With much talk about Canadians having to save for retirement, or Canadians not saving enough for retirement, the tax-free savings account (TFSA)—a new vehicle that will allow Canadians over 18 to save up to $5,000 a year—has certainly been winning the popularity contest with employers.
According to Morneau Sobeco’s 60-second survey on TFSAs, of 420 respondents, 39 said they would offer a TFSA, and 232 said they’d likely implement one after more consideration—that’s a total of 271 respondents (65%). And the remaining 35% might come around, according to Greg Hurst, principal and national DC practice leader with Morneau Sobeco. “Even employers—if they sponsor group RRSPs—that aren’t contemplating it now are going to find that employees are going to be saying, ‘You know, I’d rather have my money go into a TFSA,’ because we think financial advisors are going to be giving that kind of advice at least [to] certain groups of employees,” he says.
The No. 1 reason that a respondent would introduce a TFSA is to provide another vehicle for tax-favoured retirement savings, according to a Hewitt Associates’ poll. The poll also indicated that 36% said the TFSA would provide greater flexibility for employees, and 11% said it would help to attract and retain employees.
“It’s still seen as a piece not just [within the] retirement puzzle,” says Zaheed Jiwani, senior investment consultant with Hewitt Associates. “That’s what we want to focus on—[to] make sure we’re not just focusing on the retirement piece, [that] it’s also part of [the] benefits package.
While some plan sponsors may see the TFSA as an additional retirement savings vehicle, it has other possible uses within the benefits package. According to Oma Sharma, national partner with Mercer, the initial interest in TFSAs will most likely be for supplementing employee retirement plans for those employees who have reached the tax-sheltered contribution limits.
They could also be used to fund post-retirement non-pension benefits such as drugs and healthcare. “One way we’re going to look at it is as a health account,” says Tony Ioanna, vice-president, DC unit, with Aon Consulting. “Because of life expectancy and defined benefit [pension] plans disappearing, a lot of people are going to be on their own for future rising health costs. [A TFSA] could be a good way for them to save and pay for some health-related costs that may not covered by a government or private plan.”
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However, there are still so many unanswered questions when it comes to the group TFSA. Certainly, plan sponsors are not taking the plunge just yet. “We’re actually waiting to see how it rolls out,” says Kathy Strutt, general manager with the Saskatchewan Pension Plan. “We’re not rushing into it by any means.”
Janet Rabovsky, practice leader, investment consulting, with Watson Wyatt Worldwide, is concerned that the TFSA will be used incorrectly—that people will put money in the TFSA instead of, say, a registered retirement savings plan (RRSP). “[But] it’s just a concern,” she says. “It’s not necessarily borne out. Until we actually see how it plays out, we won’t know.”
Sharma doesn’t think this will happen. “From first dollar, you get to choose whether your first dollar of retirement savings goes to a TFSA versus an RRSP,” she says. “Personally, I don’t see that happening because I think that traditional philosophy of fostering retirement savings would lead plan sponsors to favour traditional vehicles like RRSPs and DC pension plans.” Plan sponsors, too. “Even if, on a longer-term basis, the TFSA could be a better, more tax-efficient mode of savings, I still think the lack of ability to lock in the money, or at least to control in-service withdrawals, is just going to cause plan sponsors to stick to RRSPs and DC pension plans instead.”
But, while 110 respondents said they’d make TFSA contributions only after exhausting RRSP contribution room, 41 said they’d make TFSA contributions before contributing to an RRSP, according to the Morneau Sobeco survey. And 254 said they’d contribute to both a TFSA and an RRSP in a given year.
No matter how the TFSA will be used or what the concerns are, there will be challenges. “It’s going to obviously increase the administration complexity, and we’ve got to wait and see for the recordkeepers and providers to offer up some kind of group version of the product, and at what additional cost,” says Sharma.
According to Hewitt’s poll, 28% of respondents said administration would be the biggest obstacle to implementing a TFSA. While Alayna Wilson, director, pension and insurance, with the Canadian Baptist Pension Plan thinks plan sponsors may want to introduce a TFSA in order to encourage employees to save for retirement, she is fully aware of the potential for an administrative nightmare. “I expect a major determining factor will be the degree of administrative effort that would have to go into it and [the] costs associated,” she says.
Although Hurst says there won’t be anything to stop a company from setting up a group TFSA, Canada Revenue Agency requirements could also prove challenging. “The challenge for institutions [will be] understanding what the administrative requirements are from a tax perspective,” says Hurst. But he’s hopeful. “Our view is that functionally, they’re not going to be that much different than RRSPs in terms of the tax reporting.”
Challenges not withstanding, no matter whether plan sponsors implement a TFSA or continue with the more traditional vehicles such as DC plans and group RRSPs, the winner in this popularity contest is retirement savings.
To comment on this story, email brooke.smith@rci.rogers.com .