Group RRSPs a key benefit for small business employees
Smaller companies move to avoid Quebec's burdensome pension plan regulations

During the next several weeks, hundreds of thousands of Canadians will be scrambling to make last minute RRSP contributions. Not employees of computer supplies distributor Kerr Norton.

The Vaudreuil-based company long ago set up a group RRSP plan. Contributions are automatically deducted from employees' paychecks, so there is no last minute scrambling to meet the February 28th deadline.

"The forced savings element, is a big advantage of group RRSPs," said Ed Pahud, Kerr Norton's president. "Almost all financial advisors will tell you that the best way to accumulate a nest egg is to make it an automatic part of your life."

But group RRSPs also provide employees who work at small businesses like Kerr Norton with another big advantage: logistical and financial assistance to help them plan their own retirements.

According to Sadie Babin, Kerr Norton's payroll coordinator, the company matches employee contributions of up to five per cent of their annual salaries. Full-time workers who have been at the company for than two years are eligible.

"We have a very good deal, although the markets have been pretty tough lately," Babin said. "The money deducted is transferred into employees' accounts and (they) pretty well look over their own funds. If they have any questions, they can talk to an independent financial advisor."

Group RRSPs have been growing by leaps and bounds since the provincial government instituted tougher pension legislation during the early 1990's. According to a 1998 study by Brendan Woods International, the number of Group RRSPs for companies with less than 100 employees will grow fourfold by 2006, from 40,000 to 170,000. Assets are predicted to skyrocket from $100 billion to more than $250 billion.

One example of that growth is Mackenzie Financial Corporation, which administers Kerr Norton's Group RSP investments. The company has seen the number of group plan clients jump from 1622 in 1998, to more than 4,000 today.

"Group RRSPs are a quick and effective was to reward employees," said Mackenzie's Dennis Santarossa, assistant vice-president in charge or marketing group plans. "Just by having one, companies show they care about employees not only for today, but for the future too."

According to a survey co-sponsored by Benefits Canada magazine, 73 per cent of employees said they would rather have an employee-sponsored retirement savings plan than a raise in pay.

Santarossa agreed that the automatic payroll deduction is a key benefit of Group RRSP plans, but said the fact employers typically contribute part of the cost is also important. The educational value provided should also not be overlooked.

"Today most people realize they need to take charge of their own retirements. But to be honest, many don't have a clue how to do it," Santarossa said. "When Group RRSPs are set up, independent financial advisors conduct briefings with the staff as a group and then with employees individually."

According to Roger d'Eschambualt, president of Delta Benefits, which administers about 100 group retirement plans, another key benefit being offered by many companies is Deferred Profit Sharing Plans.

DPSPs operate like Group RRSPs, with some nuances. For one, they are not considered a taxable benefit to employees. That means companies to not have to pay out onerous payroll taxes to governments. These taxes are unseen by most employees, but can comprise between 10 and 20 per cent all salaries paid out.

Employees also benefit because the contributions come out of corporate profits not employee paychecks. DPSPs typically vest after two years, which means employees cannot take the money out immediately. That helps ensure funds are saved for retirement, and not blown on a vacation.

According to d'Eschambualt, Group RRSPs are particularly popular in Quebec lately. "Small businesses are always trying to attract good employees, but job market in Montreal is getting much tighter," d'Eschambault said. "So companies have to offer more get the top people interested."

Group RRSPs are far easier to administer than pension plans which require complex accounting, audited financial statements, and the establishment of a cumbersome pension committee. Managers dislike these committees because they give employees access to otherwise confidential payroll information.

Large corporate pension plans are taking a lot of heat recently for their poor portfolio performances. According documents by the National Post, the Office of the Superintendent of Financial Institutions has put 50 of Canada's 1,200 plans in federally regulated industries on a watch list in the wake of heavy stock market losses. That gives Group RSP boosters one more reason to cheer.

 

Sidebar: Deferred Profit Sharing Plans operate like Group RRSPs -- with subtle but important differences.

o The employer pays the plan's cost out of profits. Contributions typically vest with employees after two years.
o The maximum allowable contribution is the maximum of $7,250 or 18 per cent of the employee's annual salary.
o Employees benefit because nothing is deducted from their paychecks, but they could come up short in years that the company doesn't make any money.
o Unlike RSP contributions, DPSPs are not considered a taxable benefit. That means they are exempt from payroll taxes such as Quebec Pension Plan, Employment Insurance, Medicare and CSST contributions.

 

 

Photo caption: According to Ed Pahud, president of Kerr Norton, (shown here with Sadie Babin, the company's payroll coordinator), Group RRSPs are an excellent tool to help small businesses attract and retain employees.

peter@peterdiekmeyer.com

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