As the coronavirus pandemic sent the global economy into a tailspin, many Canadians grew increasingly concerned about whether they’d amassed enough savings to weather the financial storm.
“We’ve heard the narrative that Canadians are saving like they’ve never saved before,” says Elizabeth Mulholland, chief executive officer of Prosper Canada. “The reality is, when you look beneath the national averages, you see that’s absolutely true for a portion of Canadians, but they tend to be of a higher income. As you go down the income scale, you see that people are struggling and many aren’t saving. In fact, many are drawing down from their savings because they’re experiencing financial hardship.”
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The pandemic has also made Canadians hesitant to put their savings into an illiquid, long-term retirement plan. According to a 2021 survey by Scotiabank, only 32 per cent of Canadians said they plan to contribute to a registered retirement savings plan and 56 per cent said they don’t plan to do so.
In light of this trend, how can employers restore employees’ confidence in retirement saving while also helping them set aside cash for the emergencies in life that can throw them into crisis?
Preparing for a rainy day
When the U.S. Treasury Department was researching how to help people save for retirement, it found low to moderate wage earners needed access to some liquid savings, says Mulholland.
“These workers wouldn’t touch locked-in accounts because they needed to be able to dip into their savings in the case of emergencies or when their income fluctuates.”
As a result, the department added a sidecar program to the locked-in retirement plan that employees could use for emergency savings. When the emergency account is topped up to a certain level, employees’ savings are automatically directed into their retirement plan, providing them with the best of both worlds. When the emergency savings are depleted, the funds taken off at payroll are once again directed to that account.
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Mulholland suggests Canadian employers consider this strategy. “We need to look at saving for the short and long term and build flexibility into some of those long-term saving programs.”
How to help plan members save for a rainy day has been a hot topic during the pandemic because a lot of Canadians were caught offside without an emergency fund outside of a line of credit, says Janice Holman, principal and leader of Eckler Ltd.’s financial wellness consulting group.
In the U.S., many employers are recognizing the need to help employees build rainy day funds. For instance, in October 2020, the United Parcel Service of America Inc. launched an emergency savings program for its 90,000 U.S.-based, non-unionized employees that allows them to set aside liquid, after-tax savings as part of their 401(k) retirement plan.
While these types of sidecar plans haven’t taken off in Canada, a workplace tax-free savings account is one option that helps employees build long-term savings that are also accessible for any unexpected emergencies. People are looking closely at how they can take advantage of TFSAs beyond just using them as voluntary savings vehicles, says Holman, particularly now that the contribution limit is more than $75,000 a year in aggregate. In fact, Scotiabank’s survey found 47 per cent of respondents said they plan to contribute to a TFSA this year.
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“If you take money out of your pension, you can never recontribute that money back, whereas when you withdraw funds from a TFSA, you get that same amount of contribution room back the following year,” she says. “In addition, some employers limit access to RRSPs, making it harder for individuals to withdraw the funds during times of crisis. And if they do, they’ll end up paying tax on it at the point of withdrawal.”
Employers are also beginning to see the benefits of adding workplace TFSAs to their savings options, with many allowing plan members to direct their contributions to a TFSA and choose where they want to receive the employer match — within the defined contribution pension plan, RRSP or TFSA, says Holman.
Key takeaways
• Plan sponsors should consider offering workplace retirement savings plans that have an element of liquidity to help plan members save for the future and a rainy day.
• Income, age and life stage impact plan members’ savings goals, so it’s important to provide choice in savings plan options.
• Government incentives may remove the barriers preventing employers from investing in workplace savings plans, including TFSAs.
• Younger individuals may be thinking about buying a house or having a child, while others may be planning for a trip or returning to school. This is why it’s important for employers to offer different savings vehicles.
Providing choice, guidance
For many Canadians, one roadblock is a lack of financial literacy or understanding which savings vehicle is best for them, says Susan Nickerson, a partner in Tory LLP’s pensions and employment practice, suggesting employers provide their employees with tools to help guide them toward the right savings vehicle for their individual needs.
When employers join one of Common Wealth Retirement’s portable pension plans, they also gain access to a TFSA offering. “The main reason we offered [the TFSA] is because we thought it would be a more efficient way for people who earn below $50,000 to save for retirement compared to an RRSP,” says Alex Mazer, co-founder and co-CEO of the financial planning company. “A lot of employers have a diverse workforce — some are high earners, some are frontline workers making $40,000 per year — and we wanted to give them a solution that would suit all parts of their workforce.”
TFSAs don’t come with a guaranteed income supplement claw back at retirement, making it suitable to lower-income workers, according to Jonathan Weisstub, co-founder and co-CEO of Common Wealth. During enrolment, the plan design technology even suggests the savings vehicle that’s best suited to members’ income levels, he adds.
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The Service Employees International Union provides its 130 members with a TFSA it calls My65+ in addition to a defined benefit pension plan. The union’s member organizations also have access to the TFSA, which some plan members have joined voluntarily, while others are enrolled through their workplace matching contribution plan, says Tyler Downey, the union’s secretary treasurer.
“There are too many workers who are left out of retirement vehicles and options and what we’re trying to do is address that with our retirement vehicle. RRSPs are great — we just believe there’s another advantage to having a TFSA. We represent workers from marginalized groups that have a tough time saving. Having a TFSA option allows them some flexibility, so if they came across an emergency in their lives or if they’re saving for a home, they can tap into it without being penalized.”
The proportion of large organizations that offer a combination of pension plans, registered savings plans and TFSAs grew by 50 per cent between 2018 and 2020, says Eric Monteiro, senior vice-president of group retirement services at Sun Life Financial.
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Still, TFSAs are under-utilized in the group space despite their effective funds and well-negotiated fees, he adds. “If you take all of the plan members that have access to a TFSA, only seven per cent participate or take advantage. And if you look at the contributions, the majority of these members have less than $5,000 in their TFSAs, when the industry average is about $20,000. There’s a huge opportunity for employers and employees to take advantage of TFSAs in the workplace.”
Not all savings goals are alike
The pandemic has raised concerns among employees about their financial future — not just about retirement, but day-to-day challenges, says Monteiro.
A 2021 survey conducted by Sun Life found 36 per cent of Canadians said their biggest concern was cost of living, followed by saving for the future (23 per cent), paying off debt (17 per cent), affording a house (13 per cent) and health care (11 per cent).
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Goal-based savings is gaining steam, says Andrée-Anne Bourgeois, director of products, communications and marketing for group benefits and retirement solutions at iA Financial Group. She notes plan members have multiple goals, including retirement and short-term savings for which they have to withdraw funds when needed.
Employees’ priorities around savings products may differ based on their life stages, she adds. “Younger individuals may be thinking about buying a house or having a child, while others may be thinking about planning for a trip or returning to school. This is why it’s important for employers to offer different savings vehicles.”
Two providers in the capital accumulation space now offer a student debt repayment program through a registered savings plan or TFSA, says Holman, though she notes that uptake has been slow. Sun Life is piloting a program that allows plan members to allocate a portion of their employer match directly to their government student loans, says Monteiro. And a few providers are piloting a platform that helps plan members save up an emergency fund through a program that rounds up their daily purchases. “If they buy coffee for $3.55, the card rounds up to $4 and the extra $0.45 goes into that savings account,” he notes.
Breaking down barriers
Some plan sponsors think TFSAs are onerous to administer and believe they’ll have to manage the contribution limits and be subject to penalties, says Monteiro. However, he notes TFSAs are easy to manage because it’s just one account on a provider’s platform.
Another barrier is when pension plan decision-makers are based in another country and may not understand TFSAs. However, the more these decision-makers learn about it, they realize it’s a great vehicle, he says, because there are no strings attached to the money and earnings grow tax free.
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Most employers see the benefits of providing savings plans because they understand that improved financial security leads to greater productivity and less strain on workplace programs like disability, says Nickerson. “The key is how do we encourage employers that are not already offering these programs to do so?”
While workplace TFSAs are widely available, the biggest barrier for employers is the cost for set up, she says, suggesting that governments could provide a tax incentive to help cover these costs.
The federal government is recognizing the need to ensure more Canadian employees have a viable way to save for their future alongside building emergency savings, says Downey, noting the Liberal Party’s 2021 budget included a pledge to invest $27.6 million over three years in the SEIU’s My65+ plan to make it available to workers in the elder-care sector. In the budget, the government also said it’s open to working with other unions and employers that are interested in similar targeted options for employees in the senior care sector who are currently without a workplace retirement savings plan.
Educating and building awareness on the benefits of TFSAs will make them part and parcel of how people think about retirement options, he adds. “I want to see a day where all workers across Canada have access to some type of retirement vehicle through their employer.”
Lauren Bailey is an associate editor at Benefits Canada.