Group RRSPs: Features and Advantages

What if you don’t have a pension but want to save for retirement without going it alone?

A good option is a group RRSP, an employer-sponsored variant of the RRSP that can give individual investors more buying power. Employers administer the plans for employees (called a group) and deducts contributions directly from you paycheque. Your employer may already have one, or if necessary you can try and persuade your organization to set one up.

Even better, employers often match these contributions—although they generally cap what they throw-in at a maximum of 5% of your annual earnings.

Plus, those payroll deductions are taken pre-tax (although the employer’s contributions are taxed to you as income)—so the taxable income you report to CRA when you file your return is lower. Depending on how much you contribute, that has the potential to shift you into a lower tax bracket.

Contribution maximums are the same as a conventional RRSP—the lesser of the annual limit ($26,230 in 2018) or 18% of a person’s income from all sources. If, through your work, you’re a member of a deferred profit sharing plan or a pension plan, those employer contributions will be subtracted from your annual contribution room.

The fees on the mutual funds offered in a group RRSP tend to be much lower than what you’ll pay if you purchase the same fund in your own RRSP. Unfortunately, if you leave the plan early and want to keep the same funds, you won’t get the discount on fund fees you’ll receive in a group RRSP.

Administration and investments

The majority of group RRSPs are administered by Canada’s major insurance firms—Manulife, Sun Life, Desjardins and others are all well represented in the space. If your employer has a plan set up, you’ll have to work with whichever administrator they’ve selected. But if you’re going to propose the idea, it pays to first do some research.

Generally speaking, the retirement accumulation option for these plans was designed as a vehicle to garner investments in segregated funds—which would eventually be converted to annuities to generate income streams for retirees. In exchange, these administrators cover some part of the administrative costs of running the programs, and take care of reporting to the Canada Revenue Agency (CRA) and other government entities.

While each employee member of a group RRSP usually makes his or her own investment decisions, unlike conventional RRSPs, there’s generally no option to purchase individual securities or other direct equity investments. Besides mutual funds or index funds, there’s often an option to buy GICs. If you don’t make an investment decision, your money will sometimes be put into a default fund, which is generally a low-risk fund. This may not be the best option, especially if you’re decades away from retirement.

Potential downsides to group plans include restrictions placed by the employer on an individual’s ability to make withdrawals—even for programs like the Lifelong Learning Plan and Home Buyers’ Plan—that are available to conventional RRSP account owners. There is, though, a logic to this: The power of group RRSPs lies largely in investment leveraging opportunities of the pooled funds from a large number of employees.

Employers also have the legal right to shut down a group RRSP at any time, without warning—although employees would be cashed out and could simply shift the funds into a personally owned RRSP.

Shifting to income

At retirement, or in the year in which you turn 71, the CRA considers your RRSP to have matured and you’ll need to convert it to an income stream—or otherwise cash out the plan.

Most RRSP holders will convert their funds into a registered retirement income fund (RRIF), which establishes a lifelong income and requires a minimum annual withdrawal that’s calculated based on the total proceeds of savings and investments.

Again, since insurance companies are in play as administrators, there’s also some encouragement to use the RRSP funds to purchase a life annuity (which pays a set monthly sum until the annuitant dies) or a term-certain annuity (which pays a fixed monthly sum for a set number of years, and which is often called a fixed annuity).

In many cases, the plan administrators use their leverage as insurance-product generators to offer superior annuity rates to group RRSP plan holders.