When small business owners decide to move ahead with offering a savings plan for their employees, by the far the first choice for many is a Group Registered Retirement Savings Plan (RRSP). Whereas Pension Plans are highly regulated, Group RRSPs are simple to implement.

A Group RRSP is subject to the same rules as an individual RRSP. The main difference is that the RRSPs for all the employees in your firm are “grouped” together under one plan at a financial institution. Although the accounts are grouped together, funds between each employee are kept separate, and each person receives his/her own annual statement showing total contributions, growth, and investment returns – just like they would the savings plan was not grouped.

Why a Group RRSP?

Why should you choose a Group RRSP for your company instead of a Pension Plan? There are a few key reasons.

Because a Group RRSP is simpler and less regulated than a Pension Plan, it is easier to suspend or wind down should unforeseen cash flow problems occur in your business.  Pension Plan regulations are more defined and structured, making them more difficult (though not impossible) to cancel or suspend should it become financially impossible for your business to maintain.

Once set up, both a Pension or an RRSP are simple to administer and there is minimal ongoing paperwork. However, Pension Plans have annual reporting and filing requirements, while Group RRSPs do not.

A younger workforce may appreciate an RRSP because first-time home buyers are allowed to withdraw from their RRSP to create a down payment for a home purchase. In addition, an employee of any age may borrow from the RRSP to fund training or education under the Lifelong Learning plan.

While employer contributions are an attractive feature for group savings plan for the employees, they are not actually mandatory for employers. Even if an employer chooses not to make contributions to their employees' plans, their workers still benefit from the tax deductibility of making their own contributions. Further, payroll deductions make it very easy for employees to have a "forced savings plan", especially since contributions are taken from pre-taxed paycheque earnings.

Possible Disadvantages of a Group RRSP

With a Group RRSP, once employer contributions are committed to the plan on the employee’s behalf, the deposits are immediately accessible to the employee, who then controls the funds. An employee may be able to remove all the RRSP monies -- both employee and employer contributions. Of course, the employee would be responsible for paying any withholding tax and resulting income taxes; but once the funds are withdrawn, the employee could use them for daily living, thus forfeiting the opportunity to plan for retirement.

To offset this disadvantage, you can design your plan to minimize the temptation for employees to remove funds from their plan. For example, withdrawals could mean a suspension of future contributions (either employer or employee contributions) for a specified period of time.

Another possible disadvantage is that because there are no legislated locking-in rules, a Group RRSP could be less reliable than a Pension Plan should the primary objective be to create a retirement pension of employees. If this is the case, the best way to ensure that savings be used only for retirement is to implement a Pension Plan.

Stay tuned, as next week we will discuss Pension Plans.