Cashing in on TFSAs

The Likely Evolution of TFSAs

In the near future, we can expect that brokerage houses and banks, with their vast retail networks, will be the first to market with a product that closely resembles a cross between a savings account and an individual RRSP. Such products will appeal initially to high earners with disposable income who have maxed out their RRSP contributions.

Because the interest in TFSAs will initially be limited, employers won’t show much interest in offering group TFSAs at first. Here are some of the challenges, in the short term, of offering a group TFSA.

Practical concerns – The costs of communicating and educating employees, as well as those of setting up and administering a TFSA without knowing how popular it will be with employees, may seem too high to some employers.

Regulatory issues – Group TFSAs will likely be considered capital accumulation plans (CAPs) and will therefore fall under the CAP Guidelines. Certain fiduciary-type obligations will be imposed on sponsors with respect to monitoring the plan funds, providers, fees and communications. Plan sponsors need to carefully assess their internal capacity to take on these responsibilities prior to doing so.

Employee choices – Employees with existing unregistered savings will want to move these assets into a TFSA at a rate of up to $5,000 per annum (ignoring indexing) before they consider contributing new money. Based on the average nonregistered savings of Canadians, outlined in the table, it may take a few years for employees to be financially able to take advantage of a group TFSA program—and that’s assuming that they have additional disposable income to contribute when the TFSA becomes available.

Over time, TFSAs can be expected to grow in popularity with all employee groups. In addition to high-earners who open TFSAs immediately, low- and middleincome earners may also express an interest. A number will realize that the TFSA works better for them than an RRSP, which will lead to more competitive TFSA products.

The next step will come, as it did with RRSPs, when providers pool individual TFSA assets to enhance services at a lower cost than that of retail products. We have seen this happen with similar savings vehicles in the U.S. and the U.K.

The U.S. introduced the Roth IRA (the U.S. version of the TFSA, but with more limited rules on tax-free distributions) in 1998. According to a recent survey by the Profit Sharing Council of America, 22% of employers offering profit sharing and defined contribution (DC) plans offer a Roth IRA. More than 50% of those employers are considering adding a Roth option to their 401(k) plans.

In the U.K., Individual Savings Accounts (ISAs) have been around since 1999. Although ISAs have become extremely popular—more than one out of three eligible investors holds an ISA—corporate or group ISAs are still at the development stage.

In Canada, some providers have already indicated their intention to have a group TFSA product in place early in 2009.

The Long-term View of TFSAs in Canada

Given the U.S. and U.K. experiences, there will come a time when the value of TFSAs will become apparent to individuals. TFSA products will then become more competitive, and more employers will consider implementing group TFSAs. To begin preparing for that time, there are some approaches that employers may consider now.

Adding a TFSA to a pre-existing non-registered savings program – Plan sponsors offering non-registered savings plans could allow employees to direct their contributions, along with any matching employer contributions, to a group TFSA. As with other non-registered savings programs, the TFSA would typically be offered as an alternative vehicle for employees who have no RRSP contribution room left, or who have reached the money-purchase limit under the employer’s DC pension plan or as part of the company’s overall savings program. Some employers adjust the contribution to a non-registered savings plan to compensate the employee for the fact that it is an after-tax contribution. However, no further adjustment would be required for contributions made to a TFSA, as the investment income would grow tax-free.

Adding a TFSA to a stock purchase plan – The shares purchased through the plan could reside in a TFSA and avoid any taxes on capital gains and dividends.

Before any of these options can be addressed, employers need to ask how a TFSA could fit into the company’s overall business goals and help build the kind of workforce it wants. For example, for companies wishing to attract young employees or lower-income earners, the ability of a TFSA to provide short-term savings and tax breaks could make it a strong component of the rewards package.

While the days of the group TFSA may be some time away, it’s not too early for employers to consider how they would use such a product to further their HR and business goals. With proper analysis of the potential benefits and drawbacks, the group TFSA can be an important addition to a company’s total rewards package, giving employees yet another option for increasing savings and securing their financial futures.

Lori Satov is an actuary and Lydia Maldonado is a senior consultant with Watson Wyatt Worldwide. lori.satov@watsonwyatt.com; lydia.maldonado@watsonwyatt.com

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