7.3 Group Segregated Funds & Capital Accumulation Plans
Key Takeaways
Group segregated funds offer lower fees, forced savings through payroll, professional management, default investment options and no medical underwriting.
Group segregated funds usually carry no maturity or death benefit guarantee and no sales charges; their limitations include mandatory contributions and vesting periods.
A sponsor's needs drive the plan: attracting and retaining staff, helping employees save, meeting short- and long-term needs, and linking contributions to profits (a DPSP).
Plan design depends on funding, cost, sponsor characteristics, the employee group and the administrative capacity of the employer.
CAPSA Guideline No. 3 expects capital accumulation plan sponsors to select and monitor investment options and give members the information and tools to make decisions.
Group Segregated Funds and Capital Accumulation Plans
Many employers offer retirement savings through a group plan administered by a life insurer. The money is invested in group segregated funds, and the plan is usually a capital accumulation plan (CAP): a tax-assisted plan in which members choose among investment options. Group RRSPs, group TFSAs, DPSPs, defined contribution pension plans (DCPPs) and pooled registered pension plans (PRPPs) are all CAPs. Group variable products are outside the CCIR/CISRO Segregated Funds Guidance, which covers individual contracts.
1. Understanding the Group: Plan Intention and Existing Coverage
Before recommending anything, the agent learns what the employer intends and what already exists.
Group plan intention:
- Composition of the group: number of employees, ages, income levels, full-time or part-time, turnover, union status.
- Short-term or long-term needs: short-term savings (a group TFSA) or long-term retirement income (a pension plan or group RRSP).
- Funding commitment and payroll contributions: how much the employer will contribute, whether employees must contribute, and how contributions are deducted from pay.
- Timing of plan implementation: when the plan should start, waiting periods, and enrolment logistics.
Group plan coverage:
- Plans available: what the employer already offers (for example, a group RRSP with no employer match).
- Form of the existing plan: whether it is a pension plan subject to pension standards law or a non-pension plan, and whether contributions are locked in.
2. The Sponsor's Needs
| Sponsor need | Plan feature that meets it |
|---|---|
| Attract and retain top-quality employees | Employer matching; vesting schedules (DPSP up to two years); a pension plan |
| Assist employees with retirement saving | Payroll deduction, automatic enrolment, default funds |
| Serve members' short-term and long-term needs | A group TFSA for flexible savings alongside a group RRSP or DCPP |
| Link contributions to business profitability | A DPSP, where the employer shares profits and employees cannot contribute |
3. Factors That Affect the Choice of Plan
- Funding: contributory or non-contributory; fixed formula or discretionary.
- Costs: fees charged to members, employer administration costs, and payroll taxes (DPSP and pension-plan employer contributions are not subject to CPP and EI; group RRSP employer contributions are generally pensionable, while EI treatment depends on whether members can withdraw before retirement or termination).
- Sponsor characteristics: size, profitability, industry, appetite for long-term obligations (a defined benefit plan creates funding risk for the employer).
- Group members: age, income, financial literacy, turnover.
- Administration: the employer's payroll and HR capacity, and pension regulatory filings for registered pension plans.
4. Advantages of Segregated Funds for Groups
- Lower management expense ratios: institutional pricing for large pools.
- Forced savings: payroll deductions make saving automatic.
- Professional management and no requirement for ongoing decisions: default funds, such as target-date or balanced funds, invest for members who make no choice.
- Allocations: members choose how contributions are split among funds.
- Member participation: members can make fund switches, rebalance their assets and make withdrawals where the plan allows (group RRSP and TFSA money is accessible; locked-in pension money is not).
- Absence of medical underwriting: anyone eligible can join.
5. Limitations of Segregated Funds for Groups
- Absence of guarantees: group segregated funds generally do not offer the maturity and death benefit guarantees of individual contracts. A member who needs capital guaranteed on death should look at an individual segregated fund contract, a guaranteed option or life insurance.
- Mandatory contributions: some plans require members to contribute as a condition of membership.
- Vesting period: employer contributions to a DPSP can vest after up to two years of membership; most pension plans now vest immediately.
Group segregated funds also usually have no sales charges, one of their cost advantages.
6. Recommending a Group Plan
The recommendation step has two parts:
- Selection of the appropriate plan: match the plan type to the sponsor's needs. An employer wanting a contributory plan without promising a pension, and with flexibility over its own contribution, could use a DCPP, a PRPP or a group RRSP; one wanting to reward staff from profits could pair a DPSP with a group RRSP.
- Presentation of alternatives: show the sponsor the options with costs, administration and employee impact, so the sponsor makes an informed choice.
7. Group Plans That Convert Savings into Pension Income
At retirement, members of group plans can often move to a group RRIF or LIF with the same provider, or use their savings to buy a life annuity (required forms apply to locked-in money). Converting inside the group often keeps the lower institutional fees.
8. CAPSA Guideline No. 3
The Canadian Association of Pension Supervisory Authorities (CAPSA) sets out expectations for CAP sponsors and service providers:
- choose investment options suited to members and monitor them regularly,
- provide members with investment information and decision-making tools,
- explain fees, and
- review the plan periodically, including whether the default option still fits the membership.
9. Worked Example: Designing a Plan
Services Com Inc. has 100 full-time employees, wants a contributory plan, wants flexibility over its own contributions and does not want to promise a pension.
| Option | Fit | Points to raise with the sponsor |
|---|---|---|
| Group RRSP (with employer match) | Good | Simple to run; immediate vesting; employer contributions are taxable benefits; they are generally subject to CPP, while EI depends on whether the plan permits pre-retirement or pre-termination withdrawals |
| Group RRSP + DPSP | Good | Employee money goes to the group RRSP, the employer's match goes to the DPSP: no CPP or EI on the DPSP portion and vesting of up to two years can reward staff who stay |
| DCPP | Good | Registered pension plan: contributions locked in, pension standards filings and governance duties for the employer |
| PRPP | Good | Low cost and simple for small and mid-sized employers; employer contributions optional in most provinces |
| DBPP | Poor | Promises a pension and puts funding risk on the employer |
| DPSP alone | Poor | Non-contributory: employees cannot contribute |
The agent presents these alternatives with costs and administrative demands, and the sponsor chooses. Once the plan is chosen, the agent reviews the default fund, member communication and enrolment timing with the group administrator.
Anika, 34, is a single parent whose top priority is guaranteeing her capital for her children if she dies. She invests her group pension contributions in the plan's group segregated funds. Is this suitable for that priority?
Yes, because group segregated funds guarantee 100% of contributions on death
Yes, because group segregated funds have no sales charges
No, because group segregated funds generally do not provide a death benefit guarantee
No, because group segregated funds charge higher sales charges than individual contracts
A family-owned manufacturer wants a retirement plan in which its contributions depend on how profitable each year is and employees do not contribute. Which plan best fits?
A defined benefit pension plan with a guaranteed pension formula
A deferred profit sharing plan funded by the employer from profits
A pooled registered pension plan with mandatory employee contributions
A group TFSA funded through employee payroll deductions
Which of the following is a limitation, rather than an advantage, of segregated funds in a group plan?
Lower management expense ratios than individual contracts
No medical underwriting for members
A vesting period before employer contributions belong to the member
Default funds that invest for members who make no choice
Sections you finish are checked off in the contents.