It wasn't long ago that people thought of big corporations as the good Samaritans of the retirement world, providing employees with generous pensions based on their earnings and years of service with the company.  But times have changed. Big companies are stepping out of the pension business in an effort to cut costs. Meanwhile, more and more people are working for small and mid-sized businesses that can’t afford to administer pension plans. But all is not lost: the financial industry has developed new products and services to keep up with our changing economy. One of these is the group RRSP. In a lot of ways, group RRSPs offer the best of both worlds, being more flexible for employees, and more affordable for employers.

What is a group RRSP?
A group RRSP is simply a collection of individual RRSPs owned by employees and/or members of a sponsoring organization. Usually, contributions to a group RRSP are automatically deducted from an employee's paycheque, and are usually matched by the employer. Typically, participation in a group RRSP depends on length of employment and position in the company. Much like a regular RRSP, contributions to a group RRSP are tax deductible, and investment options and withdrawal criteria are similar as well.  

What is the difference between a pension and a group RRSP?
In a “traditional” pension (i.e., defined benefit), retirement benefits were essentially guaranteed, regardless of the performance of the underlying pension fund. While this was good for the employee, the company often incurred considerable risk—the company sometimes had to cover benefits if pension investments performed poorly. With a group RRSP, each employee is responsible for their own retirement benefit: benefits are determined by how much money is in the fund at retirement.

Advantages of a group RRSP
The main advantage of a group RRSP is flexibility. Because a group RRSP contribution doesn’t bring with it a “Pension Adjustment” that limits contribution to an individual RRSP, employees are free to top up their individual plans to their maximum. And because funds in a group RRSP are the property of the employee, employees can usually invest in vehicles of their own choice, or withdraw funds to pay for a house. 

The plans are good for employers, too. With more flexible regulations governing it, a group RRSP can be much simpler—and much cheaper—to administer than regular pension plans. In addition, investment firms may give group plans lower rates on account and transaction fees, making a group RRSP an even more effective method of saving for retirement. 

Education is the key
Because group RRSPs force employees to become directly involved in the investment process, employees need to educate themselves more than with a pension. Specifically, employees need to understand the risks and rewards of different types of investments. Many companies that offer their employees group RRSPs also offer investment counselling. And firms that manage group plans often do the same. Between the two, employees can start taking charge of their retirement savings, and make the right decisions about their financial future. 

If you own a small or mid-sized business, you may want to consider a group RRSP instead of a traditional employee pension plan. Many financial institutions offer professional financial assistance and a wide range of investment options for those looking to start a group RRSP.