DCPPs differ from Defined Benefit Pension Plans, which promise a specific benefit upon retirement based on factors such as salary and years of service. Instead, the benefit provided by a DCPP depends on the performance of the investments held within the plan.
What is a Defined Contribution Pension Plan (DCPP)?
DCPPs are retirement savings arrangements where both employees and employers make regular contributions into individual accounts. These contributions are typically invested in a variety of assets, such as stocks, bonds, mutual funds, or other investment vehicles. The ultimate value of the pension is determined by the performance of these investments over time.
What Do I Need to Know About DCPPs
- Contributions: Both employees and employers contribute to the plan, usually as a percentage of the employee’s salary. Contributions are often deducted directly from the employee’s paycheck and may be subject to certain limits set by tax authorities.
- Investment Options: DCPP participants have some degree of control over how their contributions are invested. They can typically choose from a range of investment options offered by the plan, allowing them to tailor their investment strategy to their risk tolerance and retirement goals.
- Portability: DCPPs offer portability, meaning that employees can generally retain their retirement savings when changing jobs. Upon leaving an employer, employees may have the option to transfer their DCPP funds to a new employer’s plan, to an individual retirement account (IRA) or similar retirement vehicle, or to leave the funds invested in the existing plan.
- Vesting: DCPPs may have a vesting schedule that determines when employees become entitled to the employer’s contributions. Vesting schedules can vary but often range from immediate vesting to gradual vesting over a certain number of years.
- Tax Treatment: Contributions to DCPPs are often tax-deferred, meaning that participants do not pay taxes on their contributions or investment gains until they withdraw funds from the plan during retirement. This tax-deferral can provide significant benefits in terms of accumulating wealth over time.
Take the Initiative
Bolster your job offering and employee relations by providing the option to a secure financial future and fulfilling retirement. When time is right, chat with a broker about how a DCPP or another Retirement Plan can help you in your pursuit of talented and loyal employees.
Defined Contribution Pension Plan; Frequently Asked Questions
Contributions are a non taxable benefit and not subject to tax. This is a huge feature to the sponsoring employer and employee. Although, employee contributions do equally reduce their RRSP contribution room to avoid double dipping in non taxable income. Alternatively, employers with high WCB rates enjoy a huge financial advantage over a group RRSP structure.
The employee makes the investment choices from the available offerings inside the plan. The performance of their money, how much is contributed, time in and returns will determine the income the employee receives. Once the money is contributed the employee controls the money.
Generally employees can contribute into the pension plan. Contributions are tax deductible within the context of ones RRSP limit. Employee contribution will be accounted for and tracked on a separate total from employer contributions due to withdrawal rules.
In general, no to employer contributions, employee contributions can be withdrawn.
It has been quoted that if you want to help your employee in general savings, have a RRSP, if you want to help them save for retirement then have a pension plan. This holds true today due to withdrawal rules.
The governments make rules on all registered savings programs be it RRSP or pension. With a Defined contribution pension the employer is required to file an annual information return with the pension regulator and there are cash flow reports to file. Group RRSP’s do not have these requirements.
The answer is subjective to what you want to accomplish, your business needs and your personal philosophy around the end retirement goal. Pensions enjoy the non taxable benefit advantage and restrictions on withdrawal making a future retirement income legacy more certain then a RRSP.
The RRSP likely offers more personal liquidity options for the employee along the journey to retirement.