Experts discuss pros and cons of different retirement savings plans for employees
The first two months of the year have many Canadians thinking about retirement savings, with the start of March signalling the deadline for RRSP contributions.
Currently, 72% of Canadians aged 35 and up have started saving for retirement; however, 42% lack a retirement plan, according to a recent report from IG Wealth Management.
Providing some kind of retirement savings plan is a key benefit offered by employers, in looking to attract and retain employees. But what kind of plan should be offered?
Shifting from DB to DC pension plans
Defined benefit (DB) pension plans have been the gold standard for decades, but defined contribution (DC) plans have increasingly become more popular with employers.
Unlike DB plans, DC plans provide more predictability for employers, as DB plans can take on more risk if investments have variable performance or if there are dramatic changes to interest rates, said Adam Ngan, partner at Blake, Cassels & Graydon.
“We're seeing pensions or retirement savings being a pretty key part of what employees are looking for. Compared to a defined benefit plan, defined contribution plans allow employers to offer a retirement savings arrangement, which many employees find attractive. There's also a bit more predictability in terms of employer contributions each month with a defined contribution plan.”
The number of corporately sponsored defined benefit pension plans has been on a steep decline over the last few decades, said Todd Saulnier, principal senior consultant, Mercer Investments, and board president of the Association of Canadian Pension Management, “to the point where we could imagine there may be no more of these plans in the next 10 or so if the trend continues.”
In Canada, the introduction of the Pension Protection Act, which will come into force in another three years, will also make it much harder and more expensive for corporations to borrow money if they're no longer secured creditors.
“The decline of DB plans has been something that's been going on for many years, and its due to everything from market accounting to regulatory burdens,” Saulnier said.
Employers are also shifting away from DB pension plans to make the DC plans more useful for employees in giving them ways to save for financial reasons other than retirement, he said.
TFSAs as an employer benefit
When it comes to larger plans, some companies offer defined contribution plans. However, these have strong regulatory requirements, so smaller plans and companies may be unable to meet those requirements, Saulnier said.
And more employers are leaning towards more flexible plans such as the Tax-Free Savings Account (TFSA), which has been gaining popularity over the past few years, he said.
These plans allow employees to contribute funds that are matched by the employer and can be accessed before retirement without having a negative impact on taxable income.
“The popularity of TFSAs is a fairly new trend, which is potentially trying to better serve the financial wellness needs of employees,” Saulnier said. “Not everyone is at the same stage in their career, and some people need to save for purposes other than retirement, so having a vehicle that’s more flexible is a very forward way of supporting employees with their financial needs.”
Group RRSPs also remain a popular option, as they grow tax free and are more tax efficient for employers, according to Ngan.
“For group RRSPs, there's a tax deduction for employers that makes them more efficient from a tax perspective, and when employees are getting their payments out of a plan like this, they will be in a much lower tax bracket.”
Legal considerations of retirement plans
One of the key legal considerations for employers when choosing and implementing a retirement savings plan is taxes, Ngan said. For defined contribution plans, group RRSPs and TFSAs, there are tax contribution limits that employers need to consider.
There are also legal obligations with respect to running and administering these plans, such as properly choosing investments and clearly communicating with employees.
“Under pension benefits standards legislation, there is an employer obligation to administer plans prudently, and different situations can come up with employees where specific rules may need to be followed,” he said.
Privacy should also be considered and prioritised, as retirement savings plans require a lot of personal information about both the employee and their beneficiaries, Ngan said, adding that ensuring this information is protected can help avoid legal disputes.
