Different types of group financial benefit plans
There are a number of different group financial benefits an employer can put into place.
One of the most common group financial plans is the Group RRSP. A group RRSP is very similar to an individual RRSP you would open at a financial institution except that is administered on a group basis by the employer. Employees make contributions to the group RRSP directly from their paycheque and the tax savings from the RRSP contribution can be applied to each paycheque immediately. Employers have the option of matching employee contributions in some manner and although matching does make for a better plan, it is not required.
The contribution and tax rules for group RRSPs are guided under the income tax act. Pension plans on the other hand are guided under pension law.
Defined Benefit Pension Plans
A Defined Benefit Pension Plan is a pension where the future benefit is known based on a specific formula that incorporates years of service, salary and a pension factor. What is unknown with a defined benefit plan is the contributions to provide the benefit. Employees may or may not contribute to the plan but in most cases, the contributions into the plan are usually shared by both the employee and the employer and can change depending whether the plan is properly funded to pay the required future benefit. There are fewer and fewer defined benefit pension plans because they are more costly to administer (actuarial valuations are required every three years to determine if the plan is properly funded) and the liability of the plan is shared by both the employee and the employer.
Defined Pension plans really reward tenure of employees. They are the best benefit to encourage and reward long term employees. Employees who retire with a defined benefit pension, tend to have more stable, guaranteed income in retirement. Defined Benefit plans are excellent sources of retirement income.
Defined Contribution Pension Plans
Defined contribution pensions are becoming much more common that defined benefit pensions because they are less costly to administer and the there is no funding liability on the employer. There is some annual reporting required for both types of Pension Plans, but the Defined Contribution plan requires little or no actuarial intervention.
Under the defined contribution plan, the future benefit is the unknown. The future benefit depends on how much money is put into the plan by the employer, the employee and the rate of return earned by the investments. What is ‘defined’ in this plan is the amount of contributions that will be put into the plan. This is usually expressed as a percentage of income. Employees bear the market risk and, provided that contributions are remitted in a timely fashion, defined contribution plans are, by definition, always fully funded.
Deferred Profit Sharing Plan
A Deferred Profit Sharing Plan (DPSP) is an arrangement similar to a Defined Contribution Pension Plan whereby an employer distributes a portion of pre-tax profits to selected employees. Unlike the Defined Contribution Plan, employees do not contribute to the DPSP. The employer’s contribution is based on company profits.
Some employers will offer a group non-registered savings plan. These typically are less common because there are fewer benefits to both the employee and the employer. There are so many options avaible to individual employees outside the group and the money in these plans tend to be there for a very short term.