Every year as the deadline for making registered retirement savings plan contributions approaches, there is a deluge of data from surveys conducted by financial institutions documenting how many Canadians will be impoverished in their old age because they didn't save enough during their working career.

But saving is never easy, and saving for retirement is often the last thing on the minds of people early in their careers with small children and big mortgages. Even if they are able to save, the money is generally earmarked for shorter term goals like a vacation or home improvement.

However, with the announcement of the new tax-free savings account in the recent federal budget, both employers and their employees will have a new arrow in their retirement savings quiver.

Mercer partner Malcolm Hamilton calls the TFSA "the most significant change to Canada's saving system since the introduction of RRSPs in 1957."

"TFSA features will incent individuals to distinguish between retirement savings and discretionary savings, and to split deposits between RRSPs and TFSAs accordingly," says Morneau Sobeco principal Greg Hurst. "This should result in fewer preretirement withdrawals from RRSPs for purposes other than retirement income."

A comparison of the features of TFSAs and RRSPs highlights the flexibility of the new savings vehicle.

Beginning in 2009, Canadian residents age 18 or older will be able to contribute up to $5,000 a year in after-tax funds to a TFSA. Any unused contribution room is carried forward. This maximum contribution will be indexed to inflation in $500 increments.

While contributions to a TFSA are not tax-deductible, all investment income, including interest, capital gains and dividends, is tax-free, as are withdrawals. Withdrawals also create additional TFSA contribution room up to the cumulative annual maximum. Neither investment earnings nor withdrawals affect an individual's eligibility for income-tested benefits.

Because TFSAs are registered accounts, they will be able to use the same qualified investments as RRSPs, with certain exceptions for non-arm's-length entities. Individuals can also contribute to their spouse or common-law partner's TFSA if the spouse has contribution room available. In addition, account assets will be transferable to the spouse/partner upon the member's death.

For retirees, another very attractive feature of the TFSA is that funds can continue accumulating beyond age 71 - unlike an RRSP or pension plan that must be converted into a stream of retirement income payments at the higher ages. As a result, Hewitt actuary Jerry Loterman suggests the TFSA could provide an account for unused flex credits or to fund future medical expenses.

In a post-budget Special Notice, Eckler Ltd. discusses reasons why employers who already offer a defined contribution pension plan or a group RRSP might add a group TFSA as an extension of the existing savings program, including:

·        The opportunity to "piggyback" on existing savings plans, by offering similar investment options and administrative support (such as payroll deductions).

·        Reduced management and administration fees compared with the retail market, particularly for small account balances in the early years of the TFSA program.

·        Ability for an employer to encourage supplementary retirement savings beyond the limits of the basic plan, particularly for higher-income employees.

·        Availability of a taxeffective general purpose savings vehicle for non-retirement needs.

On the other hand, they suggest the addition of a totally new savings vehicle that can be used for purposes other than retirement may create an unacceptable administrative burden for some plan sponsors. It may also increase communication needs for employees who would be faced with a new set of options and decisions under their employer's benefit programs.

A Watson Wyatt InfoFlash suggests it may also be possible for employers to either sponsor or match contributions to a TFSA. However, employers are cautioned that this form of tax-assisted plan will likely be considered as a capital accumulation plan, and therefore subject to CAP guidelines developed by the Joint Forum of Financial Market Regulators.

In the next year, savvy employers and their advisors will be considering the merits of various group TFSA plan designs, implementation and communication strategies.

"The TFSA represents both a challenge and an opportunity to sponsors of currently available retirement savings arrangements," Hamilton says. "This new savings vehicle will give employers an opportunity to better align their compensation programs with employee needs and, by so doing, to better attract and retain the workforce of the future."