DPSP & EPSP Questions

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
brucecohen
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Post by brucecohen »

You can do a direct transfer from a DPSP to an RRSP. DPSPs fall within the tax-sheltered retirement savings umbrella. Your T4 for 2007 will show a pension adjustment equal to the amount your employer put into the DPSP this year. That will reduce your 2008 RRSP room accordingly.

There is no statutory lock-in on DPSP money. That's because DPSPs do not fall under pension legislation. The lock-in on your plan was imposed by the company. Lawyers and pension consultants have long suggested that such contractual lock-ins are not enforceable, but that has not been tested in court. Check your DPSP documentation for a fineprint provision stating that the company's contributions are contingent on you keeping money in the plan until you leave the company. IOW, the company can't take back what's vested but could cut off the flow of new money.

Have you actually checked the MERs on the funds offered to DPSP members? Often providers like Sun Life charge substantially less than retail on funds used in group plans.

Does the plan offer pure seg funds or the hybrids in which a regular mutual fund is wrapped inside insurance packaging? If the latter, you can easily document the difference in MERs. Construct a table showing this and send it to the company official in charge of the plan. Include one of the many articles on the Web about how fees have become the focus of defined contribution plan litigation in the much older, more developed US market. For example, this one. If nothing else, this will put the company on notice that at least one employee is watching.
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Post by cycle »

It's great to find this thread now, as I'm considering an employment offer from a company with a similar RRSP-DPSP combination. It's a bit difficult to get all the info at this moment, especially regarding vesting. With my previous employer we had a DCPP that had immediate vesting as required by Quebec law (I'm in Quebec). I cannot find whether such a law also applies to other plan types such as DPSPs. Does anyone know? Thanks in advance!
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Post by brucecohen »

cycle wrote:It's great to find this thread now, as I'm considering an employment offer from a company with a similar RRSP-DPSP combination. It's a bit difficult to get all the info at this moment, especially regarding vesting. With my previous employer we had a DCPP that had immediate vesting as required by Quebec law (I'm in Quebec). I cannot find whether such a law also applies to other plan types such as DPSPs. Does anyone know? Thanks in advance!
Best thing to do is ask the HR person administering the offer. The immediate vesting on your DCPP is a function of Quebec's pension legislation. Normally pension legislation does not cover DPSPs, but Quebec might be different.
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Post by arthur »

BC, that 's pretty funny, Quebec might be differant, haven't they been singing that song for years??
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Post by toddler »

Thanks for the responses, they have been very helpful.
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Post by cycle »

Thanks all and Bruce, I will check with HR to see if we are "different" for DPSP's too. :-)
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DPSP - is this a good deal?

Post by florch »

My skepticism is at an all time high. My employer is apparently set to offer a matching RRSP plan. Like everything they do, it is to happen only when the company can afford it. The company is profitable and growing, and they planned on doing this for Jan. 1, although we haven't been given anything yet.

DPSP stands for Deferred Profit Sharing Plan where the company matches your contribution to a certain percent, when they can afford it.

So an immediate 100% return on your investment is obviously worthwhile, but then other factors weigh in: what if they say they can't afford their part? My money is still tied up in what is possibly/probably a higher cost/under performing investment? The shorter my employment then, the better the deal I guess, before I can move it to a LIRA I can at least control.

I have had good results from previous employers, but I don't remember these strings, or my general mistrust.

I'm looking for opinions - especially from the downside of the experience.
I will likely join, but want to make sure I'm fully informed - and not just from their provider.
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Re: DPSP - is this a good deal?

Post by brucecohen »

florch wrote: DPSP stands for Deferred Profit Sharing Plan where the company matches your contribution to a certain percent, when they can afford it.
The company is matching your contribution to the group RRSP, not to the DPSP. Employees can't make DPSP contributions. The DPSP/G-RSP combo is actually a wise choice for employers who want to use G-RSPs as ersatz pensions. Technically, an employer can't contribute to an RRSP -- only the individual planholder can. To get around this, employers increase salary by the amount of their match and require that this money be paid right to the RRSP. This is income tax-neutral for the employee because of the RRSP deduction. But increasing salary increases the employer's payroll taxes and, for low- and mid-level staff, increases their EI and CPP contributions. Routing the employer's money to a DPSP and the employee's money to a G-RSP avoids this.
So an immediate 100% return on your investment is obviously worthwhile, but then other factors weigh in: what if they say they can't afford their part? My money is still tied up in what is possibly/probably a higher cost/under performing investment?
Possibly. But you can't automatically assume the G-
RSP/DPSP funds have higher MERs than what you'd pay on your own. Some employers -- mainly larger ones -- negotiate institutional pricing. Also, it's highly doubtful that the higher MER cost would wipe out the whole value of the employer match. You can test this on the mutual fund fees impact calculator at the OSC investor education website: www.investorEd.ca.
The shorter my employment then, the better the deal I guess, before I can move it to a LIRA I can at least control.
Neither G-RSPs nor DPSPs fall under pension law, so there'd be no need to move the money to a LIRA. When you leave the plans, you can directly transfer the money to your own regular RRSP.

Note: The employer's match will reduce your own RRSP room for the next year dollar for dollar. But that's fair.

Note #2: There could be added benefit to joining the plan if the financial vendor provides good planning tools. The vendors -- especially big insurers like Sun Life -- are pouring truckloads of money into developing planning software for their group accounts.
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Post by randomwalker »

I'm afraid my experience with "profit sharing" is one where the "formula" for sharing has changed over time alway being ratcheted down as in moving the goal posts as you get closer to scoring a touchdown. What kind of access do you have to the books to verify the numbers? Is the company publicly traded so as you might at least have a look at an annual report? If I had my druthers I'd forgo profit sharing in favour of a higher salary. Lets face it even hockey players opt for revenue rather than profit sharing. It's sometimes amazing how cash can evaporate between the top line and the bottom line. lol
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Post by OptsyEagle »

I'm afraid my experience with "profit sharing" is one where the "formula" for sharing has changed over time alway being ratcheted down as in moving the goal posts as you get closer to scoring a touchdown
I think you guys are confusing a deferred profit sharing plan as something that has anything to do with corporate profits. As Bruce has indicated, it is just a company's way of contributing to an RRSP for an employee, without other onerous burdens applied.

As for the clause that allows them to stop it. This can be standard in a lot of plans. Think about it. If the company fell on hard times, they might find it more appropriate to reduce some of their labour costs by simply stopping the DPSP, as opposed to laying off 4% of their workforce etc. If you were one of the employees whose number was coming up, I am sure you might prefer this option as well.
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Re: DPSP - is this a good deal?

Post by Beek »

florch wrote:The shorter my employment then, the better the deal I guess, before I can move it to a LIRA I can at least control.
Beware of a vesting period... With my employer's DPSP, all employer matches aren't vested for the first two years. This means that if I leave the company before the first two years are up, I lose all of the money in the DPSP, but the money in the Group RRSP is still mine. (After the first two years, all contributions are vested immediately.) Find out if you have a similar golden handcuff.

Personally, I like the DPSP structure - it's a conservative way for an employer to improve their compensation package. The only disappointment with mine was that the MERs were high... 2% for the cheapest funds. But my employer only has about 20 employees, so I don't think they had much leverage in negotiating pricing.

The way I see it, they implemented the program with the intention of matching contributions indefinitely. They don't want to use the option of not matching. If they did exercise that opition, I'd take it as a sign that I need to start looking for a new job.
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Post by AltaRed »

I liked DPSPs as well. Quirks like vesting, or limited transfers are a minor inconvenience for essentially free money.
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Post by florch »

Thanks for the feedback - my perspective is better now.

As for why I thought it would end up in a LIRA- past experience. It happened to me before on a matching RRSP plan- it wasn't a pension.

Beek, thanks for making the point that missing their portion would be akin to a corp. missing a div payment. This is a public company.
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Post by brucecohen »

florch wrote:Thanks for the feedback - my perspective is better now.

As for why I thought it would end up in a LIRA- past experience. It happened to me before on a matching RRSP plan- it wasn't a pension.
Are you sure it was an RRSP and not a defined contribution pension plan. DC pension plans work the same way as RRSPs but fall under pension legislation.

BTW, the risk of your employer reducing or cancelling its DPSP contributions is no greater than the risk of it doing the same if it put its money into the group RRSP. It's only with a formal pension plan -- DB or DC -- that the employer is required by law to maintain contributions. The only protection members of a G-RSP or DPSP have is the wording of the materials they were given, and it's hard to believe that documentation for a new plan wouldn't give the employer wiggle room.
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Post by florch »

brucecohen wrote:
florch wrote:Thanks for the feedback - my perspective is better now.

As for why I thought it would end up in a LIRA- past experience. It happened to me before on a matching RRSP plan- it wasn't a pension.
Are you sure it was an RRSP and not a defined contribution pension plan. DC pension plans work the same way as RRSPs but fall under pension legislation.

BTW, the risk of your employer reducing or cancelling its DPSP contributions is no greater than the risk of it doing the same if it put its money into the group RRSP. It's only with a formal pension plan -- DB or DC -- that the employer is required by law to maintain contributions. The only protection members of a G-RSP or DPSP have is the wording of the materials they were given, and it's hard to believe that documentation for a new plan wouldn't give the employer wiggle room.
Thinking back, maybe. I know it went against my RRSP contribution room.

I'm sure you're right. Thanks for the patience and info.
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DPSP = RRSP?

Post by pablito »

Hi:

My employer contributes to my DPSP each pay day on my behalf (a match type program). Their contributions vest immediately so I've checked and am apparently free to move it to another broker, etc. if I wish.

I've done a bit of double checking and from what I've read, a DPSP sounds pretty much like an RRSP except that only my employer can contribute to it. Am I missing something? Are there any nasty consequences that I am missing in moving a DPSP to discount broker under the RRSP umbrella in order to make it part of my couch potato portfolio? (which is still in planning stages by the way... more posts to come I'm sure :) )

I think I'll lose access to some of the mutual funds that I wouldn't otherwise be able to invest in so easily (e.g. PH&N), but the simplicity seems rather appealing at the moment.

Pab
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Post by brucecohen »

For your purposes, a DPSP is pretty much like an RRSP. Feel free to move the money -- if your employer allows that.

Note:
1. The DPSP might have a vesting period. Perhaps 2 years. Have you been with the company at least that long?

2. Ask your HR department if the program rules require the company's consent to move the money. And confirm that the company's match won't be suspended if you move the money.
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Post by pablito »

Thanks Bruce! Though I've been with them well over 2 years, I doubled checked with HR and they confirmed all is fully vested. I also inquired about restrictions as you suggested and was assured that I was free to move the funds away without issue. Only thing I have to keep in mind is a transfer fee that may become applicable if I do this too often.

I must apologize. After posting and seeing your reply, it struck me that I had not really searched for previous posts on the subject. I then found this post you made: DPSP locked-in (by law/regulation?). Our provider is also Sunlife, so I took your advice and went hunting for the fund's MERs. Two funds got my attention:

-BGI TSE S&P/TSX Comp Index (Capped index I think)
-BGI US Equity Index

"Fund management fees" for each is 0.25% AND they are segregated (level of coverage is unclear... checking on that). :shock: Isn't that the same fee as the XIC ETF? Minus commissions, Plus segregated wrapper? Does this seem too good to be true?

Anyway, looking at the TSX index fund first, its underlying fund is the "BGI S&P/TSX Composite Index Class D", but when I compare Friday's closing unit price between the Sunlife and Barclays sites, they differ (Barclays: 21.41; Sunlife: 19.35). The Barclays site is a bit short on details, I could only find the unit prices so I can't help but wonder if I am somehow looking at the wrong fund. They call it the "BGICL S&P/TSX Composite Index Class D", surely obvious, but what is the CL?

Sigh... this is exactly what I've so far found rather annoying with the Sunlife arrangement. I always have this uneasy feeling that I don't know the full story. At 0.25% MER, it seems like a bit of a no brainer to make use of at least the TSX index fund... the US index seems a little less clear if I compare to Vanguard equivalent ETFs.

We also have a few PH&N, McLean Budden funds available... not sure how MERs compare, though they seem low for traditional funds. I guess I've got more research ahead of me. Any comments welcome. :)
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DPSP - is it worth it?

Post by Serdic »

I have a Sunlife plan in which I contribute 10% into my high MER Bond fund, and the company kicks in 5% into a DPSP.

Is this actually a benefit?

- The DPSP reduces my contribution room, but I don't get the benefit of the tax break. Sort of like I'm the lower income spouse in a spousal RRSP.

- The money has to be invested into seg funds, of which, the lowest mer is a money market at about 2.8% interest, with .85 Mer. So, call it 1.9%. I could do the TDAM Canadian Bond Index at 4.5% - 1.63 % MER = 2.9%.

- The DPSP can be cut at any time. What if it got cut in 2 out of the next 3 years. Somebody was mumbling something about the economy, but I wasn't listening.

Would it be possible for me to find a better return by opting out of the company RRSP, filing a T1213 to reduce tax at source and then investing the difference + the tax refund?

At this point, I'm pretty sure I need to sit down and chat with a tax professional - and I saw the post, Group Plans in General Finance, but was wondering if anybody had a precanned spread sheet to figure this out (or at least let me double check my numbers).

From the looks of it, it would take about 20 years to wash out and over thirty years I'd end up slightly ahead (assuming no inflation and a constant, positive rate of return - I can dream).
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Re: DPSP - is it worth it?

Post by brucecohen »

Serdic wrote: - The DPSP reduces my contribution room, but I don't get the benefit of the tax break. Sort of like I'm the lower income spouse in a spousal RRSP.
You get no tax deduction because the employer makes the contribution. a growing number of companies are using this two-track approach -- group RRSP for employees and DPSP for the employer match -- because it's more tax efficient.

Technically, an employer cannot contribute to an RRSP; only the "annuitant" can. Employers that pay their match to the RRSP get around this by increasing the worker's salary and paying that extra amount to the RRSP account. The employee gets a tax deduction that washes out the income tax impact of the salary increase BUT there are still problems that are unaddressed:
-- The increase boosts the cost of EI premiums for workers below the EI coverage same
-- Ditto for CPP
-- The increase can boost the company's cost for workers' comp, health tax and other payroll levies.
Using a DPSP for the employer match avoids all this because the company is allowed to contribute directly to that plan -- indeed it's only the company that can make contributions.

So, in terms of income tax, there's no difference for you.

The DPSP contribution reduces your RRSP room because ALL retirement plan contributions must fit within the overall 18% limit. The only difference to you between having your employer put $1 into a DPSP and you putting $1 into an RRSP is, as you point out, that the employer has chosen a menu of funds that you wouldn't.

The tradeoff between "free" money from the boss and higher MERs was discussed here.
- The DPSP can be cut at any time. What if it got cut in 2 out of the next 3 years.
This risk applies to both group RRSPs and DPSPs. Both are contractual arrangements not covered by pension legislation. Your employer's ability to reduce/suspend/cancel the match depends on the communications you were given about the plan. If it's a new plan, the employer likely has maximum flexibility.
Would it be possible for me to find a better return by opting out of the company RRSP, filing a T1213 to reduce tax at source and then investing the difference + the tax refund?
See the discussion I linked above. Also go to the OSC's investor education website -- www.investored.ca -- and use their mutual fund fees impact calculator to project the growth of a high-MER plan with employer match and a low-MER DIY plan. Remember, though, to increase the starting amount of the group plan by the employer match.
At this point, I'm pretty sure I need to sit down and chat with a tax professional - and I saw the post, Group Plans in General Finance, but was wondering if anybody had a precanned spread sheet to figure this out (or at least let me double check my numbers).
You don't need a spreadsheet. Just use the OSC fund fees impact calculator.

BTW: CRA will approve a T1213 request only if your tax account has been kept in good order. And, you must file a new request annually -- ideally in Sep or Oct so approval is granted in time for your employer to adjust your withholding for the new year.
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Re: DPSP - is it worth it?

Post by brucecohen »

Serdic wrote: - The DPSP reduces my contribution room, but I don't get the benefit of the tax break. Sort of like I'm the lower income spouse in a spousal RRSP.
You get no tax deduction because the employer makes the contribution. a growing number of companies are using this two-track approach -- group RRSP for employees and DPSP for the employer match -- because it's more tax efficient.

Technically, an employer cannot contribute to an RRSP; only the "annuitant" can. Employers that pay their match to the RRSP get around this by increasing the worker's salary and paying that extra amount to the RRSP account. The employee gets a tax deduction that washes out the income tax impact of the salary increase BUT there are still problems that are unaddressed:
-- The increase boosts the cost of EI premiums for workers below the EI coverage same
-- Ditto for CPP
-- The increase can boost the company's cost for workers' comp, health tax and other payroll levies.
Using a DPSP for the employer match avoids all this because the company is allowed to contribute directly to that plan -- indeed it's only the company that can make contributions.

So, in terms of income tax, there's no difference for you.

The DPSP contribution reduces your RRSP room because ALL retirement plan contributions must fit within the overall 18% limit. The only difference to you between having your employer put $1 into a DPSP and you putting $1 into an RRSP is, as you point out, that the employer has chosen a menu of funds that you wouldn't.

The tradeoff between "free" money from the boss and higher MERs was discussed here.
- The DPSP can be cut at any time. What if it got cut in 2 out of the next 3 years.
This risk applies to both group RRSPs and DPSPs. Both are contractual arrangements not covered by pension legislation. Your employer's ability to reduce/suspend/cancel the match depends on the communications you were given about the plan. If it's a new plan, the employer likely has maximum flexibility.
Would it be possible for me to find a better return by opting out of the company RRSP, filing a T1213 to reduce tax at source and then investing the difference + the tax refund?
See the discussion I linked above. Also go to the OSC's investor education website -- www.investored.ca -- and use their mutual fund fees impact calculator to project the growth of a high-MER plan with employer match and a low-MER DIY plan. Remember, though, to increase the starting amount of the group plan by the employer match.
At this point, I'm pretty sure I need to sit down and chat with a tax professional - and I saw the post, Group Plans in General Finance, but was wondering if anybody had a precanned spread sheet to figure this out (or at least let me double check my numbers).
You don't need a spreadsheet. Just use the OSC fund fees impact calculator.

BTW: CRA will approve a T1213 request only if your tax account has been kept in good order. And, you must file a new request annually -- ideally in Sep or Oct so approval is granted in time for your employer to adjust your withholding for the new year.

BTW#2: Do you reasonably expect to stay with the same company for 20 years+? If not, do group-DIY comparisons for several timeframes: 3 years, 5 years, 10 years etc. My guess is that the group plan will win during the first 10 years and maybe the first 15.
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Post by Serdic »

Thanks for your time and very helpful and detailed response.
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Post by Locke »

After I joined my DC plan, that I realized that I don't get to use the deduction even though my room is being used up. Though my match is quite generous at 5% contribution for 4% match and I have access to extremely low MER index and reduced MER active funds.

BGI Cdn Bond Index 0.06 %
PH&N Balanced 0.19 %
BGI Balanced Index 0.07 %
PH&N Canadian Equity 0.18 %
BGI Cdn Equity Index 0.07 %
BGI US Equity Index 0.07 %
BGI Intl Equity Index 0.21 %
RBC Balanced Fund 0.38 %
Capital Global Equity 0.83 %
PH&N Money Market Fund 0.07 %
PH&N Total Return Bond 0.18 %
AllianceBernstein Cdn Eq 0.27 %

With the difference between active and passive, is it still worthwhile to follow index investing?
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Post by Serdic »

Sorry, Locke I can't answer your question. I can just say I'd be overjoyed to have a selection of low mer index funds like what you've described.


I do have follow on question...

Given my DPSP has a two year vesting period; if I were to leave before that two years was up, would the pension adjustment still be made and thus reduce my contribution room?

If that was the case, could I contact CRA and have them remove the pension adjustment?

My thinking on this is as follows:

My DPSP doesn't vest, therfore I don't get the funds.
Since I don't get the funds, then my contribution room shouldn't be affected. As a direct result, my employer would not get the associated tax benefit.

So, if I should leave before the vesting period, it may be in my employers interest to allow my DPSP to vest on schedule.

Is that approximately the case or can someone suggest further reading?

edit - for clarity
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Post by Serdic »

As always, Google is my friend...

This would probably be covered under a Pension Adjustment Reversal.
Pension Adjustment Reversal Guide wrote: An individual will only have a PAR under a DPSP or a money purchase provision of an RPP if he or she is not fully vested at termination.
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