Not clear on why the Group Retirement Savings Plan (GRSP) you have through work is so important? Learn more here!

 

Why Do Most Employers Offer a GRSP?

One of the biggest reasons that employers offer their employees a GRSP is because it’s a great tool for attracting, retaining and rewarding their teams. This is because for many Canadians, saving for retirement is becoming increasingly more difficult. More and more employees are looking to their employers for help; those who DO help are often preferred to those who do not. And in a tight labour market like we’re experiencing now, this is a big deal. GRSPs really help employees put their best savings foot forward, making it easy for them to make meaningful contributions to a plan throughout their working years.

 

The GRSP

A GRSP works much the same as a personal retirement plan purchased through a financial advisor or a bank. In both cases, for example, you receive a tax receipt for your contributions at the end of the year. However, an important difference is that contributions you make into a GRSP are made with gross dollars. This means your contributions are made before any tax, Canada Pension Plan (CPP), Employment Insurance (EI) or other types of deductions are taken off your paycheque. In addition, your employer can make contributions into your plan too, typically based either on a percentage of earnings or a flat dollar amount. This clearly can add to your investment growth.

One thing to keep in mind is the Home Buyers’ Plan (HBP), which enables first-time home buyers to withdraw up to $35,000 to help them purchase a home. If you qualify for the HBP, you might be able to tap into your group retirement savings for part or all of your down payment.

 

The Deferred Profit Sharing Plan (DPSP)

A DPSP is commonly offered alongside a GRSP. By it, your employer makes contributions into your account from the company’s profits. When your employer provides both a GRSP and a DPSP, this means that your retirement savings plan receives contributions from two sources (not just one). Note that with a DPSP, a vesting period applies. This means you have to be employed or a member of the DPSP for a pre-determined amount of time before you can withdraw the DPSP portion when you retire or otherwise terminate your employment. For example, if you were on a plan that had a six-month waiting period and you joined the plan at that six month mark, and three months later you left your employment for another job opportunity, those three months of contributions into the DPSP would actually get forfeited back to your employer. If you belong to a DPSP, make sure you confirm the details of the vesting period prior to making a change to your employment.

 

The Registered Pension Plan (RPP)

I think that when most Canadians think about a Registered Pension Plan, they think of a defined benefit pension plan. A defined benefit pension plan is a pension plan that guarantees employees a specific monthly benefit at retirement. It does not define the cost to the plan sponsor (the employer). The cost of the plan is determined by the amount employees contribute and the amount the investments earn. Any shortfall in the plan must be funded by the plan sponsor. A defined benefit pension plan is most common in the public sector.

Under a defined contribution pension plan, by contrast, the contributions of employees (the plan members) and plan sponsors are invested towards the funding of a retirement income. The maximum combined contribution is the lesser of 18% of earned income to the maximum contribution limit. Typically, the contribution going into the plan is known, while the final benefit is not known. The employer’s contributions are a tax deductible expense and are not a taxable benefit to the plan member.

We are increasingly seeing a tiered system based on years of service. If you’re on an RPP now, review the details of it as there might be some additional levels from which you could benefit as your employment tenure grows.

Something a bit unique to pension plans is the locked-in period. What this refers to is that in most cases, you cannot access these funds until you are at least age 55 (an example of when this does not apply is when a person utilizes the HBP we spoke about earlier). The main reason for this is that the intent of an RPP is to help with long-term retirement savings. You have the option for the most part to choose what investment options are available to you and to choose where you want your and your employer’s contributions invested. There are three main investment options available:

1. Target Date Fund: You choose the year you expect to stop working, and then buy a target-date fund targeting the same or nearly the same year. Target-date investors pretty much go back to whatever else they were doing. Behind the scenes, however, investment managers are gently nursing the savings toward the investor’s retirement goal. If you decide to go with a target-date fund, your role in the process is to continue to make regular contributions and check in occasionally to ensure everything is on track according to your expectations.

2. Target Risk Fund: Target risk funds typically label themselves as, for instance, “conservative”, “moderate risk” or “aggressive” in terms of their risk exposure so that investors can get a handle on the target risk level. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors. Target risk funds allow investors to adjust their level of risk exposure throughout their lives. These funds can have a glide path that changes the target risk exposure over time. Often, investors target more risk or volatility when they are young but seek to reduce their risk exposure as they get older and closer to retirement.

3. Guaranteed Fund: A guaranteed fund is a type of investment product offered by insurance companies that allow clients to invest in equity, bond, and/or index funds while providing a promise of a predefined minimum value of the fund (usually, the initial investment amount) will be available at the fund’s maturity or when the client dies.

4. Specific Fund: Allows you to target specific industries and sectors to make up your own portfolio. If you’re someone who wants to do the research, look at the rebalancing frequently, take the pulse of where your account is, and do that check-in more frequently, this might be an option for you. This most commonly is chosen by people who are more sophisticated in their investment knowledge and want to put the time and effort into being in charge of what they’re holding.

 

A Few Things About Your GRSP

Just a few more things to keep in mind about your GRSP:

1. Voluntary unmatched contributions are an easy way to help your retirement savings grow even faster. Check to see if your plan allows that.

2. You need to review your investment options and where your funds are held on a yearly basis or anytime you have a major life change (e.g. marriage, divorce, new child, etc.).

3. Keep your beneficiaries up to date. At the end of the day we want to make sure that your funds are going where you want them to go.

 

Saving for retirement isn’t easy for many Canadians but it’s important, and there are tools available to help make it easier. To learn more, please watch this video or contact us.

 

Danielle Roberge, B.Comm.

Group Retirement Consultant, Wiegers Financial and Insurance Planning Services Ltd.

 

The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc.