Susan's health care clinic was growing rapidly and she needed to hire more professional staff. She was quite surprised to hear that the top priority of many qualified candidates was a corporate retirement savings plan. What she heard was, "I really like that your clinic is patient focused and the work environment is flexible, unfortunately I am looking for a company that also offers a really good retirement plan as part of the compensation package."
With only 5 staff, it never occurred to Susan to offer them a retirement savings plan. Pension plans only belonged to those who worked for large corporations and government, she thought. "I am just a small family-owned business, how can I afford to set up a pension plan like the big companies have?" Susan decided to investigate further.
Of the 2 basic kinds of retirement plans, the one offered by large companies and governments makes the employer responsible for the pension income. Just as Susan thought, this type of plan is not suitable for most businesses. Small businesses are advised to offer the other type of plan where the employees are responsible for how much money they will receive in retirement. The retirement income is based on the investments they select, the amount of money they invest, and the investment rate of return over time. The employer's role is limited to establishing the plan, selecting the service provider, and together with the financial advisor, giving employees a number of suitable investment options offered through the plan.
Susan started a Group Registered Retirement Savings Plan (Group RRSP). Employees were offered a choice of 5 portfolio models developed by a large financial services company. All of the models were tailored to a specific risk tolerance and return objective. Investment objectives ranged from preservation of capital to long-term growth. After meeting with a financial advisor and completing an investment questionnaire, each employee was presented with a portfolio model that best suited their investment objectives. Susan then agreed to match each employee's contribution up to 5% of their salary. Everyone participated and put in 5% by way of automatic payroll deduction. But things didn't go as expected.
Some employees withdrew money regularly out of the Group RRSP. As soon as Susan put money in, they took that money out. This defeated the purpose for creating a retirement savings plan. Since the investments didn't have any fees or penalties to sell, though was given to add a penalty to deter this behaviour. The financial advisor advised against this and suggested another option. "In conjunction with the Group RRSP, you can offer a Deferred Profit Sharing Plan (DPSP) that restricts withdrawals. Your employees contribute to the Group RRSP, just as they do now, but your company's matching contributions are deposited to the DPSP. Same investments, same contribution amounts, just two plans instead of one.
Susan decided to give it a try. She not only restricted withdrawals out of the DPSP but also added a 2-year vesting period. This means that if an employee were to leave the company within 2 years, they would forfeit the company contributions. Even though employee turnover has never been an issue, it just made good sense to include this feature. But Susan went further. To help incentivize her highly talented team to stick around, she added loyalty bonuses to the DPSP. After every 5 years of employment, Susan increased her company's matching contributions to the plan.
Did Susan deliver on her goal to, "put together a retirement savings plan, one that is even better than those offered by some larger companies - one that also provides access to confidential financial advice?" Let's hear some employee stories.
Even though Mary indicated that saving for retirement is a top priority, she had no idea if she was saving enough on her own. After reviewing Mary's personal balance sheet, the financial advisor prepared a roadmap for Mary that showed her how much she needed to save in order reach her retirement goals. She followed the advice and was able to reduce expenses and increase her savings. Mary found the regular investment statements helpful to easily track her progress towards reaching her retirement savings goal. This relieved Mary's stress and gave her peace of mind.
Carol didn't like having "all her eggs in one basket." She had savings and retirement accounts at various banks and insurance companies for extra diversification. Carol had the financial advisor perform an analysis of her investments and was shocked by the results. What she thought was diversification, was actually duplication. She had multiple mutual funds that invested in the same Canadian large companies. When she compared her investments to the diversified portfolio models in the company retirement savings plan, she saw the need for change. Carol transferred her investments into the company retirement savings plan and not only achieved her desired diversification, but also reduced her overall investment costs.
Having never dealt with a financial advisor, Debbie didn't realize that their knowledge extended beyond providing investment advice to include other wealth related matters. In confidence, she shared details of her family struggles over her mother's estate and wanted to ensure that her children never have to endure that type of pain and suffering. The financial advisor was able to provide solutions to fix Debbie's financial situation. For this, she was forever grateful to Susan for encouraging her to open up and take advantage of the financial advice she made available.
Employees were happy, so Susan was happy. Susan delivered on her goal of putting together a successful retirement savings plan. Her employees became more financially literate and the overall compensation package she offered was very attractive.
In Susan's story, name's and situations are illustrative and are not intended as financial planning advice. Before implementing any tax, investment, life insurance, or estate planning solutions it is best to seek professional advice. Have an experienced team of professionals work together to uncover the weak links in your plans and implement the correct solutions. Don't just leave your plans to chance because without structuring your family's wealth and estate plans properly, often, bad outcomes occur.
Consult a licensed financial planning advisor to help navigate your options, and then you can enjoy life & have fun.
About the Author
John Niekraszewicz (Nick-ra-shev-itch) BMath, FCSI, CFP, FMA is the Certified Financial Planner specializing in Wealth & Estate Planning that is responsible for the AHIP Association Health & Dental Plan provided by JVK Life & Wealth Insurance Group. John is also the Principal of JVK Life & Wealth Advisory Group - provider of mutual funds and investments. John welcomes your questions and can be reached at 1-800-767-5933 or firstname.lastname@example.org
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