TFSAs were first introduced in Canada in 2009 and they have been steadily growing in popularity. Over the past couple of years we’ve seen a distinct increase in the number of companies that are adding TFSAs to their Group Retirement Plans. Usually the TFSA is a voluntary component of the plan; employees can choose whether or not to enroll and contribute via payroll deductions. However, some employers set their group plans up so that employees choose whether to direct their required contributions to either a RRSP or TFSA account and the employer’s matching contributions go to a RRSP.
For companies that offer a group retirement plan, there are a number of benefits to the employees and the employer in adding a TFSA to their existing plan. For employers who offer employees the option of purchasing Canada Savings Bonds via payroll deduction, a group TFSA can be used to either complement or replace the CSB program.
Why Offer a Group TFSA?
The savings rate in Canada has been less than 5% for the past 20 years; Canadians are saving less than 5% of their gross earnings for retirement and other savings goals. Consequently, many people rely on credit cards and lines of credit to cover unexpected expenses and large purchases.
While some people find it very easy to develop and maintain a strong savings habit, most people find it challenging to save and so “forced” savings programs like group retirement plans are very powerful tools in helping people increase their personal savings rate. Many employees will freely admit that if they were left to their own devices, they would never have managed to save anything close to the balance of their group pension or RRSP account. Partly this is due to the benefit of employer matching but, even putting the employer match aside, the true power of the workplace savings plan is that it automates the saving process; allowing employees to save directly from their paycheque into an account that is usually difficult to access.
Adding a TFSA to an existing workplace savings plan allows employees to save automatically not just for retirement but also for other savings goals. There’s no cost to an employer to set up a Group TFSA and no ongoing operating costs. The plan is a value-add for the employee and often creates good PR for the employer which helps boost employee satisfaction and morale.
One advantage that TFSAs have over the CSB program is that TFSA accounts can be used for investing as well as cash savings. Within a group plan, the management fees that employees pay on their investments are usually lower than the fees they would pay on comparable investments available through the high-street banks or financial advisors. Lower fees mean that the employees’ money is likely to net higher returns inside the group plan than inside a personal TFSA simply because less of their gross return is lost to fees.
How do you set up a Group TFSA?
Adding a group TFSA to an existing group retirement plan is very straightforward. It requires the completion of an application form by the employer that establishes the rules for the plan (contributions, withdrawals, default investment etc.) and then the completion of individual enrollment forms by the employees who wish to sign up for the plan. The contributions are deducted via payroll deductions and remitted in the same way that contributions to the group retirement plan are. Employees are responsible for giving investment directions and ensuring that their contributions don’t exceed their available contribution room.
As with all group savings plans, offering education to employees about the plan, the benefits and how a TFSA can help them save for future spending goals tends to increase the number of enrollments and the amount of money that is contributed to the plan.