A GRSP is similar to an individual registered retirement savings plan (RRSP), but with the added advantage of allowing employees to have savings deducted straight from their paycheques into a range of preselected investments, often with a match from the employer.
Unlike with a true pension fund, the plan’s administration is outsourced to an insurance company or brokerage instead of being handled by your employer. In this way, GRSPs are different from RPPs, which are employee pension plans that may be managed by the employer alone or may include employee contributions.
How does a GRSP work?
Sometimes referred to as a Group Registered Retirement Savings Plan or group RRSP, a GRSP works almost identically to an individual RRSP, and all the standard RRSP rules apply. The main differences are that you’re able to enjoy the tax savings on contributions immediately (yay!), you may get extra money from your employer without having to work for it (yay!), and you might have limited investment options (boo!).
You’re free to have both a GRSP and an RRSP as long as you don’t exceed the annual maximum contribution limit. You can contribute up to 18% of your previous year’s income, up to a maximum the CRA sets each year.
Your employer may choose to match a certain percentage of your salary, usually between 3% and 6%. Matching plans require you to contribute a certain amount to get that same amount matched from your employer, up to the set maximum by the plan.
Other plans, described as “non-matching,” means you can still contribute, but your employer won’t contribute anything on your behalf. Employer deposits are considered part of your salary, so you’ll have to pay tax on them, but once the money is in your GRSP, it’s tax-sheltered like the rest of your funds.
You can borrow money from yourself for the Home Buyer’s Plan and the Lifelong Learning Plan, but are otherwise expected to leave the money in until retirement. If you choose to withdraw money prior to retirement, the Canada Revenue Agency (CRA) will withhold up to 30% of the tax bill, payable immediately, and then charge you the rest of the tax owed in April.
Once you retire or turn 72, you must convert your GRSP into an RRIF, another type of tax-sheltered account, and pay yourself an annual, scheduled amount based on the value of the account and your age. You can also take out lump-sum or buy an annuity. At this point you’ll pay tax at your marginal rate. If you leave your job and aren’t ready to retire yet, you can simply transfer the money to an individual RRSP.
What are the pros and cons for employers?
Pros
Offers employers the power to define contributions and the chance to get tax deductions via those contributions
Acts as an incentive for new hires, helping attract good talent
Helps with employee retention, especially if the employer matches
Is easy to manage compared to other types of plans
Offers more flexibility compared to other types of plans
Cons
Requires some management time to setup and administer on top of payroll
Creates expectation that there will be a match, employees may be disappointed if the employer opts not to contribute
What are the pros and cons for employees?
Pros
Provides ease-of-use, with contributions deducted pre-tax from employees’ paycheques
Offers employees freedom to decide their contribution amount—there is no minimum
Often has lower management fees than most RRSPs due to the pooling of all employee assets
Is managed by a professional investor who balances portfolios of mutual funds or index funds, which could be a limitation to DIYers, but is usually seen as a relief
Gives employees free money in the form of matching funds up to a certain contribution percentage of their salary
Comes with the option to use the funds for either the HBP (Home Buyer’s Plan) or LLP (Lifelong Learning Plan)
Cons
Provides employees no say in the choice of financial institution or plans, and investment options can be limited or restrictive
Typically only provided to full-time employees who may need to meet a minimum tenure (ex. 3 months) to get into the plan
Limits contributions to a certain percentage of income
“Locks in” contributed funds until retirement
Gives the employer the option to cancel the plan at any time
What to consider when shopping around for a GRSP
Employers have many GRSP options to choose from, so it’s a good idea to go into the process with a sense of what to look for. One initial piece of advice is to work with a qualified GRSP advisor to select and set up your plan. As you shop around, consider the following questions:
What is the member experience like?
Look for institutions that offer an enjoyable experience for both plan members and administrators. This can be things like making it easy to manage contributions and payroll, as well as how easy it is for plan members to view their investment information and performance.
What are the investment options?
Most GRSPs offer a mix of actively managed asset class funds like Canadian or U.S. equity mutual funds and target-date funds. Make sure that the plan you pick has a platform that allows participants to select a combination of investments that meets their individual financial needs without being restrictive.
What are the fees?
Annual fees on funds in GRSP plans tend to be relatively low compared to what they would be for the same fund outside the plan. But while there are fee savings, the fact that GRSPs rely on mutual funds that charge fees means that the options for investment are still expensive. You may be able to find options with truly low fees.
