As a business owner, you know how important it is to recruit, reward and retain your top talent. It can help ensure business continuity, protect the knowledge you have accumulated within your organization and may help you make effective succession planning decisions when the time comes. The loss of a key employee can be very disruptive and costly to an organization, so give some thought as to how you can motivate key employees and keep them focused on the company’s priorities.
Employer-sponsored savings plans
Employees are increasingly conscious of the necessity to provide for their retirement. Employer-sponsored savings plans are one of the most important aspects of retirement planning and can help you ensure that your employees enjoy a ﬁnancially secure retirement. Before setting up a retirement plan, discuss the options with your professional legal, tax and/or ﬁnancial advisors. Here are some of the more common types of retirement plans offered by employers.
Group Registered Retirement Savings Plans (Group RRSPs)
Group RRSPs are a cost-effective way of encouraging your employees to save for retirement throughout their careers. They could be an option even for a small business owner. These plans operate like regular Registered Retirement Savings Plans (RRSPs), possibly with additional restrictions, and can be more cost-effective and easier to administer than pension plans.
Registered Pension Plans (RPPs)
RPPs are employer-sponsored pension plans. In general, employer and employee contributions are tax-deductible and the income earned within the plan grows tax-deferred. Funds accumulating within the plan for individual members are generally locked in by provincial or federal legislation.
There are two kinds of RPPs: Deﬁned Contribution (DC) and Deﬁned Beneﬁt (DB) pension plans.
Employees with DC pension plans will have a retirement beneﬁt based on the value of the plan when the employee retires.
In contrast, DB plans guarantee a speciﬁc beneﬁt to the employee at retirement, calculated using a formula based on earnings and years of service. DB plans generally specify an age, usually 65, at which employees are expected to start receiving retirement income.
As an employer, you face a potentially greater obligation with a DB plan than a DC plan because you are making the investment decisions and guaranteeing a ﬁxed beneﬁt to the employee at retirement.
If there are insufﬁcient funds in the plan, you may also be required to top up the plan by making a greater current cash ﬂow commitment to the DB plan than expected. However, if there is a surplus in the plan, you may have reduced payments.
Enhanced retirement beneﬁts
The following options may help you enhance the retirement savings plans of your key employees:
Supplemental Executive Retirement Plans (SERPs)
Limits on registered plan contributions and beneﬁts can leave your higher-income employees with retirement beneﬁts that are inadequate to maintain their standard of living. A SERP may help to bridge the gap between the maximum pension available under the company’s RPP and what a higher-income employee would otherwise need in retirement. It can also be a way to help you retain your valuable employees and encourage their long-term loyalty.
One of the most common forms of a SERP is the Retirement Compensation Agreement (RCA). An RCA is a non-registered pension arrangement that can help you provide supplemental pension beneﬁts for key employees and can be utilized whether your company has an RPP or not.
RCAs have no contribution limits (provided contributions are “reasonable”) and no investment restrictions. Employees may also be able to beneﬁt from certain investment strategies involving life insurance. This can provide supplemental tax-exempt investment income and may yield better results than other investments.
Individual Pension Plans (IPPs)
An IPP is a registered DB plan sponsored by an employer for one individual and potentially that individual’s spouse if the spouse also works for the company. It is an alternative to having an RRSP. The company makes a contribution to the IPP, which is a deductible expense, as opposed to the individual making an RRSP contribution, personally. Usually, after age 40, the contributions that can be made to an IPP are higher than those that can be made by an individual to his or her RRSP. If the investment earnings within the IPP are lower than required by legislation, the company will likely have to make additional contributions. IPP assets may offer creditor protection and typically suit business owners, incorporated professionals or key employees.
Note: This information provides a non-exhaustive overview of potential options to consider, which may not be suitable for every business or business owner. Given that each business is unique in structure and circumstances, it is crucial to consult with your qualified advisor and tax and legal professionals to ensure your needs and goals are properly addressed.
Learn from experience
While ﬁnancial compensation often attracts your key employees, non-ﬁnancial beneﬁts often help you retain them. Sufﬁcient tools and time to do the job are essential to employee satisfaction while training and career development help to keep them motivated. Aim to foster a social environment and a sense of team, and demonstrate your commitment by ensuring that work/life balance can be achieved.
If you lose a key employee, hold an exit interview so you understand the reasons for his or her departure. The individual's dissatisfaction may indicate problems among other key employees and may save you from another costly loss.