The Group RRSP

I know that the RRSP season is over and most people are tired of hearing about RRSP's and are now thinking about their tax return. One common ailment at this time of year is the pain that is felt upon completing your tax return and the surprise at just how much tax you pay. Many Canadians vow to do something about it. One good vehicle for saving for your retirement and for reducing taxes is the Group Registered Retirement Savings Plan.

The purpose of this article is to show you why you may want to contribute to such a plan if one is offered where you work, and if one isn't offered, to encourage you to bring up the topic of establishing a group RRSP with your personnel department. There are many advantages for both you and for the firm.

Group RRSP's are growing in popularity. According to a Benefits Canada report, group assets totaled $22.6 billion in 1999 and are expected to grow to $50 billion by the year 2004. There are several reasons for this growth. The first has to do with demographics and aging. A greater portion of society is reaching the age where retirement is important to them and they are taking advantage of group plans. Another reason is the decline in popularity of defined benefit pension plans. These plans are subject to ever increasing legislation, high costs, administrative demands and potential future funding liabilities for the employer.

Advantages for the employee:

• The biggest difference between contributing to a group RRSP and contributing to an RRSP on your own is that with the group RRSP, the contributions are deducted at source and you are not taxed on these contributions. In other words, you get an immediate tax deduction.
• With some group plans, the employer may choose to encourage their employees to contribute to the group RRSP by matching contributions by a certain percentage. If the employer matches your contributions by 5 or 10 percent it's like earning an additional 5 or ten percent on your investments. There are not too many good reasons not to get involved in a group plan when the employer does this.
• There are several other advantages to group plans. We've all heard the slogan "pay yourself first". This is exactly what you are doing when you allot a percentage of your pay, or a fixed dollar amount per pay period to your RRSP.
• It is also a disciplined way to invest which allows you to take advantage of "dollar cost averaging".
• Most plans allow you to make spousal contributions.
• Formal pension plans may have certain provisons with regards to the vesting of pension benefits and what happens to contibutions when an employee leaves the firm that are confusing and often not in the best interest of the employee. When you make a contribution to a group RRSP there is no question about who owns the contibution and what you can or can't do with it. You can do what ever you want with it - transfer it, redeem it, add to it. Note that there may be some locking-in provisions or restrictions on the transfer of amounts contributed by your employer.
• Most fund companies have a lower minimum contribution limit for their group plans. Some are as low as $25 per fund per pay.
• The financial advisor who works with your firm on the group RRSP is normally available to you for your other personal financial planning needs.

Advantages for the employer:

• The group RRSP is a free benefit that the employer can provide to their employees. With most mutual fund companies there is no set-up fee, no trustee fee and no termination fee.
• There are many advantages to a group RRSP over a formal pension plan in terms of cost and administration. If the company has an existing formal pension plan, the group RRSP can complement it.
• If the employer contributes to the employee's RRSP, this goes a long way towards attracting and retaining employees.
• One of the biggest advantages is the fact that the employer is not liable for guaranteeing a specific amount of income when an employee retires.
• Lastly, the bulk of the administration is carried out by the fund company.

Many Canadians find it difficult to save for their retirement. This is especially so when you have to first earn money, pay tax on it, then try to save. Many people also find it difficult to top up an RRSP at the end of the year or make RRSP loan payments. The group RRSP can be a godsend for investors who experience these problems.