The many benefits of employer-sponsored Group RRSPs
If you’re a recent graduate and you’ve landed a job, your employer may offer you a Group RRSP as one of the employment benefits. Should you sign up? It’s a good question, since you are probably still far away from retirement. But Group RRSPs have a host of benefits you should seriously consider.
A Group Registered Retirement Savings Plan is often offered by employers as an alternative to a conventional defined contribution pension plan. It basically has the same structure as an individual RRSP, except that it’s administered by your employer, and individual investment choices are typically limited.
Employer contributions
Group RRSPs have the added advantage of letting both you and your employer contribute to the plan. Contributions are tax deductible, and like individual RRSPs, tax on any investment growth inside the plan is deferred until you collapse the plan.
Your contributions are made by regular payroll deduction. Because this is an RRSP contribution, it results in a tax deduction. This can then be applied to reduce your source withholding, in effect, giving you an instant tax refund.
Employer contributions are not mandatory, but are usually made as an additional employee benefit. And this can really add up. An employer’s matching contributions to Group RRSPs can typically be between 2% and 6% of your annual salary. So if you’re earning, say, $50,000 annually, and you decide to contribute 3% ($1,500) of your salary annually to your Group RRSP, your employer would match that with an additional 3% contribution of $1,500.
Like a salary increase
Think about it: That’s like getting an annual salary increase of 3%. An annual contribution of $3,000 to a Group RRSP, at a 5% average annual compounded rate of return, will grow to over $39,000 in 10 years. Remember, though, that employer contributions are added to your income as a taxable benefit.
Group RRSPs are administered by your employer, and are typically contracted out to institutional pension fund managers. So you get the additional benefit of top-flight investment management of the kind associated with full-blown pension plans. Depending on the terms of the Group RRSP, you may have some choice in the type of investments or portfolios to choose for your plan, but generally you won’t be able to trade individual stocks.
Low costs, low minimums, low paperwork
Not to be overlooked is the fact that administrative costs of Group RRSPs are negligible and often non-existent for the employee. Also, minimum deposits are generally low, and the administrator will take care of all the tax reporting paperwork.
If you leave your employer, the proceeds from your Group RRSP can be transferred to your individual plan or to a Registered Retirement Income Fund or annuity if you’re at or close to retirement age. If you take the proceeds in cash, it will be considered taxable income in the year you receive it, and taxed at your marginal rate for the year.
As always, a few caveats apply to Group RRSPs. You may have only limited rights to withdraw funds from the plan while you remain with your employer. In addition, your employer may cancel the plan at any time, transferring your proceeds to your individual RRSP, a RRIF, an annuity, or giving you the cash. The same tax rules apply as if you had left the employer.
Then, too, there’s the question of investment management. While the management of Group RRSPs is typically contracted to institutional managers, this may not always be the case. If you have doubts, check with an independent financial advisor about the calibre, qualifications, and performance history of the money manager before signing up.
© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.
