Group Savings and Retirement Programs. A Guide for SME Owners

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1 Group Savings and Retirement Programs A Guide for SME Owners

2 Be an employer of choice Which perk do you think employees working for small and medium-sized businesses would choose first a pay raise, extra vacation days, yearly bonus or an employer contribution to their group savings and retirement plan? 33% of employees put an employer contribution to a pension plan at the top of their wish list 1. To ensure your company s growth and continued success, you need qualified and motivated employees. Providing a group savings and retirement program can help position you as an employer of choice in your industry. This guide provides information about group savings and retirement plans, particularly those tailored to small and medium-sized enterprises (SME), and the associated responsibilities in managing such plans. It also contains guidance in helping you choose the program best suited to your company. 1 According to the results of a Standard Life research conducted by Environics Research Group in the fall of All the statistics provided in this document are based on that study.

3 Table of contents 02 Why offer a group savings and retirement program? 06 Main types of group savings and retirement plans 10 Choosing the right group savings and retirement plan for your business 11 Choosing an investment solution 12 Your responsibilities 12 Choosing the right service provider 13 About Standard Life A Guide for SME Owners 01

4 Why offer a group savings and retirement program? One of the main advantages of offering a group savings and retirement program is how it enables you to recruit talented people and maintain a motivated, engaged workforce. 90% Nearly 90% of employees said a competitive group savings and retirement plan is an important factor when they evaluate job opportunities. 72% of employees with a group plan at their current workplace said it was a major factor in their decision to accept their employment. 02 A Guide for SME Owners

5 A group savings and retirement plan not only increases employee loyalty, it also increases the likelihood that you will be recommended as an employer. 8/10 About 8 in 10 employees with a plan would recommend their employer to friends or family members compared to 7 in 10 employees whose employer does not offer a plan. A Guide for SME Owners 03

6 Save on payroll taxes By implementing certain types of group savings and retirement plans instead of granting a pay raise, employers can save on the payroll taxes associated with traditional forms of compensation. Assumptions Annual payroll: $1,000,000 Percentage increase: 3% The information contained in the following table is based on 2014 premium rates Company spends 1 Assumes each employee earns $40,000. Traditional compensation (salary/wage/cash bonus) Group DPSP Cost of increase $30, $30, Add 1 : CPP 4.95% 2 $1, Not applicable EI 2.632% 3 $ Not applicable Work Comp. 2.46% 3, 4 $ Not applicable Health Tax 1.95% 3 $ Not applicable Sub total $3, Not applicable Total $33, $30, Employee receives Total increase $30, $30, Less 1 : CPP 4.95% 2, 7 $1, Not applicable EI 1.88% 3, 7 $ Not applicable Tax 30% 5 $9, $ Sub total $11, Not applicable Total $18, $30, Assumes employee marginal income tax rate is 30%. 2 Canada Pension Plan 3 Employment Insurance, Worker s Compensation and Health Tax for Ontario 4 Amount will depend on company s assessed rate, if applicable. 6 Tax is deferred until benefit is taken from the plan. 7 A lower contribution to the CPP and EI may reduce corresponding future benefits. The table illustrates the impact payroll taxes related to a salary increase have on your company compared with implementing a group deferred profit sharing plan (DPSP). Everyone wins if the employer contributes to this plan instead of awarding salary increases or bonuses. You pay less and your employees receive more. By contributing to a DPSP, neither the employer nor the employee pay payroll taxes on the amount contributed to the retirement plan. This means that if you contribute $30,000 overall, your employees receive $30, A Guide for SME Owners

7 Advantages for employees For your employees, group savings and retirement plans have many advantages over individual plans, such as access to funds and services not typically offered in an individual plan and immediate tax deductions. In addition, investment management fees (IMF) within a group plan are generally lower in comparison to fees in many individual plans. Everyone s familiar with the concept of a group deal or group discounts. It s the same with IMFs and other expenses related to financial products. Finally, thanks to payroll deductions, it is a disciplined way of saving. A Guide for SME Owners 05

8 Main types of group savings and retirement plans Defined benefit or defined contribution plans The two main categories of group retirement plans are Defined Benefit (DB) Plans and Defined Contribution (DC) Plans. DB A defined benefit plan promises you a specific amount at retirement, based on years of service and salary. The method used to calculate the benefit can vary, but the amount payable is determined according to a pre-established formula. The amount payable does not depend on the return on the investments in the pension fund. It is the employer s responsibility to ensure the benefits are paid and the plan remains solvent. Much has been written in recent years about these plans because lower interest rates and market volatility have affected defined benefit funding and jeopardized their sustainability. DC In general, defined contribution plans are better suited to small and medium-sized enterprises. With this type of plan, the contribution is known, while the final benefit is not. The amount of the member s retirement benefit is based on the plan contributions, the return on investment as well as the interest rates in effect or market conditions at the time of retirement. Typically, the employee is responsible for choosing his investments and assumes the associated risk. 06 A Guide for SME Owners

9 Retirement amount Investment risk resides with On termination of employment Advantages Disadvantages Predictable, based on a formula Employer Depending on age, there can be a variable transfer value or an immediate pension or a deferred pension Retirement income is independent of market performance and can be adjusted for inflation More flexibility in plan design Expensive and less predictable for the employer Communications to employee are more complex Not predictable, based on accumulated funds and rates of return on investments Employee Transfer value based on funds accumulated The employee can follow the growth of their portfolio An employee who has interest in finances has control over their investments in the plan Retirement income is dependent on how the portfolio performs Even an employee who has no interest in finances needs to be involved with their portfolio Employer contributions are predictable A Guide for SME Owners 07

10 Main types of defined contribution group savings and retirement plans The following table provides an overview of the most common types of defined contribution group savings and retirement plans and their main features. Plan and operating details Features Advantages Defined Contribution Registered Pension Plan (DC-RPP) Under this plan, employer and employee contributions are accumulated until retirement, at which point the capital is used to fund the retirement benefits. Employer and employee contributions are tax-deductible. (Employer must contribute at least 1% of payroll.) Cost control for employers their contributions are often set as a percentage of payroll. Administration fees paid by the employer are tax-deductible. Employer contributions are not subject to payroll taxes. Possibility of establishing plan rules (contribution frequency, participation level, etc.). Employer and employee contributions are tax-deductible. (Employer must contribute at least 1% of payroll.) Cost control for employers their contributions are often set as a percentage of payroll. Administration fees paid by the employer are tax-deductible. Employer contributions are not subject to payroll taxes. Employer contributions only. Flexible contributions the employer has ample freedom to reward participating employees according to individual performance. Plan design flexibility Administration and reporting requirements, such as filing financial statements with government authorities Simplified Pension Plan (SPP) The SPP is a defined contribution pension plan administered by the financial institution offering the plan (the service provider). Administrative activities such as pension governance are assumed by the financial institution Available to employers in Quebec and Manitoba only Deferred Profit Sharing Plan (DPSP) With a DPSP, the employer distributes a portion of the company s pre-tax profits to eligible employees. Specified shareholders (i.e., individuals who own, directly or indirectly, more than 10% of company stock) are not eligible. Contributions and administration fees paid by the employer are tax-deductible. Contributions are not subject to payroll taxes. Contributions are not required in unprofitable years. Source of motivation for employees to perform No employee contributions are permitted 08 A Guide for SME Owners

11 Plan and operating details Features Advantages Group Registered Retirement Savings Plan (Group RRSP) A Group RRSP is a collection of individual RRSPs where the daily administration is centralized. If the employer contributes, the contributions are treated as employee contributions and added to the employee s earnings. Employee contributions are tax-deductible. Cost control for employers no fees to pay to monitoring agencies such as the Régie des rentes du Québec and the Canada Revenue Agency. Administration fees paid by the employer are tax-deductible. If the employer contributes, the contributions are treated as employee contributions and added to employee earnings (subject to payroll taxes). Administration fees paid by the employer are tax-deductible. Inexpensive and easy to administer Employer contributions are subject to payroll taxes Group Tax-Free Savings Account (Group TFSA) The group TFSA allows employees to accumulate savings without paying tax on income earned within the account. Unlike an RRSP, contributions to the TFSA are not deductible for income tax purposes. Pooled Registered Pension Plan (PRPP) and Voluntary Retirement Savings Plan (VRSP) PRPP and VRSP are low cost and easy to manage plans created by the Federal and Quebec Governments respectively to help workers save more for retirement. Inexpensive and easy to administer Cannot be offered alone (must complement another plan) Employer contributions are optional. Employer and employee contributions are tax-deductible. Employer contributions are not subject to payroll taxes. PRPP and VRSP legislation includes provisions on investment choices and plan costs. Administration handled by financial institution Automatic enrolment with an opt-out period Administration fees: fees paid by the employer to its service provider for plan administration services. A Guide for SME Owners 09

12 Choosing the right group savings and retirement plan for your business Given the vast selection of available plans and the fact that the cost and level of administration vary from one plan to another it can be difficult to make a decision. If you already deal with an advisor for your personal finances or your company s insurance, they may be able to help you. If they can t, ask them to recommend an advisor specializing in group plans. Your advisor and service provider will help you identify the type of plan that best suits your business by determining your profile and needs. The factors you ll need to consider include: Plan objectives: Do you want to attract new talent? Do you want to help employees save for retirement? Do you want to increase employee loyalty? Your company s financial and human resources: What price are you willing to pay? Do you have the personnel necessary for plan administration? Your personnel s demographics: How many employees do you have? What age groups do they belong to? Participation level regarding plan decisions: Do you want to actively participate in designing and monitoring the plan? Are you looking for a simple solution? Once you have identified the plan best suited to your business, you will have other important decisions to make, including the type of investment solutions and the choice of a service provider. 10 A Guide for SME Owners

13 Choosing an investment solution It s a good idea to speak to a financial advisor in order to determine the best investment solution for you and your employees. The following points should be taken into consideration: Employees investment knowledge Your comfort with investment products Your involvement level in designing the investment solution and in choosing and monitoring the funds In general, you must choose among three different approaches: Tailored approach Investment solutions that include customized options High involvement Guided approach Investment solutions for which you choose among pre-determined options Employer involvement in designing and managing the solution Turnkey approach Investment solutions entirely designed and overseen by the financial institution Low involvement Remember, you don t need to be an investment expert to offer your employees a group savings and retirement program. You will have access to advice from your advisor and your service provider. A Guide for SME Owners 11

14 Your responsibilities Choosing the right service provider Employers must ensure their plans comply with applicable legislation, such as the Income Tax Act and pension legislation and regulations. There is no shortage of regulations. Your advisor and the financial institution offering the plan can help you understand and comply with the various requirements. The Joint Forum of Financial Market Regulators has also established the Guidelines for Capital Accumulation Plans (such as RRSPs, RPPs, DPSPs, etc.). Though not legally binding, the CAP Guidelines offer a roadmap of best practices for plan sponsors to follow in the design and operation of a group program. With regard to the implementation and administration of your group savings and retirement program, you will need the support of a team of experts to simplify the process and eliminate concerns. Also, make sure you have access to tools and material that allow you to simply and effectively manage the program, help your employees plan for retirement, and obtain the legislation and governance support you need. 12 A Guide for SME Owners

15 About Standard Life Standard Life plc is a leading long-term savings and investment company headquartered in Edinburgh, Scotland. Standard Life has more than 10 million customers worldwide. In Canada, Standard Life has been doing business for over 180 years. With about 2,000 employees, including around 1,400 in Quebec, it provides long-term savings, investment and insurance solutions to more than 1.4 million Canadians. Standard Life has been providing pension plan services in Canada since Today, this remains our core business, accounting for more than half of the money entrusted to us. Our business continues to grow, largely because we re determined to make dealing with Standard Life as simple as possible. We adapt to the needs of plan sponsors and provide a wide range of online and offline tools to help members plan for life. For more information about our range of group savings and retirement programs, and our investment solutions and services, visit our website at We will work with you and your advisor to help you design a competitive group savings and retirement solution, one that you and your current employees will appreciate and that will appeal to employees you hope to recruit.

16 Retirement Investments Insurance Find out more This brochure is intended for general information only and should not be construed as legal, accounting, tax or specific investment advice. Members should seek professional advice concerning their situations and specific investment matters. While reasonable steps have been taken to ensure that this information was accurate at the time of printing, The Standard Life Assurance Company of Canada and Standard Life Assurance Limited make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance on it. The Standard Life Assurance Company of Canada Standard Life Assurance Limited GE13485A GS Standard Life, images reproduced under license.

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