans
Eligibility	By class Determined by employer	Open	At employer’s discretion Shareholders not allowed to participate
Waiting period	Flexible, maximum 2 years	Flexible	Flexible
Employer contributions	Required, set by employer Must be in same class Minimum 1% of salary Tax deductible	Not required Added to T4 earnings Increased payroll taxes (CPP, EI) Tax deductible	Matched contributions % of profits Tax deductible
Employee contributions	Flexible Tax deductible	Flexible Tax deductible	Not permitted
Vesting	Immediate	Immediate	0 – 2 years
Cashable?	No, locked in until retirement (unvested contributions can be cashed out)	Yes, though plans may restrict as condition of employment	Not while employed then funds converted to an RRSP
Other	Creditor protected Government reporting	Some creditor protection Eligible for home buyers’ plan and lifelong learning	Trustee responsibilities

Source: Excerpted from “Canadian Retirement Plans Comparison,” CapriCMW Benefits, member of Benefits Alliance.