Determining Employer Contributions in Group Retirement Plans
In the last blog, we addressed the many factors that go into a setting up a group retirement plan. This blog will help answer one of the biggest questions employers face: how much should I contribute?
Broadly speaking, employer contributions in Canada tend to range from 3% to 6% of an employee’s salary (normally up to a certain cap), with a few contributing under 3% and even fewer above 6%. Regardless of what match you settle on, by choosing to put one in place you are already on track to help your employees be better prepared for retirement.
Just like with plan design, there are many factors that can influence the match level you offer your employees. The following are some of the key aspects you may want to consider.
In essence, a group retirement plan is a savings vehicle intended to help employees prepare for retirement. To that end, employers should take into account that a plurality of experts recommend that people set aside anywhere from 10% to 15% of their salary each year for retirement. Employer contributions are therefore a way of shouldering some of that burden and encouraging employees to contribute through a matching structure.
For the sake of illustration, let’s assume a savings goal of 12%. One way of attaining that goal could be to offer matching contributions up to 6%. In this scenario, the savings burden is evenly split between employee and employer. In case a 6% match is not a feasible option, you may opt for a lower match in which case the employee would have to contribute above 6%. Yet getting employees to contribute above the offered match often requires proactive outreach and education from both the employer and plan provider.
Many organizations offer employees a tiered match that rewards those with seniority. Under this structure, an employee receives a higher match every year up to a certain limit. As an example, a new employee may be offered a 2% match to start with, but on their second year that goes up to 3%, then 4% on their third year, and finally, 5% on their fourth year. The starting match and the speed in which it increases can obviously be adjusted to suit your budget and HR policies.
Although a tiered match may act as a good retention bonus, it’s important to note that it is not particularly suitable for industries with a high employee turnover. On the other hand, in industries where long tenureships are the norm rather than the exception, rewarding senior employees with a higher match may be an option.
As with all employers, budgetary constraints are likely to form a check on the level of match you are able to offer. Determining the total amount you are able to allocate to the plan is therefore instrumental to finding out the match you are able to offer to your staff. Once you have determined the total amount that can be budgeted, identify the number of employees that would be eligible to participate and then determine their average salary. Divide the total budgeted amount by the number of eligible employees and this will provide you with your budget per employee. Dividing the budget per employee by the average salary will then provide you with the budgeted match.
Let’s assume that Company "A" has $130,000 earmarked for an upcoming GRSP. The company has 50 employees who would be eligible to receive a match and their average salary is $50,000. To determine the match that can be offered, we divide 130,000 by 50 giving us $2,600 per employee. We then divide 2600 by 50,000 which gives us 0.052. Multiplied by a hundred, this gives us 5.2%, or 5% if we are to round down. Note that these calculations assume an equal percentage match for all employees as opposed to a tiered one. They also assume 100% participation rate among all eligible employees, a rare feat in non-mandatory plans.
In cases when the budget is quite limited and the match comes out quite low, engaging in benefits reprioritization might be needed. This can be particularly prudent if your organization for instance, offers a comprehensive benefits package that includes some non-essential perks. Employee surveys can be your best friend in this area as they can better inform you of their preferences as well as avoid any backlash from disappointed employees.
If you think you might benefit from some consultation on the many intricacies of determining a company match, please feel free to fill a form here and one of our team members will get in touch with you.
Open Access is a discretionary manager of group retirement plans. Being a fiduciary, we are legally and structurally bound to act in the best interests, and only the best interests, of our clients. This means no proprietary products, no conflicts of interest, and no hidden fees.