It's back to school time, so you're probably starting to think about what that will mean when your kids are much, much older. As in, tuition time!
You may have seen advertisements encouraging you to enter to win a $1,000 contribution towards your child’s RESP, or been accosted at a parenting trade show by eager salespeople asking you if you want to win $500 towards your child’s future education. Fill out the form and you’re sure to have an education savings plan sales representative calling you day and night to set up an appointment to open an RESP for your child. That’s because the salespeople work on commission, and often receive incentives for selling a certain number of plan units. A scholarship trust fund is a "pooled" or "group" plan. Your money is pooled with that of other parents and used to purchase plan units. When you are ready to withdraw money, you share in the pooled earnings of investors with children the same age as yours.
Pooled group plans have a spotty reputation. Generally, if you cancel your plan, need to change your contribution schedule, or your child does not go to school you could forfeit the plan earnings, the CESG and the fees. Combined with the fact that scholarship plans are often limited to investing in low risk, low return investments, it’s entirely possible that after 20 years of contributions you’ll receive less than what you contributed, not more. Group plans do not offer the same payout flexibility as self-directed plans. Pay-outs may be made annually or semi-annually until the schooling is completed.
Need a few more downsides? The fees might be ridiculously high, and not well publicized. There are enrolment fees, administration fees, investment management fees, depository fees, trustee fees and more. These fees are paid up front from your contributions. Plus, pooled group plans are riskier than individual plans because you have less flexibility in the way you make your payments. If you miss a contribution and your account goes into default, you could lose your earnings. Some plans impose far more restrictive regulations regarding what schools or types of post-secondary program actually qualify for pay-outs than you will experience with a basic RESP established by either your financial planner or financial institution.
When considering a group plan, remember that whether you choose a self-directed plan or a group plan, all RESP contributions are eligible for the Canada Education Savings Grant. The group plan funds have been the target of many formal consumer complaints. Some salespeople will go so far as to insinuate that the government-matching portion is only eligible to parents in their plan – not true! Any parent investing in a properly registered plan, including those organized through the bank, will receive the grant.
I strongly encourage you to do your own research and speak with your personal banker before signing any contract with a group fund. Most Canadian banks offer a flexible RESP, one where you can establish a regular contribution, but which can be changed if your financial situation changes, and one where you can make lump sum payments whenever you have them.
We chose to set up a family RESP with non-scheduled contributions through our bank. All three children are named in one plan, so if one or more of the kids chooses not to pursue a qualified program, we don’t have to worry about closing their individual RESP – the benefits are simply shared by the children that do qualify. Being self-employed, I like not being tied to a specific contribution each month and instead having the flexibility to contribute lump sums when our finances allow it.