While it is difficult to predict with any certainty, as TFSAs become more familiar to Canadians, the interest in group TFSAs by employers that offer retirement plans should be reasonably high. Relative to a group RRSP, a group TFSA will allow employees to more clearly differentiate between longer-term retirement objectives and shorter-term discretionary savings, while providing the convenience of contributions through payroll deduction. The group TFSA may prove to be a logical complement to an employer’s existing retirement program, benefiting employees in a wide range of income and demographic groups.
One obvious complementary application of a group TFSA is for plan sponsors already offering a non-registered savings plan to their employees. The flexibility of being able to direct up to $5,000 of contributions in 2009 to a group TFSA would be a tax-effective solution from which many employees could benefit, particularly if they have exhausted their RRSP or defined contribution pension room.
While many employers will no doubt take a wait-and-see approach before adding a group TFSA to their existing benefits programs, certain plan sponsors have already decided to do so. In most instances, the group TFSA has been added strictly for voluntary employee contributions with no associated matching by the employer. Nonetheless, this provides employees with enhanced flexibility to save for short-, medium- and long-range goals, while benefiting from the convenience of payroll deduction in a more competitive fee arrangement than is easily replicated with a retail product. Finally, the ongoing employee education and consolidation of member reporting for all available sponsored plans should not be underestimated as a tangible benefit to the employee.
Primary Service Providers
Most providers of group retirement services have implemented group TFSA capabilities. An employer wishing to add a group TFSA to its capital accumulation plan (CAP) program would likely see no change to the fees for the existing plans, in terms of both recordkeeping administration and investment management services. Initially, most insurance providers are offering group TFSAs only in conjunction with an existing CAP for a client and on the same fee basis. However, to the extent that average account balances (an integral determinant of fee levels) are likely to remain lower for TFSAs than for other types of registered plan accounts, it is quite possible that life insurers will ultimately require a different administration fee for the group TFSA as well as transaction-based withdrawal fees.
Currently, there is significant variation between the magnitude and frequency of the withdrawal fees proposed by life insurance companies. However, the current trend supports insurers offering one free withdrawal per year, with subsequent withdrawals generating a fee. While this is a popular trend, it should not be construed as universal among all insurance companies that are providing the group TFSA product.
Market Trends
At a TFSA information session held in late November 2008, the Canada Revenue Agency advised that it is anticipating that TFSAs will amount to approximately $8 billion in 2009 and grow to $120 billion by the end of 2013. These figures were developed on the basis of early-bird accounts offered by some financial institutions and suggest that TFSAs will prove to be very popular among Canadians.
At the retail level, competition to capture TFSA market share is intense. Since TFSAs are operationally very similar to RRSPs for financial institutions, the expectation is that fees for TFSAs would parallel those for RRSPs. However, so far, this has not been the case. Financial institutions are heavily discounting administrative fees relative to those charged to RRSPs. In some instances, they are completely waiving them, at least for 2009.
These fee levels will not be sustainable. However, while they remain, consumers will have an additional incentive to choose a TFSA over an RRSP, which may result in pressure to reduce RRSP fees.
These low fee levels also serve as a barrier to the implementation of group TFSAs. One of the largest advantages of group RRSPs for employees is the lower cost of investing in those programs relative to retail RRSPs. While investment management costs will still be lower for group TFSAs, the benefit will be largely offset by administration fees that may be greater than retail.
An informal Morneau Sobeco poll conducted among group CAP providers indicates that initial uptake for group TFSAs has been slow. In fact, although most providers announced that they were ready to provide group TFSAs as of January 2009, one insurer has broken ranks and delayed implementation of its group TFSA capability until April. This insurer did so on the basis of feedback it received from its clients, indicating a waitand- see stance on the part of employers.
One concern that has been raised in the institutional market is whether financial institutions should price group TFSA services on the same basis as other CAPs. The argument is that since most costs of administering a CAP are recovered through asset-based fees (as part of the investment management fees) and TFSA account balances are likely to be considerably lower than those of retirement programs with longer-term investment horizons, the cost burden of group TFSAs may have to be subsidized through revenue from other kinds of programs.
When the TFSA honeymoon ends for financial institutions and fees are set at levels similar to those charged to RRSPs, the popularity of TFSAs among Canadians will be well established. Employers offering group RRSPs can expect many employees to show a preference for a group TFSA to complement the RRSP program.
In the meantime, wait-and-see will likely remain the dominant view on group TFSAs, with the possible exception of employers currently offering non-registered savings plans. These employers may have considerable early pressure to have a TFSA capability to minimize taxes payable on investment income accruing in such plans.
Ross Gilbert is a principal with Morneau Sobeco in Toronto, and Greg Hurst is a principal with Morneau Sobeco in Vancouver.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the February 2009 edition of BENEFITS CANADA magazine.