Choosing an Employer-Sponsored Retirement Plan
Questions often arise as to which type of retirement plan best meets the needs of an employer and the company’s employees. The purpose of this article is to review the advantages and disadvantages of each type of plan and the goals of both the employer and employees to ensure that the best selection is made.
To do so, you must consider:
- The differences in the types of Plans available
- The goals and priorities that determine the best plan for any particular group
- The plan design options available to you
- Who is the best provider (insurance company, bank, trust or mutual fund company?)
While there are a number of types of retirement plans, the primary ones are:
Defined Contribution Plan
This plan is registered with the Canada Revenue Agency and provides tax-sheltered advantages to employers and employees. The Employer will contribute a fixed amount or percentage of employee’s earnings to a retirement fund for the employee’s credit. The employee may or may not be required to contribute of his own earnings. The accumulated value of the contributions is applied at the employee’s retirement to provide a pension income. The employee’s pension will depend on how well the funds have been invested and on pension purchase rates at retirement. Vesting limitations can require an employee be in the pension plan for two years or more before they own the employer’s contributions. Employee contributions are tax deductible by the employee.
Costs to this type of plan include set-up fees (for registration) and ongoing administration expenses that are paid by the employer. All expenses and employer contributions are tax deductible.
Defined Benefit Plan
This is a plan in which the retirement pension is defined by a formula that provides a unit of benefit for each year of service. Employees may or may not be required to contribute. The employer contributes the balance necessary to fund the plan’s benefits. An actuarial evaluation is required by law at least once every three years to determine the contributions required to keep the plan financially solvent. Expense charges for this type of plan are significantly higher than those of other options.
Types of DB Plans include:
- Best or Final-average earnings – pension is based on the members service and earnings over a stated period.
- Career-Average earnings: The member’s pension for a given year of service is equal to a percentage of that year’s earnings.
- Flat benefit: Pension is defined as a stated dollar amount for each year of service.
Group Registered Retirement Savings Plan
This popular mode of retirement savings is a tax-assisted, capital accumulation program for individuals. Contributions are tax deductible within prescribed limits but fully taxable when received in the form of a benefit. Contribution limits are set based on income for the year and reduced by the assessed value of benefits accrued under an employee’s Pension Plan (called a Pension Adjustment or PA). Contributions made by employers to Group RRSP’s are not usually deductible by the company. Employees can claim this amount plus their own contributions as tax deductions.
Choosing the Right Plan
Pension Plans and Group RRSP’s are designed to meet differing needs. To choose the best plan for your company, you should consult an experienced advisor. Together you will consider the following concerns:
What are the Priorities of the Employer?
- To ensure the employees have an adequate retirement fund
- Ensuring that the funds are used for retirement purposes and not withdrawn prematurely.
- What happens to employer contributions if the employee leaves after one year? Three years?
- The cost of providing the plan, expenses charged to administer the plan, filings with federal and provincial authorities, tax deductibility etc.
What are the Priorities of the Employee?
- Maximum flexibility in use of the funds before and after retirement.
- Portability of funds if the employment is terminated.
- Maximum choice of types of investments available.
Creating a balance between these sometimes competing needs is at times difficult. If the employee’s preference is the prime concern, then a Group RRSP probably works best. Where the employer’s concerns are the priority, a Defined Contribution plan is usually the answer. To get a balanced perspective and a personalized evaluation of your retirement planning requirements with a long-term perspective, ENCOMPASS Benefits and HR Solutions should be your first phone call. The rest is easy.