A defined contribution plan is a pension plan in which the employer agree to contribute a fixed amount to the employees account.
The money will accumulate based on the level of contributions, time invested and investment returns. The Income at retirement is based on the fund value and decisions of the employee. The employer agrees to the contribution amount only.
Defined contributions pension plans are a non taxable benefit which make them quite attractive in higher WCB industries and offer a level of creditor protection that is superior to the RRSP structures.
Employee contributions are a tax deductible expense to them and all money inside the plan grows tax sheltered until it is turned into a income or withdrawn.
Defined Contribution Pension Plans Frequently Asked Questions
A Employer sponsored pension plan in which the employer promises to contribute a set amount usually a percentage of income. Plans can start at 1 % of income. The words pension plan sometimes scare off companies but the only promise is the contribution.
Contributions are a non taxable benefit and not subject to tax. This is a huge feature to the sponsoring employer and employee. While the contribution does reduce the employee contribution room to avoid double dipping it is non taxable income. 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In general no to employer contributions, employee contributions can be withdrawn.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 if you want to help your employee save, have a RRSP, if you want to help them save for retirement have a pension plan. This holds true today due to the withdrawal rules. Waves of attacks on this feature are chipping away at this feature though.
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.