Why You Should Avoid Group RESPs

Most parents know that RESPs are a great way to help save for your child’s education.  But there’s one type of plan that’s giving RESPs a bad name.  Group RESPs, or group scholarship trusts, are known for their aggressive marketing tactics and they come with a long list of fees and complex rules.

Related: The RESP Book – Interview With Mike Holman

Group RESPs: Parents Beware

Group RESPs aren’t a scam – they’ll work just fine if you see the plan through to the end – however parents need to be cautious and read the fine print before signing up.

The flexibility of a group RESP is much different from the individual or family plans offered by your bank or credit union.

Here’s how they work:

With a group RESP, your contributions are pooled with those of other people.  The money your child gets is based on the amount of money in the pool and the total number of students of the same age who are in school that year.

Related: RESP Contributions And A Tuition Benefit

Usually you’ll need to sign a contract agreeing to make regular contributions to the plan over a set period.  Group plans are offered and administered by scholarship or group plan dealers.  They may be more expensive than individual or family plans, depending on your investment choices.

Group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when they need it for school.

Here are the five main providers of group RESPs:

  • Canadian Scholarship Trust Foundation
  • Universitas Foundation of Canada
  • Heritage Educational Foundation
  • USC Education Savings Plans Inc.
  • Children’s Educational Foundation of Canada

What To Ask Before You Open An RESP

Some group RESP providers have fallen under scrutiny from the Ontario Securities Commission for providing misleading plan documentation.  Before you choose an RESP provider, make sure you read the fine print and ask about:

  • Fees for opening an RESP;
  • Fees for withdrawing money from a RESP;
  • Fees for managing the RESP;
  • Fees for services and commissions;
  • What happens if you can’t make regular payments;
  • What happens if your child doesn’t continue his or her education;
  • If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type?

Related: Saving For Your Child’s Education

You can withdraw from a group RESP contract and get all of your contributions back in the first 60 days after receiving a prospectus.  If you’re past the 60-day point, you might be better off seeing the plan through to the end.  Otherwise you might pay fees upwards of $800 to $1,200 to collapse the plan during the first few years.

Final Thoughts

Critics of group RESP plans say they are often aggressively marketed to low-income and immigrant communities.

When our youngest child was born, we signed up to receive free samples and coupons from a few different websites.  A short time later we got a phone call from someone who asked if we received samples of baby formula.  It turns out he was a group RESP salesman in disguise and he wanted to come to our house and talk about setting up a plan.

Related: MBNA Canada’s Aggressive Marketing Tactics

We avoided a group RESP plan and instead decided to open a family RESP account with our bank.  Both of our children are named under this plan, so if one decides not to pursue a qualified education program, we don’t have to worry about closing an individual RESP – the benefits are simply shared by the children that do qualify.

As a young family with a lot of competing financial priorities, we just contribute what we can afford right now – $200 per month – and we hope to bump that up as our kids get older.

We like the self-directed RESP because we’re not tied to a specific contribution every month, plus we have the flexibility to contribute lump sums when our finances allow for it.

Have you had any experience with group RESPs?

19 Responses to Why You Should Avoid Group RESPs

  1. I think your site automatically posts a link to your interview with Mike Holman who wrote the RESP book – but it’s worth a comment. The RESP book by Mike Holman is a must read for any parent. It’ll take all the mystery out of RESP’s.

  2. I had a super high pressure sales rep contact me about visiting (they really want to make it to that initial sales meeting). The willingness to meet in person immediately indicates their commission structure is huge. I found the information she provided to be very “rosy” in that it ignored all of the very significant negatives that you discuss above. It’s not a scam, but it’s an extremely expensive option with inferior returns for the average participant that’s pitched far too aggressively.

    Occam’s Razor definitely applies. Your simple RESP plan is superior because it will produce reasonable returns and offers your family flexibility.

  3. Thanks for the kind mention.

    Group plans had a place back in the days before RESP grants existed, but there aren’t any compelling reasons for anyone to sign up for one now.

    I looked up Occam’s Razor as well. I’m still not too clear what it means. :)

  4. My husband and I set up 2 different group RESP’s with CST Plan (one in Nov. 2008 and one in May 2010) for our children. We have what we consider a very affordable $100/month payment for each ($2400/year).

    We were not very well informed on other options at the time, but decided to go for it as I had benefited greatly from the same companies group plan when I attended post-secondary school for a 4 year program. We don’t really see it as an option to get out of.

    Do you think that it’s a good idea to set up another plan (self-directed), in addition to this one (as our income could now afford to max out the possible CESG grants by contributing up to $2500/year/child) or is that just making it even worse if none of them end up attending post-secondary school? I guess I should also add that we have a 3rd child now and will be setting up a self-directed plan for this child.

    I guess I’m just wondering what the best course of action would be if you have not avoided a group RESP plan.

    Thanks for the great post – I’ll be sure to check out your site some more while I’m here!

    • @L – Since your group plans have been set-up for a few years, you’ll probably be better off seeing them through to the end.

      The self directed route sounds better for your 3rd child, since you’ll have more flexibility on contributions.

      Maybe Mike can weigh-in on the idea of setting up another self-directed plan for your other two children so you can make contributions in addition to the group plan.

      • @L If you wish to increase the contributions to your two eldest kids, I would set up self-directed contributions for them. There is no issue with having more than one resp for any one child.

        If none of them use their RESPs, then it won’t matter which type of account you have – there will be penalties. :)

      • Just this month we’ve finished paying the enrolment fees on the newest one. I guess all I can do is hope and pray that the children decide on at least a 4 year program – perhaps an engineer or pharmacist! 😀

        I’ll be interested to see the difference between the 2 plans (group vs. self-directed). Only 13.5 years until the first-born’s plan reaches maturity!

      • One thing that many people have neglected to mention about group savings plans is that they
        offer lump sum deposits as well, meaning parents can deposit when and how much they wish to make. As well, it is thanks to group savings plans that RESPs exist. Banks only jumped on the band wagaon in 1998 when the grants took effect. More money to be made.

    • L, the Federal Government set up the rules about the RESPs that is applicable to all financial institutions. If your child(ren) choose not to go on, your interest earned with CST and interest on the CESG can be transferred to your RRSP or used by yourself to go to post-secondary if you so choose or worse case, cash it out.
      Do you like to know how much “will be there” when your children are 18 & potentially off to college? Your annual statement from CST will tell you that, your self-directed will tell you what it is worth at the time of printing, not when they are 18.

  5. That first reply was @Echo…

    @Mike – would you actually believe that my husband and I have had a good experience with paying a penalty? We broke our mortgage a few years back to get a much lower rate and we’re actually $4000 ahead taking into account the $3500 penalty. Do I wish there was no penalty and I could be $7500 ahead? Of course! Unfortunately, penalties are here to stay.

    Also, Mike, it looks like you have written a book – is there a paperless version available for purchase?

  6. Interesting how you, Mike, say “Group plans had a place back in the days before RESP grants existed”. Thanks to the group plans talking with the Federal Government that the grants came about.

    To lump all “group plans” together and more or less bash them would be the same as putting all the financial planners/advisers, banks, credit unions, mutual funds all together. Just read this morning “Profit at Royal Bank rose 22 per cent in the fourth quarter, pushing Canada’s largest bank to a record year.” This was one of the reasons why a group resp was started back in 1960. What if any, did you profit from any bank that makes a double digit return annually while giving you 2% in a savings account that is locked in for 2-5 years i.e. GIC, Oh did they tell you that if you want your money back before the term has matured that you forfeit all the interest that it has earned.
    Your comments about fees, at least they are disclosed with most of the group plans. The majority of investors that “give” their money to financial advisers because they don’t have the time to be a self-investor, never have heard of M.E.R., T.E.R.s, Rule of 40, Deferred Sales Charge (5% if you withdraw your money from the mutual fund with in the first year)etc. Then there is the protection of the investment, most self-directed plans are directed into mutual funds,where there is “no” protection at all, what can the investor be “guaranteed” back when their children are 18. Is your self-directed investment recession proof or did it have a negative rate of return in 2008? Did your financial advisor inform you that he still made money while you were loosing money, MERs always get paid no matter what the economy.
    You have some fair questions to be asked, but it is applicable to both self-directed and group plans. With some more greater disclosure from the self-directed investments.
    At least I knew what my principal would be when my three kids were 18 and I always believed that they would go onto to post-secondary, not hoping they would. They all did.

  7. We have a group RESP plan for our daughter since 2001 and the maturity date is 2019.I am not naming the institution but it is one of the five organizations offering RESP plans. Luckily we have been able to put in our contributions faithfully and will be able to receive the full $7200 CESG from the government. Throughout the years we have been encouraged to increase our contributions or to get more units by the sales rep. In 2001 when we signed up the statement showed a potential value of $113,754 in our plan and now for 2012 statement it has dropped to $77,831.This last figure however contains an amount of $1342.45 which is not guaranteed because it is discretionary and we should not count on it ! We have 5 more annual contributions to make and I really am wondering what we will really be getting at the end of the road.
    Early this year our sales rep called us to encourage us to do a conversion plan which will increase the potential value of our plan. I am sure we told the sales rep that we don’t want to put any more money than what we had signed up for in 2001. At that point we were told that we will not be paying any more for this conversion plan and we will be getting more units at the same time. To make a long story short we did sign up for this “conversion” but cancelled the very next day after going through the terms of the plan adjustment which stated that we need to add 2 more annual contributions to get these extra units ! This means that we would be putting in 2 more contributions to make it 7 before maturity. This important piece of information wasn’t pointed out to us at the meeting with this sales rep on the phone nor when we met.
    My advice to those who want to buy group RESP is to invest some time reading the prospectus and asking questions and being okay with the contract.Also check the banks to see what they are offering in RESP and of course read all the fine prints. We were stupid for not being more careful before signing the new “conversion” plan. Be cautious when something sounds too good to be true. When I told the sales rep to withdraw our application she said we will be missing out on the potential increase in value of the plan. Well, the “value” or the EAP of our RESP plan with this organization has been decreasing at an uncomfortable rate and I am not sure I can trust their creative calculation of the grand total payouts.
    One last advice is to read and yes try to understand your annual statements and keep track of your contributions and the CESG which are the grants from the government. There are 2 parts to CESG ,basic and additional. For us we know that we would get full $7200 grants by the maturity date of our RESP plan based on our contributions. This is also evident on our annual statement. Yet the sales rep (after we cancelled our conversion plan) informed us that we are short 1 contribution and therefore would not get full grant
    at maturity. I am left scratching my head because this sales rep has been working for this group RESP organization for the last 14 years or so and surely would know how to read my annual statements ?!
    After correcting and explaining to this rep about how to calculate the CESG it was concluded that yes there would be full grant and she blamed someone at the “office” for not seeing this!
    All this left a bad taste in my mouth.

  8. I have a question for those who are experts regarding group RESP plans. When I signed up for the group RESP with the organization in 2001 ( see my previous post ) the prospectus stated ” you will receive one cheque in your child’s first year of academic study for an amount equal to your Savings and the portion of Membership Fees to which you are entitled”. I now have a copy of the most recent prospectus dated August 16, 2012 whereby it states ” the subscriber receives the return of Principal….toward the Beneficiary’s first year tuition and expenses”. There is a change as to when the subscriber will receive the membership fees. In 2001 it was the student’s first year and the latest prospectus has divided the membership fee return into 3 equal payments to be received from the 2nd, 3rd and 4th year of studies.
    My question is …am I stuck with this new arrangement legally?

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