Weighing in on group TFSAs

While individual tax-free savings accounts (TFSAs) are growing in popularity among investors, there’s still a gap to fill in the group retirement savings plan market. In 2009, the plan sponsors that typically added the TFSA to their group retirement programs already offered a non-registered savings plan. And generally, it’s been members with a keen interest or an immediate need who scooped them up. Yet after the initial excitement, the demand for group TFSAs compared with other plan types was fairly quiet last year.

Unfortunate timing
Launched during the 2009 recession, the TFSA has been slow to catch on with plan sponsors and members. Many HR departments avoided making big changes to their benefits programs during a period of cutbacks and downsizing.

In 2009, Great-West Life found that the number of new group RRSPs exceeded new group TFSAs by a healthy 34%. More striking was that the number of member accounts in these new plans was more than 50 times higher for RRSPs than for TFSAs, showing a comparative lack of member participation in group TFSAs. A group RRSP tends to be the core plan, while the TFSA is positioned as a supplementary savings plan.

It’s usually the case that employers match member contributions to the RRSP, up to an annual limit. But this hasn’t yet materialized widely for group TFSAs. In addition, the economic downturn had a negative impact on overall investor confidence and has likely influenced employees’ decisions about joining the plan. Recently, markets have improved and the volatility has become more moderate, which should improve member enrollment and contributions to group TFSAs.

When the federal government announced the TFSA in January 2009, it heralded the product as “the most important tax innovation in a generation.” However, it remains to be seen whether or not the TFSA will become a financial must-have for many Canadians.

Integration with other plans
Adding a TFSA generally supports the purpose of an existing traditional capital accumulation plan (CAP) to provide tools and products to help members save a sufficient amount for retirement. Yet the TFSA has been perceived as a short-term savings account for short-term investing, and plan sponsors have been justifiably concerned about adding an account that could support “churning” amounts (frequent withdrawals and contributions) rather than accumulating savings.