Group RRSP, DPSP or Pension: Three Things Employers Call the Same

Ask an employee whether they have a pension at work and a great many will say yes with complete confidence and be describing a group registered savings plan, which is not a pension in any technical sense. That is not carelessness. Employers use the words loosely, benefit summaries use them loosely, and the three arrangements do look similar from the outside: money goes in every payday, some of it comes from the employer, and a statement arrives. But they differ in who owns the money, what happens to it if you leave in three years, whether it is locked, and how much room they take from your own personal savings. Those differences decide real outcomes, and an employee who does not know which one they have cannot make the decisions that matter. This article sets out what each one is, what to ask about your own, and the mistake that costs employees the most.

The group RRSP

A group registered retirement savings plan is exactly what its name says: your own RRSP, held at an institution the employer selected, with contributions made through payroll. It is not a pension and it is not governed by pension legislation.

That produces several consequences. It uses your own contribution room and reduces the room available for a personal plan. The tax deduction is generally obtained immediately through reduced source deductions rather than at filing, which is a real advantage over contributing personally. The money is yours, and where an employer contributes, that contribution is treated as employment income to you and then deducted, which is why the arithmetic looks different from a pension.

The most important feature is what it does not do: it generally does not lock the money in. Employees can typically withdraw, subject to withholding and to any restriction the employer has placed on the employer funded portion. That flexibility is genuinely valuable and it is also the single largest weakness of the arrangement, because a plan you can empty is a plan that sometimes gets emptied.

The deferred profit sharing plan

A deferred profit sharing plan is funded by the employer only. Employees cannot contribute to it, which is the first distinguishing feature and the one most people do not know.

It is frequently paired with a group RRSP: the employee contributes to the group RRSP and the employer contributes its matching amount to the deferred plan instead. From the employee’s point of view it looks like one arrangement with two accounts, and it is two arrangements with different rules.

Two of those rules matter. It has vesting, meaning the employer’s contributions become yours only after a stated period of membership, and an employee who leaves before then can lose the employer money. And it produces a pension adjustment, which reduces your RRSP room for the following year, so the employer contribution is not free of consequences for your own saving.

The registered pension plan

This is the arrangement that is genuinely a pension. It is registered under pension legislation as well as tax legislation, and that second layer is the whole difference: the money is subject to rules designed to make sure it produces retirement income.

There are two families. A defined benefit plan promises a formula based benefit, generally calculated on earnings and years of service, and the employer bears the investment and longevity risk. A defined contribution plan promises a contribution rather than a benefit, and the employee bears those risks. They are as different from each other as either is from a group RRSP.

The features that distinguish a pension plan from the others are locking and the pension adjustment. Once vested, the money is generally locked in: it cannot be withdrawn as cash, and on leaving it goes to a locked in account or stays in the plan as a deferred pension, which this site covers in its own articles. And the pension adjustment it produces is the largest of the three, which is why a member of a generous defined benefit plan has very little RRSP room.

The comparison an employee actually needs

Ownership. In a group RRSP the money is yours immediately. In a deferred profit sharing plan the employer’s money becomes yours on vesting. In a pension plan your entitlement is defined by the plan terms and by pension legislation.

Access. A group RRSP is generally accessible, subject to restrictions on employer money. A deferred plan restricts access. A pension plan locks, once vested.

Effect on your own room. All three reduce what you can do personally, but not in the same way: the group RRSP uses your room directly, while the other two reduce it through the pension adjustment.

And what happens when you leave. This is the question people ask last and should ask first, because leaving is what actually happens to most people well before retirement. A group RRSP moves with you. A deferred plan pays out or transfers what has vested. A pension plan offers the choice this site covers separately, between a deferred pension and a transfer value, which is one of the largest financial decisions in a working life.

The mistake that costs employees the most

Not contributing enough to get the full employer match is the most expensive ordinary mistake in Canadian workplace saving, and it is remarkably common. Where an employer matches contributions up to a stated percentage, an employee contributing below that percentage is declining money that has been offered to them.

The reason it happens is usually not indifference. It is that the enrolment happened during a first week when eleven other forms were being signed, a default was accepted, and nobody has looked at it since. Checking takes ten minutes and is worth more than most of the financial decisions people spend longer on.

The second mistake is treating a group RRSP as an emergency fund. It is accessible, which makes it tempting, and every withdrawal is taxable income in the year, permanently removes the contribution room, and undoes the compounding that was the entire point.

The third is leaving an account behind. People change jobs and leave a group plan account at an institution they never think about again, sometimes several of them. Consolidating is administratively simple and it makes the money visible, which is most of what makes it get managed.

What to ask, this week

Which of the three do I have, by name, and if it is a combination, which part is which. The benefits administrator answers this in one sentence.

What does the employer contribute, on what condition, and am I currently getting all of it.

When does the employer money vest, and what happens to it if I leave before then.

What are the investment options and what do they cost, since a group plan often has institutional pricing that is materially better than what the same person could get individually, and that advantage is one of the real reasons to use the plan rather than saving personally.

And what happens when I leave. Ask now, while nobody is leaving, because the answer sometimes changes what you would do today.

What happens to each of the three at death

This is the question employees ask least and families discover fastest, and the three arrangements answer it differently. A group registered savings plan follows the beneficiary designation on file, and where that designation names a spouse the balance can generally be rolled over so that tax is deferred rather than triggered. Where it names anybody else, or names nobody at all, the value is generally brought into income on the final return and the estate pays the tax while the money goes wherever the designation sends it.

A deferred profit sharing plan pays what has vested, under its own terms, and a registered pension plan is the one that surprises people. Pension legislation generally gives a surviving spouse a statutory entitlement that can override a designation made on a form, which is a protection rather than a trap, and it means the answer for a pension is found in the plan text and the legislation rather than in whatever was written during an onboarding week.

Two housekeeping items follow from all of this. Designations made years ago at a former employer are still live documents and are frequently out of date after a separation or a remarriage. And a designation on a workplace plan is not made in a will, so a will that says one thing and a plan record that says another produces exactly the argument nobody wants. Review the designations, then take the tax consequences to a qualified tax professional and the estate consequences to a lawyer or notary.

Two smaller points sit underneath. A designation naming a minor child does not put money in that child’s hands: it puts it into an arrangement somebody has to administer until the child is of age, and a plan record is not where that decision is best made. And value that passes by designation generally does not run through the estate, which is where probate fees are charged.

What each one turns into at the end

A group registered savings plan behaves like any other registered savings plan at the end of its life. It has to be converted by the deadline the Income Tax Act sets, usually into a registered income fund or an annuity, after which a minimum has to come out every year whether or not it is wanted. This site covers those minimum withdrawals separately.

A deferred profit sharing plan has its own set of endings written into the plan text: a transfer to a registered plan, the purchase of an annuity, or instalments over a stated period, with a taxable lump sum as the option nobody should take by default. A member close to retirement should read those terms rather than assume they mirror the savings plan next to them.

A registered pension plan pays. That is the whole point of the second layer of legislation, and it is why the decision at the door, between a pension for life and a transfer value, is the largest one in this whole subject and has its own article. Money that leaves a pension plan generally lands in a locked in account and stays subject to rules the savings plan never had.

The sequencing question underneath all three belongs to a qualified tax professional, because the order in which accounts are drawn interacts with government benefits in ways a general article cannot resolve.

Frequently Asked Questions

Continue Learning

Read RRSP Contribution Room for how the pension adjustment works, Taking the Pension or Taking the Money for the decision at the door, and Locked-In Accounts for what the transferred money becomes. The Group Insurance guide sets out the whole picture.