Advantages of Retirement Plans for the Employee and Employer

Retirement plans are an employer's workplace benefits for eligible employees.

At first glance, it’s safe to assume these plans only benefit the employee. On the contrary, employers also stand to enjoy some equally pleasant perks.

Want to know what’s in it for your company?

Why would a small business owner want to contribute money to a retirement account with all the expenses on their plate?

Here’s an article detailing the advantages of retirement plans for both the employee and the employer.

Key Advantages of Being an Employer-Sponsored Plan Participant

Employees eligible for their employer-sponsored retirement plans have some pretty attractive perks to enjoy. They include:

Free Money

Employer-sponsored plans essentially work like this: an employer sets it up, and eligible employees enroll as plan members.

Employees participating have contributions deducted from their current taxable income as tax-deferred contributions. The money is then put into investment assets such as mutual funds and GICs. Although it's not mandatory, the employer adds a matching contribution to the retirement savings account.

So, strictly speaking, the employee gets free money from their employer if they keep up with the employer match. And as discussed below, they don’t even have to worry about keeping up with monthly contributions because they are automated.??

Simplified Investment Management

Employees don't just get free money; they also enjoy superb investment gains without lifting a finger. The employer employs an investment manager experienced in financial matters to handle the complex and time-consuming task on their behalf.

In exchange, employees who participate pay investment management fees. The fee is also not that expensive because most employer-sponsored retirement plans are managed together to spread out management costs.

Fantastic Tax Advantages

Employee contributions to retirement accounts aren't part of taxable income and generally enjoy tax-deferred growth until withdrawal. And with most employer-sponsored retirement plans, even the investment assets they select enjoy similar tax advantages.

Even better, most employees often withdraw their benefits when they attain the right retirement age.?

The result??

They'll be in a lower tax bracket, resulting in lower tax rates on taxable income. Conversely, it leads to better monthly benefits or a higher retirement payment lump sum.?

Encourages Better Financial Habits

Saving is difficult for most employees due to personal and external reasons.

While you cannot tell them how to spend their earnings, you can guide them towards better financial habits by setting them up with an employer-sponsored plan.

How will it help, you ask??

Well, monthly employee contributions are automatically deducted from the employee’s paycheck. This gets the discipline part out of saving since an employee won’t even get the chance to ponder over whether to save or not.

Plan members are also only required to contribute 18% of their earnings. This is usually just a small portion of the employee's salary, meaning they will feel a little pinch, but they'll have enough money to cover their living costs.

And since the money is put into investment assets where it grows tax-free, the employee is encouraged to find and invest in similar retirement plans or even open their own retirement account.?

Also, as noted, investment management is left to the pros. This further simplifies investing for the average Joe without knowing what mutual funds are or how money markets work.

This has a potential bubble effect on your entire team, consequently inspiring a saving culture and better financial habits across the entire company.

Why Offer Employer-Sponsored Retirement Plans?

Now onto the elephant in the room; what are the retirement plan benefits for the employer, or rather why should a small business owner add retirement account costs to their expense list? For the pleasant benefits below:

Unlocks Tax Benefits

Employees aren’t the only ones who enjoy significant tax advantages from retirement accounts. While employees get tax deductions, employers usually get tax credits.

These credits are offered under the Income Tax Act to encourage employers, particularly small business owners, to invest in employer-sponsored retirement plans. This and related acts categorize the cost of setting up and managing employee retirement accounts as a business expense. As a result, employers can claim tax credits, reducing their overall tax burden.

Employer Sponsored Retirement Plans Foster Employee Loyalty and Productivity

Whether in the manufacturing or service industry, employees are the cogs that turn the wheels in your business. And they'll be more productive when they're happy, comfortable, and have a positive attitude towards their work environment.

How's this related to retirement plans, you wonder??

Setting up retirement accounts and matching contributions proves to employees that you value their skills and lives in general.

This fosters a positive employee-employer rapport, leading to improved employee comfort at the workplace, loyalty, output, and, ultimately, business productivity.

Improves Talent Attraction and Employee Retention

Due to the increasing cost of living, retirement plan benefits are a key feature for candidates and employees. In fact, most modern employees prefer retirement benefits over other workplace benefits.?

Consequently, rolling out an employer-sponsored retirement plan as a small business owner will give you the competitive advantage required to attract talented candidates in this tight labor market.

Not only that, but it'll also enhance job satisfaction among your current employees, reducing their chances of quitting.

The outcome??

You'll build great and talented teams voluntarily committed to their jobs, leading to business success. It'll also lower turnover costs, which are pretty expensive, usually averaging between 29% and 46% of an annual employee's salary.

Flexible Options

Unlike in the past, when many employers were limited to defined benefit plans, employee-sponsored retirement account options are abounding nowadays.

Most small business owners in Canada can now switch between qualified and non-qualified retirement plans. Options vary, ranging from defined contribution and benefit plans to group registered saving plans (discussed in detail below).

This allows small to medium-sized business owners to opt for plans that favor the employee and are financially suitable for their enterprises. And if you find a reliable retirement plan provider, you may have the plan tailored to fit your business needs and the cost of living in your region.

It Doesn’t Take Away from You

Due to the costs, most small business owners in Canada shy away from setting up employee retirement savings accounts. But employer contributions don't take much from a business owner.?

The basic interest rates and management fees are typically passed on to the plan participants. Simultaneously, employer contributions and related retirement plan expenses are considered business expenses, unlocking significant tax advantages.?

In essence, setting up an employer-sponsored retirement plan for your employees doesn't take away from you. If anything, it benefits your business in both monetary-tax benefits (and non-monetary ways- increased employee retention).

What Employer Sponsored Retirement Plans are Available?

Employers in Canada can choose from a variety of retirement accounts. This allows them to select retirement savings programs that best suit their business.

The different types of retirement accounts generally fall into the following categories:

Registered Pension Plan

These are the tax-deferred retirement savings programs offered by employers in Canada. The employee and employer contributions are usually automatic and recurrent. RPPs are essentially officially recognized or qualified plans in Canada. They include two main types of qualified plan accounts:

• Defined contribution plans

They're the most popular type of retirement account nowadays. Employees participating contribute from their current taxable income, but their retirement benefits aren't defined. Benefits at maturity usually depend on maximum contributions, the employer match, and the accumulated investment gains.

• Defined benefit plans

The employee's taxable income at withdrawal is defined with defined benefit pension plans. It's usually based on their salary and their years of contribution. Some employers may also calculate the total compensation based on the employee's tenure.?

Besides defined benefits, the primary difference between defined contribution and benefits pension plans is that with the latter, the employee has no control over their investment choices.

Registered Retirement Savings Plans

Registered retirement savings plans(RRSPs) are the Canadian equivalents to the retirement programs mandated by the US internal revenue authority, such as the 401(k)plans. While they're essentially individual retirement accounts, Canadian employers who find RRSPs appealing still have options such as:

• Group RRSPs

Group RRSPs, or GRRSPs, are tax-sheltered retirement accounts similar to individual retirement accounts in terms of investment options. They are offered as a workplace benefit for employees.

Employees contribute, usually just 18% of their current taxable income, and the company offers an employer match. These contributions are then put into preselected investments that enjoy tax deferred growth until maturity.

Most people often confuse GRRSps with 401(k) plans, but while they share similarities, they differ. GRRPs are Canadian, while 401(K) plans are usually in the US.

Of all the Canadian retirement saving accounts, GRRSPs are the closest tax-deferred retirement accounts to 401(k) plans. The plans are similar in that the employee can select the right investment instead of having the employer choose for them.?

Employee contributions are also pre-tax in both plans since the employer match is subject to tax deductions. Additionally, participants in GRRPs and 401(k) plans can borrow from their savings plans to buy a home under the Home Buyer's Plan.

The difference??

401(k) plans usually feature vesting requirements, while GRRPs don’t. Unused GRRSP contributions can typically be carried over to subsequent years, while with 401(k)plans, they cannot. And while GRRSP contributions are set at 18% of the employee’s taxable income, 401(k) plan contribution limits are adjusted annually based on inflation. Moreover, GRRSPs often allow a spousal account while 401(k)plans don't.

Other similar options available to Canadian employers include group tax-free savings accounts and the voluntary retirement savings plan.

Choosing a Retirement Plan for Your Employees in Canada

It's no secret that employees stand to benefit significantly from retirement plans. They get free money thanks to the employer's contribution and excellent investment earnings because professionals manage their funds.?

Employees also enjoy hands-free, tax-deferred savings based on the setup plan. They may even control their investment choices. Contributions are subject to tax deductions, which means better benefits upon maturity because they'll be in a lower tax bracket.

But employers get to benefit too. They enjoy tax breaks and a competitive advantage in the ever-tightening labor market.?

Establishing retirement plans also increases employee loyalty and productivity, ultimately leading to business success.?

So, if one of your long-term goals is to secure your future and that of your employee, you need one. Don't know where to begin?

?Get in touch with us today to get started.