Read the fine print before you sign up for a Group RESP

When our first child was born we were contacted by one of those group RESP  plan reps and we decided it would be a good idea start saving now in a RESP. We thought we were being smart when we signed up for a registered education savings plan. But after we received our first annual statement,  wished we had studied the fine print a little more closely. That’s because we signed up for a special type of RESP called a group, or pooled, plan. These plans account for a third of the $18 billion that Canadian parents have socked away for their kids’ post-secondary schooling since the federal government created the RESP program in 1998.
They are run by nonprofit organizations that manage the RESP assets on behalf of parents, with names like the Canadian Scholarship Trust Foundation and Heritage Education Funds.
The catch: the pooled plans, which have had a reputation for aggressive marketing campaigns, including ads in hospitals and dentists’ offices, come with long lists of fees and complicated rules. The plans are now the subject of a growing wave of complaints from parents and scrutiny by regulators.
In a 2004 nationwide study of the sector by provincial securities regulators concluded with a damning report that revealed a litany of serious shortcomings, including: poor oversight of salespeople, who didn’t disclose fees properly and passed themselves off as working for a nonprofit organization when they actually worked for commissions; deceptive marketing material that falsely suggested government regulators had endorsed the plans; inflated rates of return that relied on "creative calculations to make the returns appear higher"; and lax record-keeping.

How do these plans work?

While the Family group plan has the highest potential payout, it has the least flexibility, which increases the risk that your child might not meet all of the requirements to receive education assistance payments.

• uses a pooling concept, where plans with the same year of eligibility pool their income together

• payout is potentially higher because students who qualify for education assistance payments can share in the income l

 

eft by plans that close before they mature or by plans for students who don’t qualify

• criteria for receiving education assistance payments are more strict

What are the fees involved?

You should keep in mind that there is no such thing as a free lunch. Scholarship plans are heavily promoted at doctor’s offices throughout the country. They also employ agents to sell their products. Guess whose pocket these expenses come out of?
In a typical plan, you’ll pay an enrolment fee of $200 per unit. If you enrol your newborn in a group plan, you are agreeing to invest $105 for each unit every year. The enrolment fee may be refunded to you, in portion or in full, when your newborn enrols becomes a qualified student. Note that you won’t receive any earnings on your enrolment fee.
 
 
You will also pay :

Fees and Expenses for Your Deposits:

One-time sales fee based on the number of units in your plan,  Depository Fee (Plus GST or HST) Annual fee for processing your deposits, Special Processing Fees (Plus GST or HST), One-time fees for specific transactions in your savings account, an insurance premium (plus the applicable provincial sales tax in some provinces) for group life and total disability insurance is deducted from each deposit and the balance becomes your contribution to the plan,  the Foundation receives 25% of the premiums from the insurance company.

Fees and Expenses on your income generated:

Annual fee for investment management, Annual fee for administering your plan, Annual fee for holding your plan’s assets in trust,  Annual fee for providing IRC services for subscribers and One time fee for collecting the Canada Learning Bond on your behalf.

What are the advantages of a Group RESP?

When a contributor withdraws from a group plan, only the initial investment (less enrolment fee) is returned. The earnings on the investment stay within the plan and is shared by children who become eligible to receive payments. If the earnings boost from forfeited income were much larger than the total fees, you would benefit from a Group RESP.

What are the drawbacks of scholarship plans?

Education Assistance Payments:  Your child has to qualify for payments, the child must receive the first education assistance payment before he or she turns 22 years old, your child must be entering the second academic year of a program that qualifies. Also, If your child takes only a two-year or three-year program, he or she will not qualify for all three education assistance payments.
Returns: You should keep in mind that scholarship plans are invested in low-risk and low-return assets like T-bills, bonds and mortgages. The return you should expect from scholarship plans will be similar to what you can get from bonds (around 5% currently) plus the earnings on capital of members who dropped out less plan expenses. It is extremely difficult to say how much the fees add up to and since it is not obvious, you have to assume that you will be left with more if you invest on your own. Also, note that fully one-third of returns are “discretionary payments” and around 12% was due to “attrition”.

Are there better options available?

In my opinion, you should meet with a licensed financial advisor such as myself who can show you the alternatives and then you can decide for yourself if they are better.  As an example The My Diploma RESP from Industrial Alliance has no administration fees,  pays you an bonus of up to 15% of the total monthly contributions paid into it.   Your protected against financial market fluctuations and may attain and even exceed 100% of the capital invested. Educational assistance payments are available upon enrolment for the first session of studies. No proof of academic success is required. You determine the amount of the educational assistance payment, and the beneficiary may use it for any school-related expenses, with no administrative restrictions.  You can take advantage of the RESP loan to increase your contributions.

What should I do if I have already enrolled in a Group RESP?

There are several options, cancel the plan, transfer the funds to another RESP or keep making contributions. You should speak with me and I can  look over your statements and then recommend the best course of action.

By Andrew W Bradley
Family Financial Advisor
Children's fitness tax credit

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