We’ve been approached about signing up for a Group RESP, what is that?
Group RESPs (they come in many names, Scholarship Trusts, Scholarship RESP Plans, Educations Trusts) are independent pooled education savings plans. Contractual members of the plan contribute on a scheduled basis, along with all the other members over a set period of time (likely around 18 years). When your child is ready for post-secondary education you receive a shared benefit based on the value of the pool at that time along with the government grants and the earning growth of your investments which are held in trust.
This question brought back a vivid memory…
Our first born was about a month or two old, still not sleeping (at all!), and we received a phone call from one of the Group RESP providers who offered to come to our home and speak with us about RESPs. My first reaction was, “Great! So efficient – I can set up an RESP from my home!”. Being completely new to this whole parenting thing, the pitch sounded entirely convincing and straightforward. So, we signed on the dotted line and then passed out from fatigue.
However, when I awoke (at about 2am) I started thinking about some follow-up questions that I hadn’t thought to ask the night before:
- How much were the fees going to be in dollar terms since they had only mentioned percentages?
- What were the penalties for missing a contribution?
- How do these plans compare with an RESP I could get from the bank?
Down the google rabbit-hole I went and was horrified by what I found. So many people were voicing their frustrations about these plans – feeling confused with the lack of transparency around fee structures and the lack of flexibility for the withdrawals.
Ultimately, feeling overwhelmed, we decided to cancel our commitment to the Group RESP until we had time to do more research (and get more sleep).
This experience taught me some important lessons about Group RESPs.
Relatively unbiased Facts about Group RESPs
When researching this subject anew, I couldn’t believe what a polarizing topic it has become. Most of those voicing frustrations seem to have a common issue around the lack of understanding about the plan rules. Here I don’t blame them because when one reads the prospectus or even the Plan Summary, the details are not transparent! From my experience, the rep was also not forthcoming with critical information unless you knew to ask. Let’s dive into a few of the fuzzier topics…
Fees
The lack of transparency around the fees is my biggest beef with these plans.
To start, each member pays an upfront Sales Charge, or RESP handcuff. The prospectus indicates a cost of $100 to $200 per unit which is completely unclear, but on average it represents between $800 to $1,200 paid to the administration of the plan before much principal is invested. The helpful sales person will indicate that at least 50% of these fees will be reimbursed to the qualifying student at the end of the plan. What they don’t tell you is that the amount of the payout is at the discretion of the Plan (you have no control!) and that the dollar value of the fees is worth much less after 18 years of inflation.
On top of the Sales Charge there is an Annual Management Fee averaging between 0.56% and 0.63%. I would compare this fee to the Management Expense Ratio (MER) of any mutual fund or ETF. It could be argued that this fee is not unreasonable when compared to mutual funds which can charge as much as 2%. However, as another comparison, BMO’s Aggregate Bond Index ETF, which arguably mimics these plans’ holdings, costs 0.09%. Just an example.
Investments
These plans take a low-risk approach by investing in fixed income products (bonds, GICs, T-bills). The principal protection afforded by these plans and the specialized management specific to an education plan may appeal to members. With low risk comes low reward which leads me to…
Returns
One plan disclosed a return to plan members of 4.6% (after fees) in 2017 and 6.0% in 2016. It’s important to note that a portion of the returns are comprised of the pooled funds from those who left the plan early and a return of a portion of the Sales Charge. The formula for those calculations is completely at the discretion of the plan administration and therefore, impossible to predict.
Restrictions (or ‘being as flexible as a flagpole’)
Unlike a more traditional RESP at a bank or brokerage, the Group RESPs come with a few tricky restrictions which if not adhered to, can result in lost earnings, grants and the Sales Charge.
- Once you decide on a prescribed contribution schedule, it is difficult to deviate from it.
- You cannot leave the plan or transfer your assets to another RESP (which FYI 20% of the plan members do – not great retention)
- At the end, your child must enroll in an eligible program (the prospectus’…prospecti?…indicate a minimum of a two-year program at any post-secondary institution).
For members whose lives follow a standard path, these restrictions are not onerous and their children are able to take advantage of the funds for post-secondary education.
How do I know if the Group RESP is for me?
To fully benefit from these plans, you should have the following criteria:
- Conservative risk profile, principal protection is paramount
- Solid and predictable financial situation
- Firm belief that your children will attend post-secondary education (although this is tough to know at birth!)
- Willing to pay for peace of mind knowing that your RESP is managed by someone else as long as you make the payments
The Ontario Securities Commission provides a more detailed summary here if you are considering a Group RESP it’s worth the read: https://www.getsmarteraboutmoney.ca/invest/savings-plans/resps/understanding-group-resps/
How did you decide on your RESP route?