Putting a digital spin on profit-sharing at small and medium-sized businesses

Digital retirement-planning platform Common Wealth has expanded on its commitment to help small and medium-sized business owners support their employees’ financial security in retirement with a new account option.

Beyond RRSPs, TFSAs, and RRIFs, the platform now supports the use of deferred profit sharing programs (DPSPs), which can also help employers address the rising challenge of worker retention.

“There are many surveys to show that small businesses are struggling to attract and retain talent,” said Alex Mazer, co-founder and co-CEO of Common Wealth. “I think that's a combination of the Great Resignation trend that's come as a result of COVID, and longer-term structural issues in the labour force that are being caused in part by an aging population.”

In KPMG’s recent Business Outlook Poll, two thirds (68%) of Canadian businesses said they’re having a hard time recruiting people with the skill sets they need to grow. The Canadian Federation of Independent Business (CFIB) has reported that 52% of small and medium Canadian businesses have had at least one vacant position for four months or more, and a survey conducted by the Harris Poll for Express Employment Professionals found 84% of Canadian companies are bracing themselves for hiring challenges over the next year.

Against that backdrop, more employers are looking to improve the incentives they offer to job candidates, and retirement benefits are playing more of a role. In some cases, creating a group retirement plan has become more of a priority than it has been in previous years; for companies in the tech sector, traditionally known for their high-growth orientation and focus on cash compensation, group retirement plans are increasingly becoming table stakes.

“It's a very competitive market,” Mazer says of the tech industry. “You don’t want to just put in a plan, but also build it with matching contributions at a good level.”

For many small businesses facing the pinch of inflation – including energy prices, food costs, and wages – the idea of spending more on yet another piece of the employee compensation package might be a tough ask. But after two years suffering the pandemic crisis, business owners are also realizing their role in supporting employees’ financial wellness.

“There are obvious costs if you can’t retain people,” says Jonathan Weisstub, co-founder and co-CEO of Common Wealth. “So now there’s more thoughtfulness around how to design compensation packages around not just helping ensure employees’ long-term financial security, but also how to incentivize them to stay longer.”

That’s where Common Wealth’s new DPSP feature comes in. The beauty of DPSPs for many business owners is the vesting feature attached to it, where the contribution from the company doesn’t vest for up to two years into the tenure of an employee, depending on the way it’s been set up. That means aside from having “skin in the game” and being involved in the business’s profitability, employees who want to benefit from profit-sharing must wait for the vesting period to elapse before they can benefit.

In conversations with many of Common Wealth’s advisor partners, Mazer and Weisstub have found that business owner clients have effectively used DPSPs as an employee recruitment and retention tool. But in many cases, the financial firms that have offered them have traditionally delivered less than optimal experiences for customers.

“One of the things that happens with what we’d call legacy providers is that the DPSP is opened for and shown to the customer as an account that’s separate from other registered investment and financial accounts they may have,” Weisstub says. “When you think about the customer’s accounts and their underlying investment products separately, that’s not a very holistic approach to helping Canadian workers become retirement-ready.”

“What we hope to deliver is an interface that can show a user different accounts – DPSPs, RRSPs, and TFSAs – working together in support of the user’s retirement plan,” Mazer says.

According to Mazer, a survey of Canadian businesses conducted last year found that retirement plans were a top retention tool, besting other options including pay, upward mobility, and health benefits. Some data from the U.S. also suggests defined-benefit plans are more effective for retention than defined-contribution plans, partly because DB plans have vesting schedules; for small businesses that don’t want to offer DB plans, a DPSP can be a good option.

Unlike group RRSPs, DPSPs are not subject to payroll taxes when an employer makes contributions. Contributions are tax-deductible from company income, and business owners can contribute up to an annual limit of either 18% of the employee’s annual earned income or half of the money purchase limit (up to $15,390 for 2022), whichever is less.

“Historically, advisors have viewed group retirement as a complex offering that requires years and years of experience,” Mazer adds. “We’ve been trying to simplify the onboarding, the plan design, the setup, and the education that’s built in for employees, which we believe helps more advisors support their business owner clients as they introduce this powerful strategy.”