Get into the group mentality

If you are an HR director or business owner, chances are that employee retention has crossed your mind at some point. It’s one thing to hire employees to work for your company, but it’s another to keep them engaged enough to want to continue working there. When employees begin leaving your company for positions with your competitors or in other fields, you have to wonder what factors are influencing their decisions.

Some employees will tell you that an offer from another company was the reason for their exit. Others may say that they simply needed a change. And then some might say that is was the business’s shortcomings in certain areas that sparked their decision to leave.

Employee retention can be difficult, but there are ways of enticing your employees to remain with your company. Sometimes, the answer is a simple as matching a competitor’s offer, if your budget allows for it. Other times, certain changes must be made to retain your workforce.

As the point person for administering group benefits packages, sometimes improving the benefits can help keep your employees with the company. You could, for example, increase the allowance provided for the group Health Care Spending Account (HCSA), or you could introduce a group pension plan to help your staff save for their retirement.

In this comprehensive guide, we will explain the importance of group pension plans in Canada, how they function, how they help your staff and how you can find the right plan for your workforce. We will also answer some of the most frequently asked questions about this plan.

What is a Group Pension Plan?

A group pension plan is a type of retirement plan where an employer makes regular contributions to a fund established for the future benefit of an employee. The money in this fund is then invested on behalf of the employee to generate income for their retirement.

In addition to the employer’s contributions, employees can also add to their pension plan fund through voluntary individual contributions taken from their pay cheques. In some cases, employers will match all or a portion of the employee’s annual contributions. A dollar-for-dollar match would effectively double the amount being contributed to the plan.

How many types are there?

There are several types of this plan available in Canada, each with its distinct contribution structure. They include:

1. Defined Benefit Plan

A defined benefit plan features known and unknown aspects. The known aspect is the money your how much your pension will be worth when you retire. Three factors contribute to this:

• The employee’s salary
• A predetermined percentage
• The amount of time the employee worked for the company

In terms of the employee’s contribution to the plan, it is usually a set percentage of their salary, which is capped at a certain maximum. The employer’s contributions to the pension plan could potentially fluctuate based on market conditions and risk. If, for some reason, the plan is cancelled, the employer is only responsible for covering their contributions to the plan. This money is due upon the cancellation of the plan. The employer bears any risk involved with a defined benefit plan.

Example:

An employee who has worked for a company for 25 years. He has a pension plan that offers a benefit of 2%, and he took home an average of $60,000 in salary over the past five years. The amount of her pension would be calculated as follows:

25 (numbered of years worked) × 2% benefit (0.02) × $60,000 (salary) = $30,000

Thus, the value of this employee’s pension would be $30,000.

2. Defined Contribution Plan

A defined contribution plan reverses the unknown element, meaning that the amount of the future benefit is now the unknown. The “defined” aspect is the amount of money that is being contributed, which, like the defined benefit plan, is a portion of the employee’s income.

The benefit’s future value depends upon the amount of money contributed by the employee, employer and the rate of return the contributions earn over time. With this type of plan, the risk is managed by the employee rather than by the employer. If the contributions are submitted in due course, the plan will always have funding available. As a result, this plan is often comparable to an RRSP.

Example:

An employee earns an annual salary of $50,000 and contributes 2% of that amount to his plan each month. His employer adds a further 3%. The calculations are as follows:

Employee contribution: $50,000 (salary) × 2% contribution (0.02) = $1,000 annually
$1,000 ÷ 12 months = $83.33

Employer contribution: $50,000 (salary) × 3% contribution (0.03) = $1,500 annually
$1,500 ÷ 12 months = $125

Total monthly contribution: $83.33 (Employee) + $125 (Employer) = $208.33

Thus, the total amount being contributed to the employee’s pension plan each month would be $208.33.

How do you establish it?

Just like Rome, group pension plans in Canada aren’t built in a day. You need to take the time to ensure the plan is not only a good fit for your company and its staff, but also for your company’s budget. There are many insurance companies that provide group benefits, and it’s best to perform a comparative analysis before you arrive at a final decision.

But there’s more to the story. Establishing this plan in Canada is a process that involves several steps. If you follow these steps, you’ll land a plan that will resonate well with your employees.

1. Getting an early start

One thing many group benefits plans share in common with each other is an early enrollment option. This includes an eligibility period that takes effect before your staff can officially subscribe to the plan. The shorter this period is, the more likely your staff will be to join.

2. To join or not to join?

That is the question, especially for group plans with voluntary participation. On average, employees are more likely to join if the plan has voluntary participation, and the proof is in the numbers.

According to the 2017 CAP Benchmark Report from Great-West Life, immediate eligibility for defined contribution plans is more common in mandatory plans (48%) as opposed to voluntary plans (18%). It’s an entirely different story for group RRSPs, however. Voluntary group RRSPs checked in with 58% participation, while participation in voluntary plans was at 30%.

3. Contributing factors

One element that attracts more employees to group pension plans in Canada is matched contributions from their employer. Depending on the company’s budget, they may offer a partial match of the employees’ contributions or a full dollar-for-dollar match.

The results of the 2017 CAP Benchmark report indicate that defined contribution plans have a slight edge (64%) over group RRSPs (61%) when it domes to dollar-for-dollar matches. Those numbers decrease significantly for matches less than at par. Only 20% of direct contribution plans match for less than dollar-for-dollar as compared to 24% for group RRSPs.

There are also rare instances where employers will match contribution at rates higher than a dollar-for-dollar. According to the statistics, 12% of direct and 8% of group RRSP contributions from employees are being matched at this generous rate.

4. Withdrawal symptoms

Some employers allow employees to withdraw money from their group retirement plans. However, there are often restrictions placed on how much and how often money can be taken out of the account. The money is then remitted to the employee within a few days and can subsequently be used for a variety of purposes.

Some employers do not provide a withdrawal option for their group retirement plans. This option is usually applied to defined contribution plans. Employers who choose to disallow withdrawals do so with their employees’ best interest in mind; the more money left in the plan, the more the employees will have when they retire.

How do employers and employees benefit from this?

One of the best things about this group plan is that they benefit both the employers who administer them and the employees who receive them.

Here is how employers benefit from these plans:

1. Employee attraction and retention

One way employers attract new talent to their company is to be offering a competitive salary with benefits. Some companies provide new hires with benefits immediately; others require their employees to pass a probation period of three or six months, with a review after that period. If the employees pass their review, they are awarded full benefits, which often include a group pension plan. Benefits also allow employers to reward their staff for hard work and loyalty to the company.

2. Preserving productivity

Not only do group supply employees with health and dental benefits and a pension, but they also help employees to stay healthy and ensure that they have money available when they retire.

3. Easy implementation and management

While employers need to test the waters before deciding on a provider for their group pension plan and benefits, once the decision is made, the plans are relatively easy to implement and run. Some plans give employees the option of opting or not opting into the coverage, as some may already be covered by personal insurance policies. Others are mandatory for all employees. When employees are opt-in, they receive their benefits after completing a few forms and communicate directly with the provider if they have any questions or concerns about the plan.

4. Tax savings

Employers sometimes reward their staff with a raise for a multitude of reasons. It could be for hard work, passing the probation period, or as a reward for several dedicated years of service. While this certainly helps to boost employee retention and morale, the employer will be subject to various payroll-related taxes that must be paid when the raise officially takes effect. This changes if the company offers a group pension plan that provides tax savings. In this scenario, employers can still offer raises to their staff but will not have to worry about payroll taxes.

Group pension plans also offer several benefits for their employees themselves, and they include:

1. Super savings

This plan allows employees to make contributions via deductions from their paycheques, which makes saving money much easier for them. These contributions are made automatically rather than manually from their personal bank accounts, which ultimately leads to more savings for them.

2. Matchmaker

Some plans give employers the option to match their employees’ group pension plan contributions. They can either match a percentage or match them at par, which effectively doubles the amount of the contribution. Matching is only available through employer-sponsored group pension plans; those purchased individually do match contributions.

3. Personal investment 101

The good thing about this policy is the function for everyone. Whether your employees are rookie investors or established veterans, the plans are designed to help them meet their personal investment goals. First-time investors will find advice and information about how to get the most out of their group investment plans readily available. Online assessments can provide them with further insight into how to invest.

4. Assistance at your fingertips

In the previous point, we mentioned that help and support are always available to first-time plan members. This guidance is usually provided by the people who manage the plans, who are often subject to reviews by insurance providers.  Many of these individuals are held in high regard, allowing your employees access to the knowledge and experience they need to get the most out of their benefits.

5. Tax savings

Employers aren’t the only ones who can benefit from the tax savings associated with this product. All contributions made by employees to their pension plans are in pre-taxed dollars. This not only leads to more savings and higher earnings for them; it also means they do not have to wait until they file their tax returns the following year to receive a tax credit.

6. Managing management

Whether you have a group pension policy from your employer or one you purchased individually, there is one element that links the two – management fees. Plan managers deduct these fees from the revenue earned by the employees. The good news is that the management fees for this group plan are lower than individually purchased plans.

7. Deferring income tax

This plan allows your employees to build up their retirement savings. At the same time, they defer income tax payments on the returns they receive. The income tax payments are usually made at the time of retirement when the employee withdraws the accumulated funds from the pension plan.

How do group pension plan contributions affect a personal RRSP?

Some of your employees may have a personal RRSP in addition to the group pension plan or Registered Pension Plan (RPP) offered by your company. It’s also important to note that the maximum contribution for RRSPs in 2019 is 18% of the earned income reported on your 2018 tax return, up to a maximum of $26,500. This amount is slated to rise to $27,230 in 2020.

The reason for the RRSP contribution cap is to ensure that everyone has access to a reasonable amount of sheltered benefits. Contributing to an RPP outside of the RRSP decreases its deduction threshold, thus limiting the contributions you can make to your RRSP.

Why do you need a pension plan for your employees?

As previously mentioned, having this plan not only helps your employees secure a better financial future by saving money for their retirement, it can also be used to attract or retain employees. Many employees make participation in the plan voluntarily, and some even offer to match all or a portion of the employees’ monetary contributions. The more enticing the benefits are, the more likely your staff will be to opt into the group pension plan.

What are the costs and fees associated with this group plan?

There are several costs and fees associated with this policy that both employers and employees must cover.

Given that some employers match all or a portion of their employees’ contributions to the group pension plan, the rate at which the contributions are matched is usually the only fee employers are responsible for.

It’s a different story for the employees, however. They are responsible for paying several fees, the most important of which are Investment Management Fees (IMFs). These are fees that are paid by the plan members to the provider for the management of the investment. In most cases, the IMFs paid by the employees are much lower than those for individually purchased plans.

In a group plan scenario, the employer may offer to help their staff lower their IMFs, which include:

1. Member fee

This member fee a small monthly fee that is paid to the employer that usually does not exceed $2 per month. It helps to cover some of the predetermined fees for group pensions and defined contribution plans.

2. Contribution fee

Sometimes referred to as a cashflow fee, this fee is a small percentage of the employees’ contributions to the plan. In most cases, this amount does not exceed 2%. The employer collects this fee in addition to the member fee.

3. Plan fee

The plan fee is a predetermined amount charged to the employer for the plan itself and typically does not exceed $1,000 annually. The majority of this product does not directly charge this fee to employers; it is integrated into the other IMFs instead. When the plan is established, the employer has the option to pay the plan fee themselves or distribute its value amongst the other fees.

There may be additional fees charged based on the type of plan and provider your company chooses for its group pension plan. These include a fee for the filing of the Annual Information Return (applicable only to defined contribution plans) and a trustee fee (applicable only to deferred profit-sharing plans).

How do I get a quote for this plan?

The best way to get a quote or proposal for this plan in Canada is through a licensed insurance broker or a direct representative of a policy provider. They can provide you with all the assistance and information you need to help you make an educated decision about this product.

You can also get a quote directly through our website. Simply click the ‘Get a Quote’ button and complete the pop-up form. Once you submit the form, one of our agents will contact you to discuss your options.

Here at GroupEnroll.ca, you can compare insurance quotes for different policies and providers to get the most affordable and perfect plan for you and your family before making a final decision.