Differences between banks and insurance companies for group savings plans
Giving your employees access to a group savings plan can be an excellent way to boost your talent acquisition and retention efforts. As you’re researching your options, you may think the capital accumulation plans offered by banks and insurance companies are the same, but they’re not. We’ll outline the key characteristics you may want to consider in deciding which provider would be right for your business.
Start by deciding the group plan structure you want to offer
If you want to offer a group savings plan, you have a few plan types to choose from—registered and nonregistered, tax deferred, and tax free.
Primary capital accumulation plans
| Registered Pension Plan (RPP) | Registered Retirement Savings Plan (RRSP) |
Deferred Profit Sharing Plan (DPSP) |
|
For retirement or long-term goals |
✓ | ✓ | ✓ |
For short-term goals |
|||
Employer can put money in |
✓ Requirement |
✓ | ✓ |
Tax treatment of employee contributions |
Tax deductible for the employee
Deducted from pay before income tax
|
Tax deductible for the employee
Deducted from pay before income tax |
N/A |
Tax treatment of employer contributions |
Tax deductible for the employer
Not a taxable benefit for the employee until payout
Made directly into plan and doesn't affect payroll taxes |
Taxable income for the employee
Tax deductible for the employer
Increase overall payroll and related payroll taxes |
Tax deductible for the employer
Not a tax benefit for the employee until payout
Made directly into plan and don't affect payroll taxes. |
Withdrawals during employment |
Not permitted while still employed
May be allowed for voluntary contributions, as per plan rules |
May be permitted in plan rules |
May be permitted in plan rules |
Add-on plans
Tax-free savings account (TFSA) |
Non-registered savings plan (NRSP) |
|
For retirement or long-term goals |
✓ | ✓ |
For short-term goals |
✓ | ✓ |
Employer can put money in |
✓ | ✓ |
Tax treatment of employee contributions |
Not tax deductible for the employee
Deducted from pay after income tax |
Not tax deductible for the employee
Deducted from pay after income tax |
Tax treatment of employer contributions |
N/A |
N/A |
Withdrawals during employment |
Allowed at any time
Not taxable and therefore not subject to tax withholding |
May be permitted in plan rules
Subject to capital gains tax |
Understanding the differences
Although both insurance companies and banks offer group savings plans, the plans usually aren’t an apples-to-apples comparison.
Consider five advantages of group plans offered from an insurance company
Because a plan offered by an insurance company is set up as a formal group structure, employers and plan members can enjoy several benefits.
1. Institutional pricing and typically lower fees
In an insurance company group plan:
- Members gain access to institutional pricing, which can result in lower investment fees. The investment cost is tailored to plan size. As a result, the cost of the investment the member pays is typically lower.
- The administrative costs—which cover recordkeeping the plan and managing the investments—are typically shared among all the plan members.
In a bank group plan:
Members pay retail pricing like any other individual investor.
A lower fee can mean more money for your employees' pockets when they need it
Investment value in 40 years
The Manulife FutureStep Leith Wheeler Balanced Fund has an annual fee of 1.75%, compared to mutual funds that have an average annual fee of 2.13% (143 comparable Class - A Canadian Global Neutral Balanced Funds). This is based on an initial investment of $6,000 and a yearly contribution of $6,000, compounded annually over 40 years. Assumption: Saving $500/month over 40 years with a 6% rate of return (lc r). All charts and illustrations are for illustrative purposes only and are not intended to illustrate the performance of any security or portfolio.
2. Value-add services for your employees
Insurance companies offer a wide array of resources to support plan members, from financial advice to education sessions, webinars and self-serve tools, with no added cost, to help them make informed decisions about their plan. As the employer, you can also gain assistance in targeted communication to drive employee education.
3. A tailored and diverse investment menu
Plans offered by a bank generally include the bank's own proprietary investment options. Plans offered by an insurance company include a custom investment menu tailored to the needs of your organization. The investments are usually a mix of investment funds from many portfolio management teams, not just propriety investments. Your financial advisor and insurer will work together to understand your employee demographic and create a custom investment menu that's best suited for your organization.
4. Value-add services for you, the employer
Most group savings plans offered by insurance companies provide administrative services to support you and your human resources team and help streamline the management of the plan. In addition to training, dedicated online portals, and reporting, an insurance company will help ensure you understand everything that’s going on with your plan and your employees in real time.
5. CAP Guideline compliance
Capital accumulation plan (CAP) guidelines were created by the Canadian Association of Pension Supervisory Authorities (CAPSA) to guide sponsors in the management of their group retirement plans. CAPSA requires sponsors to periodically review the plan’s service providers, investment options, records, and the decision-making tools provided to members. Typically, insurance companies have a deep understanding of the regulatory landscape, enabling them to provide sponsors with tailored guidance and support to help ensure compliance of all aspects of the CAP Guidelines—from investment reviews to employee education and everything in between.
Ask questions to find the right group plan provider for your organization
There are plenty of group plan providers to choose from, but some may structure their plans more like individual plans. Getting answers to these questions from multiple providers can help point you in the right direction for your organization:
- What are the investment fees and other fees being charged to plan members?
- Do you offer investment options other than your own proprietary investment funds?
- What’s the enrollment and onboarding process for employees?
- How do you help educate plan members?
- How do members access financial advice?
- Are the same features and services available to all plan members?
- What support is available to my administrative team?
- What information and reporting are available for the plan and for members?
Important disclosures
The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.