Should you opt in to a group RRSP?

Q.I’m 35 years old and have just started a new job with a large transportation company that offers a group RRSP. What is this and how does it work? And how do I determine whether I should sign up for the group plan, or just stick to my regular annual RRSP contribution at my bank?
–Jonathan

A. Some employers offer group registered retirement savings plans (RRSPs) to their employees. Group RRSPs differ from employer to employer, so it is important to understand the plan specifics for your company.

In general, group RRSPs are provided by insurance companies like Sun Life, Manulife and Great-West Life—these are the top three group RRSP when you look at the amount of assets (contributions) they are managing.

A common feature for group RRSPs is an employer matching contribution. For example, if you contribute to the group plan, your employer may kick in a certain percentage of your salary, or a specific dollar value. Some plans match 100% of your contributions, others, 50%, while some have various other matching arrangements depending on the plan.

The matching contributions are considered income to you, so in the eyes of the Canada Revenue Agency (CRA), participating in a group RRSP with a match is like you’re receiving a bonus from your employer. However, you can also deduct your employer’s contributions, in addition to your own contributions, on your tax return.

Your contributions plus your employer’s contributions cannot exceed your available RRSP room as reported on your notice of assessment for the previous year.

Investment options for group RRSPs are generally limited to mutual funds. There may be a shortlist of funds or a long list, but an employer determines the available options with the provider. Fees vary from plan to plan. Often, mutual fund management expense ratio (MER) fees are competitive given the buying power of an employer placing a large amount of investments with the group RRSP provider.

Compare the best RRSPs in Canada >

More often these days, target-date funds are being offered in addition to the traditional bond, stock and balanced mutual funds. Target-date funds use a target retirement date to try to help employees more easily determine their investment asset allocation. At age 35, let’s say your target retirement date is age 60, Jonathan. That is in 25 years—in the year 2044. A 2045 target-date fund may be the closest target year to your target retirement (they are generally in 5-year target increments, ie. 2020, 2025, 2030, and so on).

A typical asset allocation for a 2045 target-date fund could be 10 to 20 percent in bonds and 80% to 90% in stocks. Over time, as the years pass, and 2045 gets closer, the mutual fund will automatically reduce exposure to stocks and increase exposure to bonds, so it rebalances dynamically.

A 55-year-old who may be planning retirement at 60 may own a 2025 target-date fund, with maybe 40% to 50% in bonds and 50% to 60% in stocks. The thinking is risk tolerance may decrease with age, and if nothing else, the time horizon for needing the money is shorter.

Target-date funds can be easier than trying to build your own portfolio, but employers often provide tools to help build your own portfolio with different mutual funds, and providers may also provide some direction. The investment advice tends to be less than you might otherwise expect from a full-service investment advisor, including those at the bank since it is usually provided by a call centre.

Even though you may get more hand-holding or have more investment options at the bank, Jonathan, I think the key factor that makes group RRSPs more attractive than the bank or any other third-party RRSP option is the matching contributions. Even a modest match like 25% is an instant 25% return on your investment. That would be hard to achieve elsewhere.

Another benefit of group RRSPs is that your contributions are made at source, and deducted from your salary, which promotes good saving habits—the contribution is made before you have the opportunity to spend it. You also get the benefit of having your tax refund upfront, as there is no tax withheld on the income you redirect into your RRSP.

In some cases, a saver may be better off contributing to a tax-free savings account (TFSA) instead of an RRSP but, again, the matching contribution on a group RRSP tends to favour RRSP contributions over TFSA contributions for those with a group RRSP available.

Compare the best TFSAs in Canada >

If you have high-interest-rate debt, like credit card debt, that could be one reason to forgo group RRSP participation, particularly if the matching contributions from your employer are low (percentage or dollar amount). But, generally speaking, maximizing your group RRSP contributions is an opportunity you do not want to miss.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

More from Ask a Planner:

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• “Will my hard-working teen have to pay tax on withdrawals from our family RESP?”

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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