RESP Basics

November 9th, 2006 · 150 Comments

Reader Alex left the following comment on how to get started with a RESP for his soon-to-arrive baby:

Do you have any RESP accounts that you recommend? Most I’ve seen charge an administration fee, and I’d like to avoid that.

I have set up a RESP for my boys with TD eFunds, which doesn’t charge an administration fee and offers some of the lowest-cost index mutual funds in Canada. There is a bit of a process involved in setting up the account initially but once it is taken care of, you can contribute every year with the click of a button. Three-to-four weeks after the contribution is made the Canada Education Savings Grant (CESG) is automatically deposited into the account.

I park the initial contribution and the CESG in a money market fund, which I then liquidate and buy four funds according to my asset allocation target (TD Canadian Bond Index eFund: 20%, TD Canadian Index eFund: 20%, TD US Index eFund: 35%, TD International Index eFund: 25%). The portfolio is rebalanced roughly once a year when new contributions are made. This simple portfolio has performed reasonably well gaining about 4.3% over the past nine months.

There are other options available for RESPs that are not very attractive in my opinion. Group RESP plans like the Canadian Scholarship Trust are inflexible, expensive (the heavy promotions to new parents comes out of the pockets of existing plan members) and are invested in low-growth fixed income assets. I also avoided a self-directed RESP because they typically charge an annual administration fee if a minimum balance is not maintained.

150 responses so far ↓

1 Dan // Nov 10, 2006 at 2:02 am

The RESP world is almost as complicated as the RRSP world. I have a self directed account with TD Waterhouse. I do pay a $50 a year administration fee + GST, but I like the fact that I can trade stocks and that I am not limited to mutual funds.

Run away from the Canadian Scholarship Trust type plans. The only way they make money is because people fail to follow all of their rules, and then loose the money already invested.

I have been having a hard time finding out about the family option with RESP plans. I have heard that you can have more then one child listed for benefits, but I have not been able to find out what the rules are. Before I lock myself into any plans I like to know what the cost would be if I need to cancel it. Any good links out there about this?

Cheers and thanks for starting this topic CC.

Dan
2 Traciatim // Nov 10, 2006 at 11:02 am

Wow CC, I have an appointment Wednesday to go in to my local TD Branch to get everything set up for almost the exact same plan you have with your RESP. I was going with the European index rather than International, and a slightly higher North America bias.

I have 2 children now, one aged 5 just stated Kindergarten, and one 2. The Aged 5 one I opened a CST plan; unfortunately before I starting reading about other RESP strategies (www.cst.org, everyone join pay their fees and quit to put my daughter through school). It’s growing steadily, however they have ENOURMOUS GIGANTIC fees at the start which really slow the growth. These fees are refunded at the end, however you will not gain interest on this money and it’s taken from the first payments. You bash the interest income from these, but according to their 2005 annual report their 10 year returns have been between 6.9-8% depending on your plan. I don’t consider that too bad for an easy to set up, simple monthly ’set it and forget it’ plan.

My plan for my 2 year old son is simply ride out low MER indexes for 8 years and from age 10 to 16,17 or 18 slowly move more and more funds to safer locations.

I think this simple approach will far surpass the return I will get from my daughters CST plan, however only time will tell. Though both my children will have more than I started with when I went to college, and that’s the only thing that really matters.
3 Canadian Capitalist // Nov 10, 2006 at 11:22 am

Dan: We have made only two contributions to the boys’ plans so far, so I think paying $50 or 1% for an administration fee is a bit steep. I would wait for at least for a few more years before considering the self-directed option. That said, if you already have a bit of money saved up in a RESP, self-directed is a good route to take.

I think you can list any related family member as a beneficiary. You can find all the rules on the Government website. Check the resources link in my old post.
4 Canadian Capitalist // Nov 10, 2006 at 11:28 am

Traci: The reason CST has decent returns is attrition. If a member does not keep contributing, because they lose money already invested.

In my opinion, you can do just as well with a self-directed or mutual fund RESP with all the flexibility.
5 Traciatim // Nov 10, 2006 at 1:08 pm

I think your wording is a little deceiving on the CST. Your contributions will be returned upon termination of the plan less their fees. Since people have to pay $200 per ‘unit’ of the plan this can be quite a sizable chunk. Also, I believe the interest is held separately from your contribution amount and that may not be returned to you on leaving. It seems they reserve that for regular withdrawals when a child enrolls in a post-secondary education institution.

In their own words:
“To close your plan, please send a written request to terminate your agreement … your contributions less enrolment fees, depository & service charges and any insurance premiums paid will be returned to you.”

I am in no way advising anyone to even consider using them. I feel it is by far better to set up your own plan through something like the TD eFunds than use an RESP service. This is the reason I am switching for my son instead of using CST like I did with my daughter.
6 DaveB // Nov 10, 2006 at 1:32 pm

Great site CC - I visit every day.

I have 3 kids, have a self-directed TDW account which is now well over 20k so I think there are no fees (right??).

One of the obvious advantages of an RESP is the governments contributions. I also try to keep any foreign ETF’s in Canadian dollars to eliminate currency risk.

A great “strategy” we have is to get the grandparents to contribute to the RESP in lieu of expensive toys which my kids play with once and have too many of anyways! May not work for all/many but works for us well.
7 Canadian Capitalist // Nov 10, 2006 at 2:15 pm

Traci: My apologies for the incorrect understanding. Still, like you point out a mutual fund RESP account is a better option.

Dan: TD Waterhouse has a $50 admin fee if the account is less than $25K.
8 Rob // Nov 10, 2006 at 5:21 pm

Always set up a family plan RESP even if you have only one child - that way you’ll have less paperwork when you add another child along the way.

Family plans are the best way to go because if only one child goes to school, he/she can use siblings growth and grant money w/o penalty.

The real trick to RESPs is withdrawing the money in the smartest fashion. You have a lot of control whether you take out taxable ‘EAP payments’ or non-taxable “refund of contributions’, so tax efficieny is paramount. If the student has little or no taxable income, consider creating taxable income by withdrawing EAP payments (even if the student doesn’t need the money). Also, withdraw any amount the government can take back first so you don’t risk losing the funds if you fail to meet the criteria later.

Last thing - Scholarship plans are horrible - the OSC warned on these years ago - they are really inflexible. Just say no.
9 DeVirt // Nov 11, 2006 at 12:21 am

I’m just wandering if anyone of you had chance to get “Additional CESG” for your kids RESP? Apparently they will add “10% or 20% on the first $500.00 contributed to an RESP”?
10 Traciatim // Nov 11, 2006 at 12:13 pm

I believe that’s the Canada Learning Bond if you are searching for it. It’s strictly for lower income families and is available as a one time $500.00 deposit to your RESP in the first year and, from what I understand, $100 for the next 15 years as long as the income eligibility is still met. Apparently this is set at about $36000 of family income.

Info at: http://www.fin.gc.ca/budget04/pamph/paleae.htm
http://www.hrsdc.gc.ca/en/hip/lld/cesg/publicsection/CESP/Canada_Learning_Bond_General.shtml
11 Monty Loree // Nov 11, 2006 at 7:05 pm

I was doing a search for Canadian Money Blogs. There don’t seem to be all that many of them.

This is a nice looking blog. (One of the very few Canadian blogs!)

I put linked to you from my site, CMA. Cheers!
12 DeVirt // Nov 12, 2006 at 1:40 pm

Traciatim: thanks for pointing this our! You’re right, this is just another name for Canada Learning Bond created by RESP providers (http://www.scotiabank.com/cda/content/0,1608,CID9385_LIDen,00.html).
13 anjo // Nov 12, 2006 at 7:34 pm

Devirt: Rather than the Canada Learning Bond, I thought you were refering to the different levels of CESG based on income as referred to on the Canlearn website, see link: http://www.canlearn.ca/en/parent/save/growmoney/investing_101/invest_options/resp/cesg/index.shtml

According to this website, besides the 20 cents per dollar to the first $2000 of contributions, the CESG is 40 cents per dollar contributed on first $500 for net family income of less than $36,378; and 30 cents per dollar contributed on first $500 for net family income of $36,378 to $72,756. I fall within the latter net family income bracket, but have only seen 20 cents per dollar so far in this first year of contributions. Hopefully, they correct this next year after reviewing my tax return.
14 Ahmed // Nov 13, 2006 at 8:41 am

What are your thoughts about avoiding (or limiting) the RESP and investing mostly in dividend paying stocks? Although there are no tax advantages for me, my child would have more freedom with the dividends.

My concern is that our child may not want to pursue further education and why should we impose that decision on him/her. What if the child wants to travel for sometime or start a business? Currently, these are avenues covered by RESPs or the CST. However, a diverse portfolio of dividend paying stocks would supplement our childs income during life enriching travel, starting a business or pursuing their educational dreams.

I’d be interested to hear your thoughts.

Ahmed

PS. my mother invested in the CST plan for me and my two siblings. Only one of us took *full* advantage of it. Personally, I’d not recomend it.
15 Ahmed // Nov 13, 2006 at 8:42 am

Correction:
Currently, these are avenues NOT covered by RESPs or the CST.
16 Ryan // Nov 16, 2006 at 2:52 pm

Ahmed, if your child does not choose to go to university you can roll the money into your RRSP’s, assuming you have room to. You only lose the gov’t contribution amount. Then you could take the healthy income tax return and give it to your child to go travelling.
17 Vancouver Dad - Fatherhood in Vancouver, British Columbia » Blog Archive » The Cost of Kids // Nov 16, 2006 at 6:07 pm

[...] RESP Basics (Canadian Capitalist) [...]
18 anjo // Nov 16, 2006 at 11:05 pm

Ryan: I didn’t think that rolling over the RESP to an RRSP would be counted as a RRSP contribution since they are both tax-deferral tools. Sorry to be a doubter, but it sounds a little too good to be true.
19 Ryan // Nov 17, 2006 at 3:35 pm

Hmmm, well I could be reading this wrong but…

1. What happens if the beneficiary decides not to pursue a post-secondary education or I need to withdraw the money?

You have a number of options, including -

transfer the RESP assets to another eligible beneficiary
withdraw the funds for yourself (you must repay the government grants and pay taxes and a surcharge on investment income you withdraw)
transfer up to $50,000 of the investment income to the subscriber’s regular or spousal Retirement Savings Plan (RSP)if there is enough contribution room
donate the investment income to a Canadian educational institution

http://www.tdcanadatrust.com/resp/resp_faq.jsp
20 Canadian Capitalist // Nov 17, 2006 at 4:02 pm

Anjo: I think Ryan is right. Note that you don’t get a tax deduction for a RESP like you do for a RRSP. In other words, you put after-tax dollars into a RESP but pre-tax dollars into a RRSP.
21 Anjo // Nov 17, 2006 at 6:11 pm

anjo: I hope Ryan is right. Your logic is sound, CC. While I hope my kids pursue post-secondary education someday, this would provide some consolation should they not.
22 Steve Forrest // Jan 25, 2007 at 12:50 pm

Some comments on this blog, in no particular order:

- Scotiabank seems to be the best option for self-directed RSP - their fee is $25/year when you have less than $15,000, no charge after $15,000 - everyone else is $25,000/$50. It will be years before I have even $15,000 in.

- What does your RSP investment strategy look like? I have self-directed so I can purchase stocks, rather than mutual funds (MF). MF’s charge an MER (Management Expense Ratio) of about 3% *which you do not see* to manage your money. Take 3% of your holdings, per year, and this is what you are losing. The reality is that MF managers need to make money, thus the fee (fair enough). If you like a fund, and believe in it, look at the stocks the MF managers buy, and buy the same ones. Net result will be the same, but you will have another 3% in your pocket!

- If your children do *not* go to school, you will get back the money you put in, at a minimum, and the interest you make on those funds. The amount you contribute will be returned tax-free because you have already paid tax. You will pay tax on the capital gains. The government will get their money back…it wasn’t your’s to begin with! Its for education, and if they don’t use it for that, well, you shouldn’t get the money.
23 Aaron // Jan 30, 2007 at 3:09 pm

I am with a group resp company for my children. I like the fact that it offers guaranteed principal and a good rate of return. The fees are taken from early contributions, but at least I have a chance on getting these fees back. and with a self directed plan, fees are paid over the 18 years that you are making your contributions, adding up to alot more than what the membership fee would be in a group plan. for those of you that are considering RESPs, stay away from the mutual fund market as your investment is not guaranteed and you could lose money along with the government grant and this was the reason for starting the RESP.

I think what some people are forgetting is that this program is not intended to make parents wealthy. its about covering the cost of your childrens education.
24 Canadian Capitalist // Jan 30, 2007 at 3:53 pm

Aaron: Thank you for your comments. It seems to me that you have researched the RESP options and concluded that a group RESP is suitable for you.

I reached the opposite conclusion. As I’ve noted in this post, I am enrolled through TD eFunds. I do not pay a penny in fees. My kids are still in nappies, so I am willing to take the risk of being in the market for a better return. The RESP portfolio is diversified using index funds and as they enter their teen years, I would slowly convert to a fixed income portfolio. The biggest attraction though for me is that a self-directed RESP is totally under my control.
25 Ray // Feb 21, 2007 at 10:18 am

Parents stay away from CANADIAN SCHOLARSHIP TRUST PLAN. I made the mistake and trusted a salesperson who was a friend of a friend. He told us that CST was the only plan of it’s type at the time (9 years ago)and I didn’t bother to check. A lot of people don’t read their prospectus (I didn’t) and don’t know that your money doesn’t earn any interest for the first two years, yes u get it back if you don’t miss any contributions, but why would yo want to do that if there are alternatives that pay far better returns. I totally agree with cc, regarding group plans they are extremely expensive especially if you are not able to continue contributing for what ever reason. We had to stop contributing when my wife went on mat leave and decided to stop when she decided to stay home with the kids. group plans are extremely expensive and a complete rip! When the contributions stoped they swithed our plan from the Group Plan to a ‘family Savings Plan’ less all the setup fees etc. The total value of all our contributions were $6800 and thier enrollment fees etc amounted to $3600, so we were left with $3200. These plans are so restrictive that you get penalized even if you want to reduce the amount you contribute every month.

Also, if you stop and want to start back again you have to make up for all the contributions missed. For the people who are in favor of these plans I hope, for thier childrens sake, they never have to stop making payments, because if you do, you’re SCR&^D.
26 George // Mar 18, 2007 at 8:55 pm

Aaron writes: “for those of you that are considering RESPs, stay away from the mutual fund market as your investment is not guaranteed and you could lose money along with the government grant and this was the reason for starting the RESP.”

If you’re extremely averse to market risk, then this might be a route to choose. The problem with more conservative plans (such as CST) is that they face another risk: inflation. Post-secondary education in the past 20 years has become more expensive at a rate far exceeding inflation (upwards of 8-10% each year for some years). If your RESP money is in an investment that pays you only 3-5% per year, you had better be making a lot of contributions!

Sure, money in mutual funds isn’t “guaranteed”, but there are risks to every investment. Many people only look at market risk (the risk that your principal would decrease in value) and ignore inflationary risks. This isn’t a very good way to invest - you need to look at all the risks, and all the potential rewards, and come to a conclusion from there.
27 Brenda // Mar 21, 2007 at 7:43 pm

George is right about education costs rising and for this reasong when CST gives you all of their fees back plus the return on the money of about 6%
plus top ups (extra money in the plan) the return on the money is between 7% to 8%. Canadian Scholarship Trust the foundation is non-profit so all of the surplus is paid back to children when they attend a post-secondary institution. This surplus is calculated each year as children apply for post secondary education and is paid on top of the interest rates earned from investments. As for Ray’s advice to never to stop making payments. This is true. The money is intended to grow over the years in order to have some valuable savings. CST agents will tell you so themselves that once you start a plan you need to keep contributing. But isn’t this the truth everywhere you go that there are fees to pay and anytime you want to pull out and the contributor looses the money. I have a CST plan for my daughter and I am happy with it. This plan will mature in her 17th year and the money will wait for her to start post secondary education. So, this plan has a maturity date. Mutual funds have no maturity dates so if the plan performs poorly in the year when the child needs the money the child will not be able to go to school until the plan makes some money. To work with mutual funds or stocks parents need to know what they are doing. This takes a lot of time and planning. I am too busy for that. My suggestion is to people who complain about group plans like CST’s don’t put in the plan more than what you can comfortably pay for. That way you will not have to pull out of the plan.
28 Brenda // Mar 21, 2007 at 8:04 pm

My reply to Ahmed:
If a child does not go to a post secondary education it will have a very hard life. In the future to find work people will need minimum two years of college or university. Also, to have a business one needs to know how to manage and market a business and that also takes education. Many businesses in Canada fail because people don’t know how to find a good location suitable for their business and how to manage a business in our society.
29 Brenda // Mar 23, 2007 at 6:48 pm

To Ahmed:

How much do you know about RESP payouts?
A lot of payouts depend on government rules.
Go on the HRSDC website under frequently asked questions and you will see that payouts are regulated by the government and all institutions are under the same law.
30 Frank // Mar 24, 2007 at 3:01 pm

The banks will rob you over the years with their MER’s. The CST plan is quite incredible when you compare it with the alternatives. And the plan has become much more flexible over the years for changing beneficiaries and reducing payments. Do some more research, I happen to know that some of the top financial people at Scotiabank invest with CST.
31 Canadian Capitalist » Is a Group RESP Plan Right for You? // Mar 26, 2007 at 12:05 am

[...] In my opinion, you should carefully consider the alternatives and decide for yourself if they are better. I have a RESP set up for our kids with TD eFunds. There is no RESP administration fee and I am able to invest in one of the lowest cost mutual funds available. It gives me flexibility (I can decide to contribute or skip entirely. Remember, most people have other priorities like saving for a retirement and paying off their mortgage) and control (my kids are very young, so the portfolio is heavily tilted toward equities. If your kids have five years or so till university, you should be invested in bonds or GICs). In contrast, you have to keep contributing to a scholarship fund or you lose your membership. You also don’t have control over where the money is invested. It makes no sense that an infant’s college fund should be invested entirely in bonds. Is there any drawback to self-directed RESPs? [...]
32 Helen // Apr 4, 2007 at 4:06 pm

I am just beginning to understand the mistake I made with the Canadian Scholarship Trust Plan. I also trusted that the salesman was telling me the whole story and I didn’t read the package he left with the prospectus in it. I had no idea about the penalties for stopping contributions.
I just pulled out the prospectus and the fact that it says right on the top of the front cover “No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise” is making me think I’m in trouble.
Any advice out there? Is there any chance that I can guilt or scream these people into returning my enrollment fees?
33 Canadian Capitalist // Apr 4, 2007 at 4:16 pm

Helen: The short answer is you can’t unless you had enrolled within the last 60 days (I may be wrong, so check the prospectus). If you have already contributed for a few years, your best bet is to keep contributing.
34 Helen // Apr 5, 2007 at 7:13 am

I looked at the prospectus (Three years too late) and I think you are right. I considered continuing the contributions in order to not lose the fees, but that leaves a really bad taste in my mouth. It feels like paying protection money or something. Then what other fine print surprise will I find in the end? If they can stucture it like this, what else is in store?
I’m just having a hard time wrapping my head around this. It seems ludicrous. In this day and age when we are regulated to death and there are bazillions of laws on the books for our protection, this is allowed? It just doesn’t seem right.
Still scratching my head.
35 Brenda // Apr 11, 2007 at 1:17 pm

To Helen:

You will notice that with CST when children start post secondary education YOU the contributor can withdraw all of the principal minus the fees right away and children get the fees back over the 4 years together with the government grant money and the interest from CST and any surplus from investments. Banks will also charge you a high fee if you try to pull out. The government takes their money back also. So, like any investment it is intended for children’s education and should be kept for that. CST returns more money back to the contributor in the first year when children start a post secondary program than other institutions of the same kind. Compare the prospectus rules to the rules on the Human Resources Development Canada web site and you will see that they follow the same rules. You are not in trouble as long as you keep the plan and your children go to school. CST also allows you to transfer any unused contributions to younger children or you can transfer to your RRSP. Like RRSP you would pay a penalty any time you try to pull out the money because investments of this sort are not bank accounts the money needs to be there for RESP purposes. The government has allowed these plans for these purposes and does not tolerate withdrawals. If people want an investment where they want to withdraw cash or make money they need to buy different kinds of investments like stocks, bond, treasury bills, mutual funds etc. make the money and pay taxes on income from the investments.
36 Brenda // Apr 11, 2007 at 1:25 pm

I agree with Frank that banks will rob you of your money with their MER’s. Also you need to consider the fact that banks put your RESP money into mutual funds. If you have another day like September 11th in the future when your children go to school what will happen to mutual funds and your children’s money? I prefer to invest with companies that put most of the RESP money into Canada and Provincial Savings Bonds because my child’s money needs to be in low risk secure investments. I am not looking to get rich off this just to save some money for my child’s education, get the government grant money and some interest.
37 Canadian Capitalist // Apr 11, 2007 at 1:50 pm

Brenda: I’ve elaborated elsewhere that I invest the RESP funds in a very low-cost manner using TD eFunds. I’ve also noted that you shouldn’t take unnecessary risks and move money into low-risk investments like GICs and bonds as kids are approaching university age. I am not looking to get rich off RESPs either, just pointing out that there are other superior (in my opinion) alternatives with less strings attached.

The problem I have with group RESPs is that they are sold aggressively by agents without explaining the risks to clients (Can the client afford to contribute monthly for more than 15 years? What does the agent care if they can’t? Once they have the signature they have earned the commissions).

My kids are still in their nappies and it makes no sense to me that their college funds should be invested entirely in bonds. They can afford to take a bit more risk and invest in equities to have a shot at a better return.

A self-directed RESP gives me total control. I can take appropriate risks with the portfolio. I can contribute one year and skip entirely the next. I still get the matching grant. IMO, its the best option.
38 Brenda // Apr 11, 2007 at 1:57 pm

One more point about CST. CST is a non-profit organization which means that any surplus is paid to children when they attend a post secondary institution whereas in banks and other institutions like insruance companies the profits go to shareholders of that organization. The money that CST hold back if people cancel the plan is also put back in the pool and given to children who do go to school. Educate you children that they need some kind of post secondary education in order to have a decent job. In the future people will need minimum two years of college or university to be able to get
an office job or similar. And those who do finish the 4 year programs or higher will get much better salaries than those who do not go to school. Over the next 5 years the most promising jobs will require a university or college education. By the way CST pays for university, college, distance education, trade schools, religious schools, vocational schools, technical schools etc. as long as they are registered with Human Resources and Development Canada and recognized by the tax act. Some other institutions will pay only for college and university. So before you invest in any plan find out what they will cover.
39 Brenda // Apr 11, 2007 at 2:12 pm

To Canadian Capitalist: How many people do you kn ow who have the financial knowledge to deal with transfers of funds to maximize returns? Most people just buy it and pay into it for a number of years. Also CST agent do tell the clients about the fact that they need to keep the plan and the risks of cancelling. There is an alternative plan with CST - Family or Individual Plan that I bought for my child which is started with one time fee of $50.00 non-refundable and to start I deposited $150.00 after that I just call CST and tell them how much to withdraw from my account. I am not obliged to make regular monthly contributions. I do need to contribute at least $100/year dollars to get the government grant mioney. So I was given a choice between the two plans. And I don’t think that people are pushed into these plans but they choose them because the interest rate is better and there are extra monies in group plans from surplus which Family and Individual plan holder do not get. I am too busy to worry about mutual funds and their fluctuation and this is why I chose CST. I acutally called them to come and sell to me after I talked to the banks and checked out other group RESP companies. I found CST better structured and more flexible than other companies after I looked at the descriptions of their plans.
40 Canadian Capitalist // Apr 11, 2007 at 2:58 pm

Brenda: You are right that CST is a non-profit trust but that it because it has to be to qualify as a group RESP program. I don’t know if you’ve read the prospectus. I did and it is extremely difficult to figure out what the impact of fees will be (and there is a laundry list of fees). Also, the topping-up of the education payments is discretionary (more than 1/3 of the payments of the past few years) and CST is under no obligation to keep making these payments.

We live in a world where basic financial knowledge is absolutely essential. If you can understand how CST works (you shouldn’t even consider investing before you do), you can easily learn how to construct a portfolio with an appropriate risk level.

While we can debate if the group RESP plan is better than a self-directed RESP, it is very clear that you do not want to invest in the family or individual plans because they invest in low-risk assets without the benefits of attrition and topping-up. You will be better off transferring to a self-directed RESP and investing in a money market fund on your own.
41 Canadian Capitalist // Apr 11, 2007 at 3:05 pm

Brenda: I think you are mistaken that the earnings in a group RESP is similar to the “interest rate”. A group RESP’s returns depends on:

1. Investment earnings on bonds which carry an interest rate. Today, it will be 4%-5%.
2. Earnings from attrition. i.e. earnings on other people’s money who have dropped out.
3. A top-up from the general fund into which your enrollment fees are deposited. This is totally discretionary.

I can’t recall the exact percentages (you’ll have to read the prospectus) but roughly #3 supplies 1/3 of the earnings, #2 roughly 12% and #1 the rest.

Don’t forget that going forward earnings from #1 are likely to be low (unlike in the past).
42 Brenda // Apr 11, 2007 at 3:10 pm

To: Canadian Capitalist, yes, I have read the prospectus and the fees in the group plan are $200 per unit and in the individual plan $50.00 one time fee. I am not willing to risk my child’s money in anything else because of fluctuation and you cannot tell me that TD-bank’s funds are low risk. Mutual funds are never low risk. 17 years is not enough time to recover from if the funds drop also what if they drop just before the child goes to school. I believe that then I could loose not just my prinicipal but the government’s 20% as well. I am not a gambler with my child’s money. I will not cancel the plan that I bought so I do not have to worry about cancellation fees and so forth. I personally know people who have kept the CST plans and are vey happy to see the money when children go to school. People who cannot afford to keep a plan should not start one in the fist place becaus they will loose a good portion of their money no matter with whom they invest.
43 Canadian Capitalist // Apr 11, 2007 at 3:18 pm

Brenda: I am not trying to convince you to leave the group RESP. In fact, I’ve written a post that if you’ve signed for a group plan, you should keep contributing.

I am also definitely not advocating that you gamble with your money, whether it is for your child’s education or for your retirement. If you go through my posts, you’ll hopefully agree that I haven’t ever advocated taking excessive risks.

I don’t know how you can say that over 10 years a fully diversified low-cost portfolio won’t deliver superior returns compared to fixed income investments. I am simply saying that a self-directed RESP, implemented properly, will provide superior returns to group RESPs, with greater flexibility to the contributor.
44 Brenda // Apr 11, 2007 at 3:18 pm

To Canadian Capitalist: Earnings from bonds plus other top ups have given on average 7% interest rate over the 10 years according to CST that is in their prospectus as well. And how much I get in interest rate is not important for me. All I want is the government grant’s money plus some interest which by the way is much better than what TD canada trust offered my on my child’s savings account. I opened an account with Bank of Nova Scotia for my child because they were giving higher interest rates than anyone else and it still isn’t worth keeping the money there so I opened a RESP and I am quite happy with it.
45 Canadian Capitalist // Apr 11, 2007 at 3:22 pm

Brenda: The 7% earnings in the CST prospectus refers to the earnings on its investment portfolio (different from what you earn on your contributions), without taking fees into account. It is exactly the same return you could have earned if you had purchased a no-risk Canada bond in that same period. It is definitely not going to be the return you earn on your contribution.

Comparing a savings account with a group RESP is like comparing apples to oranges. The fair comparison is between a group RESP and a self-directed RESP.
46 Brenda // Apr 11, 2007 at 3:27 pm

To Canadian Capitalist: I agree with you that a self directed plan can deliver better returns but people have to have the knowledge of mutual funds and if they don’t they should not open such a plan. Like anywhere people who are not involved in financial world will be persuaded by agents to put their monies God knows where. So this type of plan is good if you are a banker, stock broker insurance agent etc. I am not so I play it safe.
47 Canadian Capitalist // Apr 13, 2007 at 4:08 pm

Brenda: In my opinion, if you can understand how the CST plan works (if you don’t, you shouldn’t invest), you can create a passive portfolio that takes 15 minutes to implement and 5 minutes to maintain and switch to GICs/bonds as kids reach university age. While I agree that once you enroll in a group RESP, it is best to keep contributing, I disagree that it is the best option for someone planning to start a RESP.
48 Brenda // Apr 17, 2007 at 8:10 pm

I am happy with what I have. The plan has a maturity date and they money will mature in her 17 year on the child’s bihday and it will be waiting for her to go to school.
Everyone is focusing too much on the negative and what if children go to school. What about if they do go to school and what if they go to school after 4 years of university. My child wants to be a veterinarian. So with CST she has a chance to get scholarships after she completes 4 years of education up until she is 27years old. This is a 5-year university degree minimum. Can you get this from a bank?
49 Canadian Capitalist // Apr 17, 2007 at 10:21 pm

Brenda: I do hope the CST works out for you. I just decided to choose a different option. I don’t think a chance to win 1 of 10 graduate scholarships worth $7,500 should be a reason to go with CST.
50 DJ // Apr 21, 2007 at 1:16 pm

hello folks,

We have been contributing to an RESP for 4 kids through MD management for the past number of years without paying any attention to it. I now have more time and as our portfolio is increasing, have decided to become more aware.

Our kids are grade 8 and 10, and year 1 and 2 at Queens.(ages 14,16,18,20) Clearly out of nappies.

My “advisor” at MDM is OK with our 127K divided almost equally between fixed income(MD bond and mortgage fund, mer 1.4) and Canadian equity ( MD dividend fund, also 1.4 MER)

What do you think?

Maybe its too late to get too worked up about costs, but I also have some issues with the allocation at this stage of the plan.(the withdrawal phase)

I am thinking about moving the plan to a self-directed plan at TD (where we are already “private clients” for banking purposes) and look at a combination of “cash”(MMF or high-interest savings), a GIC “ladder” and the rest in e-series funds (say, 1/3-1/3-1/3 CDN,US,INT)

Cheers
51 Canadian Capitalist // Apr 25, 2007 at 12:16 pm

DJ: In my opinion, your asset allocation is far too risky because even your youngest is only 8 years from finishing his/her degree. A 50% allocation to equities sounds far too aggressive at this late stage in the game. In the event of a steep fall in Canadian equities, you may not have enough time to recover. If you invested in the S&P500 in 2000, today, 7 years later, you are still waiting for a recovery.
52 Give Yourself a (Financial) Education // Apr 30, 2007 at 8:00 pm

[...] a long-running rebate on the merits of Group RESP plans, a remark by a commenter touched a nerve: To work with mutual funds or stocks, parents need to know [...]
53 Mike // Apr 30, 2007 at 10:28 pm

Great discussion - I’ll just add a few words…

Brenda I think you have some of the facts wrong - the non group plan withdrawal rules are not the same as the group plans. In the group plans you get your contributions back minus initial fees and the plan keeps the earnings. In the self-directed plans, you get 100% of the contributions back and you get the earnings as well. There are extra taxes on these earnings but at least you get some of those earnings back.

As far as the banks “will rob you of your money with their MERs”. You would be hard pressed to find a normal fund at a bank that has a MER as high as CST. In the CST prospectus it lists the charges for administration and depository charges which total $20,288,831 for 2005 which represents an mer charge of about 5.4% considering the investment portfolio is approx $375 million. This is roughly twice what a normal equity MF fund would charge and about 3-4 times what a fixed income mutual fund would charge. RESP providers of any type have to spend quite a bit on admin but the problem with CST is that the assets under management are not large enough to get any kind of economy of scale. Most of the big mutual fund companies have 20+ billion in assets so they can spread out the costs a lot better.

Another thing you mentioned is how if something happens, the mutual funds will lose value - this can be dealt with asset allocation. Any financial advisor can help with this or better yet, do a bit of reading and learn the basics…that’s all you need.

“CST is a non-profit organization” - this is true and you know what else is true? Mutual funds are also non-profit organizations. However…both these funds need investment advisors, administrative and operations completed and both entities hire other companies (which are for-profit) to run these duties. Bottom line is that there is no difference in the profit/non-profit status of CST or any mutual fund.

As CC has mentioned Brenda - don’t even think about leaving CST, it’s not a scam or a big ripoff, and once you are in then you are better off staying in. The lesson here is that most people who haven’t started an resp would be better off with a financial advisor at an investment company or better yet, diy.

DJ - I think the portion of the portfolio that will be going to the 2 eldest should be in fixed income only. The younger two - maybe 60/40 bonds/equity? or even 70/30. The mers aren’t too bad at MD management so although you should save some money by going low cost, I’m not sure if it will be worth the hassle - but that’s up to you. My suggestion is to do it during the summer when you don’t need to do withdrawals since it might take a while to do the transfers. Also - the MER on the MD Bond & Mortgage is 0.94% - not 1.4%
54 mario // May 9, 2007 at 3:35 pm

All you guys that are cutting up scholarship plans think you know what you are talking about you don’t, you don’t know how flexible they really are.
55 Canadian Capitalist // May 10, 2007 at 6:58 am

Mario: Just claiming that scholarship plans are more flexible than self-directed is not enough. Please do tell us how.
56 Jennifer // May 14, 2007 at 10:49 am

Can anyone help me find a comparison chart that shows the difference between saving for your child’s education with just a regular savings plan vs with an RESP? I’m trying to find a chart like this for a powerpoint presentation at work, and can only find charts with outdated info (before the new budget came down). We were using the chart that’s posted on TD Canada Trust’s website, but they have not updated it. Any help would be greatly appreciated! Thanks, Jennifer
57 Canadian Capitalist // May 14, 2007 at 6:54 pm

Jennifer: I don’t have such a chart but a RESP provides two significant benefits that make it the better option (how much better, I don’t know. I’ll try playing around with spreadsheets): (1) Taxes are deferred on portfolio income within a RESP and (2) you get the matching grant. My guess is you’ll end up with significantly more money by saving within a RESP.
58 mario // May 16, 2007 at 3:35 pm

I have a group scholarship plan for my son and i did my homework on it,did you know that these plans had been around since 1972,alot of people and financial planners don’t know this.Financial planners and banks only really started focusing on resps since 1998 when the cesg came out,as they saw the potential for more business.the reason i am saying they are flexable is when you start a plan it starts off as a group plan,if your child doesn,t further his/her education you simply choose the self determined option and your interst is there for you to roll into your rrsps or withdraw subject to taxes.
59 Canadian Capitalist // May 21, 2007 at 7:33 pm

Mario: Yes, you do have the option of transferring to a self-determined plan. However, you’ll get just your principal, grants and earnings on your principal. You’ll lose the enrolment fee (a significant chunk of early contributions) and earnings on your earnings (compounding growth). I don’t see how this is more flexible than a self-directed plan, where everything is under your control.
60 mario // May 21, 2007 at 8:33 pm

I understand that I would lose my enrolment fees but if I were investing with a mutual fund company I would lose paying the MER fees which would be more than my enrolment fees that is if I was paying an Mer of 1.87%, thats what I am paying for my RRSP.
61 Canadian Capitalist // May 21, 2007 at 9:19 pm

Mario: CST also charges you a MER. Administration + Investment fees add up to 0.60% to 0.80% plus a depository charge. This is in addition to the enrolment fee.

You have the option of investing in low-fee mutual funds into a self-directed RESP (that’s what I do and the highest MER we pay is less than 0.50%). Of course, if you’ve signed up and contributed already, it is best to keep contributing.
62 Neophyte Investor // May 21, 2007 at 11:33 pm

Hello,
I stumbled upon your site while researching my RESP options. Everyone on this board seems very financially savvy. I, on the other hand, am not. Given my complete innocence of all things investment, I wonder if anyone might offer a recommendation for the best RESP for someone planning to simply park his investment in a bank and hope it grows. TD seems to be getting good reviews, as is Scotia Bank. Can anyone recommend one over the other? And does anyone know the MERs and admin fees for each bank?
63 Alex Harford // May 22, 2007 at 12:24 pm

Neophyte,

I was the original start of this thread with my question regarding fees (The baby arrived ok, BTW ).

You’ll find that the MERs are explained in the mutual fund prospectus, so it’s not specific to an RESP.

I like to use the Globe and Mail selector to do my initial research:
http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_srh

ie this should get you a list of TD funds, sorted by MER:
http://globefunddb.theglobeandmail.com/gishome/plsql/gis.gen_fr?in_rep_type=ADM&in_sort_col=ADM_mer+pct&in_orig_start=+&in_curr_val=+&in_orig_fund=+&in_curr_fund=+&in_direction=FWD&fr_param1=TD+Asset+Management+Inc.&fr_param2=+&fr_param3=+&fr_param4=+&fr_param5=+&fr_param6=+&fr_param7=+&fr_param8=+&fr_param9=+&fr_param10=+&fr_mode=COMPANY&msg=+&page_no=1&generation=+&orig_col=STD_fund+name&orig_order=ASC&result_cnt=228&fr_param11=&fr_param12=&fr_param13=&fr_param14=&pi_universe=PUBLIC_FUND&product_id=&pi_totass_value=All&pi_mininv_value=All&pi_currency=All&pi_mgr_company=

Then I go to the bank’s website and look at the PDF for the specific funds I’m interested in.

Admin fees are listed throughout this post, but it would probably be best to get on the phone and make a spreadsheet with all the details yourself, in case things have changed recently.
64 Fred // May 23, 2007 at 12:35 am

Mike,
You said, “In the CST prospectus it lists the charges for administration and depository charges which total $20,288,831 for 2005 “. Can you detail how you come up with this number? I can’t figure it out. I am eager to find out the high fees CST charges (with proof). Thanks a lot.
65 Edward // Jun 4, 2007 at 12:21 am

Anybody here who delt / dealing with Children’s Education Funds Inc. (CEFI) http://www.cefi.ca ? It’s another scholarship plan dealer.

What is your experience?

As some posted here I just started looking at what I signed in 1999. I’m pazzled to say the least. They have this line in the statement “Available for education”: this number dropped from $41,000 in 2003 to $26,000 in 2004 and it is going down every year.
66 Mikey // Jun 24, 2007 at 6:30 pm

I guess it has been established that getting out of the CST is difficult and financially unwise once enrolled. For a guy like me who has little will power the fact that I would be penalized so much for pulling out is probably the only way I’m going to be able to put together any sort of savings plan for my child, so for me it works just fine
67 Jose // Jun 29, 2007 at 10:44 am

Hi! I’m new to RESP, I need your help and I need your advice.
I was registered in CST last month and I’m thinking of transferring to CET because an Agent told me that they give more rate of returns than CST. plus With the CET Group Plan, your child would receive all their EAP’s in year two upon entering the 2nd year of an accredited two year diploma program. (Childrens Education Funds Inc.)(www.cefi.ca)
An Agent told me that I can transfer to CET without loosing any money, unless I do it within 60 days. Thank you.
68 Canadian Capitalist // Jul 4, 2007 at 7:44 am

Jose: While I personally prefer the self-directed route over group RESP plans, I am unable to suggest if CET is better than CST. I use CST for illustration purposes and I have gone through their prospectus, but I must confess that this is the first time I am hearing about CET.
69 Edward // Jul 9, 2007 at 5:44 pm

Jose,

You can check my page about me CEFI experience at http://www.geocities.com/pelyavskied

Basically get out of the scholarship plan and open an RESP account in any bank. I think that only people who understand the scholarship agreement and prospectus really well should choose group RESP.

Edward
edward@evpnet.com
70 Edward // Jul 10, 2007 at 11:17 pm

Jose and everybody else,

A great article about CST is here
http://www.globefund.com/servlet/ArticleNews/wise_story/WISE_INVESTOR/20050927/weekly

-Edward
71 slick // Jul 14, 2007 at 6:19 am

Canadian Capitalist;
I just wanted to put in my 2 cents worth.
I have a family plan, self directed RESP for my 4 kids. It is a trading account with TDW. I have stuffed it full of income trusts, because the growth and CESG comes out in the childs hands, esentially untaxed. No fees if over $25,000, however you do pay commissions on trades. [$29].
Very pleased with it.
slick
72 Mohit // Jul 27, 2007 at 3:15 am

Canadian Capitalists and others, thanks for your in depth analysis and comments. I find myself vehemently agreeing with you folks as you point out the flaws in the “Group RESP” programs.

Do any of you know of ways to invest in an RESP plan with US$ and / or in the US equity market?
73 ken // Sep 18, 2007 at 4:19 pm

what about setting up two portfolios? one with CST and the other with self directed?
What is the risk for stopping monthly payment to CST?
74 Edward // Sep 22, 2007 at 8:43 am

I’m just thinking out loud: the government grant money will have to be split between the accounts (portfolios) or only one account would get the grant. When you register an RESP you have to provide your child’s SIN. That’s the way to control where the grant money goes.

The risks are outlined in the CST prospectus. The prospectus used to be on one of the links from this page http://www.canadiancapitalist.com/2007/03/26/is-a-group-resp-plan-right-for-you
until CST took care of it.
75 Sam // Sep 24, 2007 at 3:18 am

Anyone heard of this -> USC Family Education Savings Plans. It is non-profit corporation. Is it Trust? Please advise. Thanks.
76 mario // Sep 30, 2007 at 10:49 pm

This message is for edward to me it seems like you don’t know what you are talking about and for me I don’t see what the problem is with group RESPS.
77 Edward // Oct 2, 2007 at 8:27 pm

Mario,

Please provide details and examples of how you think group RESPs work. My biggest problem with plan dealers is that I was lied to when I was sold this thing. But, please, never mind me, I’m new to this country…
Just read some of the articles mentioned on my page: http://www.geocities.com/pelyavskied
78 mario // Oct 12, 2007 at 11:51 am

Edward

Please share how you were lied to and your concerns about the resp tou have chosen.

Thanks
79 Edward // Oct 30, 2007 at 4:45 pm

mario,

I’ll share my experience shortly.

For now check new posts here: http://cefi.aceboard.com/259399-2434-266-0-lost-quite-some-money.htm

Edward
80 Investing in TD e-Series Funds for Your RESP // Nov 5, 2007 at 9:05 pm

[...] of opening a new TD Mutual fund account in order to buy the e-Series index funds described in this post is not very clear. I regret that I did not do a better job of explaining and hope to make the [...]
81 Investing in TD e-Series Funds for Your RESP // Nov 5, 2007 at 9:05 pm

[...] of opening a new TD Mutual fund account in order to buy the e-Series index funds described in this post is not very clear. I regret that I did not do a better job of explaining and hope to make the [...]
82 mario // Nov 8, 2007 at 10:01 pm

Edward I am still waiting to hear how you were lied to.
83 mario // Nov 8, 2007 at 10:03 pm

Edward I am still waiting to hear from you.
84 harry // Dec 21, 2007 at 11:26 am

Hello -
just came across this site, researching the RESP subject. Great discussion!

I have a few questions, or thoughts I’d appreciate your opinion on..

We have to kids, one 7, the other one 17. When the younger one was born, we’ve enrolled both in USC Family Group Plan. We are not contributing much (we’ve allocated more to the older one, since we’ve started rather late) - therefore we could buy more units to get the full governmental contribution, for both, but we were wondering if we could create a new RESP plan outside USC and manage that independently. Any thoughts/advice?

Anybody having had recent experiences with USC, any words of advice on how to best use USC process to pull out the funds for college/university education (we will be soon finding out what this RESP adventure will bring us, with the older kid)?

A potential option … to pull the younger one out from the plan, and start differently, but had the same concerns as voiced here, about penalties, and the uncertainty that we won’t be able to make up for the losses. I guess this may not be the best idea?

Thank you.
85 FourPillars // Dec 21, 2007 at 10:57 pm

Harry, the penalties for withdrawal are way to harsh with the pooled plans, which is their major drawback.

I would suggest leaving the plans as they are now and maybe starting a new resp elsewhere (ie self-directed) if you want to contribute more. Yes, you can set up as many resp accounts as you want.

Mike
86 How To Open Up An RESP Account For Your Child | Quest For Four Pillars // Dec 29, 2007 at 4:15 pm

[...] resp account and then apply to convert it to a TD e-Series account and then makes your purchases. Here is another post on getting started and please check out my asset allocation post on this subject. This [...]
87 ben // Jan 13, 2008 at 10:56 pm

Thanks for the information. Im already in CST and have been for years. Im regretting my decision. Would it make sense for me to lower my payments and start a DIY resp in addition to the CST. Any help appreciated.
88 Ottawa // Feb 12, 2008 at 12:39 am

I had CST reps come to work and convinced me to sign up for Group RESP. $200 per unit and all that glooming advise. But when I received statement, at maturity 50% of enrollment fee was no where to be found. The rest 50% stands if you ever missed a payment or not. Trying to run out fast…
89 Sandy // Feb 22, 2008 at 5:53 pm

I am right now int the mits of transfering my RESP account with Canadian Scholarship Trust Plan. They are keeping alot of money and I can not figure out their calculations. They are deliberaly difficult. We were dooped. I will let you know how it goes. Ray I feel for you. You feel so foolish for not reading and understanding all the rules, but you would have to be a Philidelphia lawyer to understand.
90 Gabriella // Mar 23, 2008 at 7:41 pm

We have 2 kids, 17 & 13. When we started, the group plans were the only choices (as far as we knew), so we are with USC — & regretting. We switched to single payment a number of years ago, but with the “fees”, we lose a few thousand dollars. Also, over the years, the payouts are steadily declining — probably because there is a lot of competition now (& I think in the “old days”, the earnings of the children who did not go to post-secondary stayed in the pool, whereas a few years ago, they could be transferred to RRSP’s?)
One thing I did not see mentioned is that USC (& probably other group plans) are set up to cover specifically 4 years of post-secondary studies. The EAP’s cover years 2, 3 & 4, & that’s where you get 1) your earnings & 2) the CESG’s. So, if my daughter decided to go for a 2 or 3 year college program, she’d be missing out on 1/3 to 2/3 of the earnings AS WELL AS 1/3 to 2/3 of the CESG that was given to her by the gov’t (the earnings being interest on our contributions & interested on the CESG’s) Seems corrupt to me, but the response from Revenue Canada is that how the CESG payments are administered is up to the RESP provider & the agreement we signed with them (nevermind that there WERE NO CESG’s 16 years ago). It seems they are getting away with keeping portions of our money in various ways!
Final 2 cents — I’d never advise anyone to sign up with USG / CST / Heritage / whatever — the banks have various flexible plans — something reasonable for everyone.
91 shawn // Apr 7, 2008 at 1:39 pm

I recently invested with the CST plan for my son and had a very informed meeting with my CST sales advisor. I had heard about the concern over “high fees” and yet I wanted a safe investment for my child’s education, which is why I looked into CST. After doing the math on this investment, I am again more than satisfied with the plan. It is unfortunate that your criticisms are so lacking in the actual payout details of the plan, which are very impressive for a safe investment.

I have spent some time now reviewing your blog on RESPs and referencing my CST prospectus. Here’s the actualities on the plan:

My example is this:
$1000/year for a newborn, investing 17 years.
9.524 units purchased ($105/unit for newborn)
$1904.80 in upfront enrolment fees

Returns on units in plan, as per Prospectus 2007, p.66, “Amount of Education Assistance Payment per Unit”
$600/per payout, 4 payouts/unit: $2400

My example:
9.524units x $2400 = $22857.60
This is a projected interest payout on my plan for 9.524 units over the 17 years, based on last year’s performance.

Now, let’s look at the principal return:
$17000
- 1904.80 enrolment fees
=$15095.2
- 180.2 depository charges ($10.60/year)
=$14915.00
So there’s my principal return.

Now CST fully guarantees the return of half of my enrolment fees, up to 100%.
So my minimal enrolment fee return is:
$952.00

Now I add up all those figures to see my investment return at maturity, with fees taken into consideration. (and without grants from government)

$14,915.00 Principal
$22,857.60 Educational Assitant Payment return (investment return)
$952.00 Enrolment Fee Return 50%

Total return:
$38,783.60

Now I need to look at a compounding interest calculator to see what type of compounding interest I have received here. So I went to moneychimp.com, and found the compounding interest calculator.

Inputs:
Current Principal: $1000.00
Annual Additions: $1000.00
Years to Grow: 16 years
Interest Rate: 8.7%

Results: Future Value: $38,770.82

So what I am seeing here is that regardless of those fees you keep struggling with, this investment grows at a compounding interest rate of 8.7%!

The money chimp calculator doesn’t even take into consideration that in the first two years, $1000 isn’t fully going into the account because of the fees. So in actuality, your money grows higher than 8.7%.

So unless this compounding calculator is wrong, all of us investing with CST have a very strong, secure investment on our hands. No wonder it quotes itself as “one of the most experienced and reliable RESP providers in the country” - it truly is offering Canadian parents a safe RESP investment for peace of mind futures and excellent investment growth.
92 Warren Fishwick // Apr 7, 2008 at 2:52 pm

My question is this: I have a Family RESP Plan made up of an 18 year old and two 15 year olds. My 18 year old is going to school in Sept 2008. I have contributed $12000 for the 18 year old and have gotten $2400 in grant money. We intend to withdrawal all of her grant money as an EAP to use for her 1st semester. I have twin 15 year olds that will be going to post-secondary in a few years. My wife had this brilliant plan; you are allowed to withdrawal your original contributions at any time and there is no penalty if at least one of the beneficiaries is enrolled at a post-secondary school (which I will have in Sept 2008). So from what I can see after many hours of research is that we could withdrawal the $12000 out of the family plan come September when the 18 year old is in school and then reinvest it back into the plan but for my 15 year olds (say $5000 for each this year since this will give me my annual max grant of $1000 and another $1000 each in 2009) hence basically getting double grant money on the same $12000. Can this be done or am I missing some rules to stop this?
93 Canadian Capitalist // Apr 7, 2008 at 2:58 pm

Shawn: I have a couple of comments on your calculations.

(1) I’d strongly caution against extrapolating past returns to the future. Pooled RESP growth comes from just two sources - the investment returns, which is principally from bonds plus the extra boost from attrition offset by the fees in the plans. Bond returns were very strong in the past and it is unlikely that returns will be just as good in the future.

(2) The EAP includes CESG grants and the growth of the grants. The grants are available for all RESP plans and should be included in your calculations.
94 shawn // Apr 7, 2008 at 5:23 pm

Well, here again you are not well informed, especially on point 2.

(1) All funds show historical rates of returns and of course, there is no way of predicting the future. Where you err here is that unlike the more varying highs and lows of equities, fixed-income bond funds are much more stable in terms of performance.

For example, the year-by-year investment returns for Group Savings Plan 2001, as outlined in the CST Prospectus 2007, p.31 are as follows:
2002 - 6.2 %
2003 - 7.7%
2004 - 7.8%
2005 - 6.7%
2006 - 5.8%
This steady 5 year rate is because the bulk of the investment is in long term provincial and federal bonds. In fact, my recent financial statement quoted that target future investment income range is in the 6-7%. That’s the target.

Next point, you are not correct that the growth only comes from 2 sources: investment returns and attrition. The “growth” or rather what is correctly called the “Income from the EAP fund”, as per Prospectus, p.54, is actually made up of 3 sources:

- Income from matured plans (Investment return- target 6-7% range)
- Income from attrition and the General Fund
- Donation from the Foundation (at the discretion of the Foundation. Mind you, I was told that the Foundation, being a non-profit organization, has to donate the surplus revenues back into the educational pools in order to keep their non-profit status and they’ve been not-profit since 1960! “Every year since 1987, the Foundation has donated surplus revenues to students. Total donations since 1987 have reached 33 million”p.3 Pretty good track record!!

The donation from the Foundation actually makes up between 20-30% of the overall EAP payout.(p.30) No wonder you thought, incorrectly again, that the EAP return ($2400/unit) I have quoted above includes the grants. It doesn’t. Check out p.3 of the Prospectus - it is very clear that it doesn’t.

(2) The very big err here, as I was saying above, is that the grant is absolutely not included in the EAP calculation. That is completely false information. The CESG (grant) and it’s interest is over and above the EAP payout.

So it seems to me that you have extrapolated a lot of false information for the base of this 1 1/2 year criticism/blog against group plans and notably CST. It is unfortunate that no one with basic investment knowledge relayed to you all the mistakes in your arguments. It is very unfortunate that some parents may have even canceled their plans and yes, lost the enrolment fees due to this misinformed blog-site and some of your heavy-handed posters.

So my question to you again is, based on last year’s returns and my simple calculations inputted into the compounding interest calculator, are we not indeed now looking at an 8.7% compounded return with the CST RESP?
95 Canadian Capitalist // Apr 7, 2008 at 7:41 pm

Shawn: The returns don’t sound bad until you read the footnote - “These rates of return do not take into account expenses”.

You’re welcome to defend group RESP plans but get your facts straight. I’ve *never* advocated canceling a plan. Here’s what I wrote in another post (Link): “It makes no sense to stop contributing to a scholarship plan…”.

Page 6 clearly states that EAP includes CESGs and income from the CESG.

Let’s work backwards. I’ll assume that 8.7% is accurate for past returns for a group RESP. Let’s also give the group RESP the benefit of doubt and add back the CESG of $200 for 17 years to your total for $42,183.

From 1989 to 2005, Canadian bonds returned 11% per annum. Assuming a $1,000 contribution, a 20% grant, a simple portfolio of bonds or GICs over 17 years would have yielded a total RESP portfolio of $59,000. Here, I’m not assuming the entire portfolio is liquidated in Year 17 whereas the group RESP’s EAP payments are stretched out from Year 17 to 21. Despite the handicap, the self-directed RESP has 40% more.

That’s exactly my point - the high costs of a group RESP seriously handicaps returns and the attrition doesn’t make up it. A self-directed low-cost RESP will return more and provide more flexibility.
96 Canadian Capitalist // Apr 7, 2008 at 8:04 pm

Shawn: Looking back, there is an error in my calculations. The 11% figure I’ve used is the average return over those 17 years, so my numbers above should be ignored.

Here’s my deal for you: if you post exactly how much an annual investment of $1,000 along with the CESG would grow into over 17 years, I’ll work out how much a self-directed RESP would have returned over the same 17 years. That would give an apples-to-apples comparison. Thanks.
97 shawn // Apr 7, 2008 at 9:02 pm

The main problem in your calculations is that the EAP at $2400 does not include the CESG and it’s interest. Although the Prospectus, on p.6 states that EAPs include the CESG and the bonds, this is solely for the purposes of describing the taxable income a child receives at maturity, which includes income on plan, general fund monies, grants and learning bonds. The CST EAP is clearly outlined in a table on p.30, stating :”The following table provides a breakdown of the sources of funding of Education Assistance Payments (excluding any donation from the Foundation) under the Group Savings Plan Series 1 for each of the last five years”. The table clearly does not include the CESG or it’s interest.

I also know this to be true because I have a copy of my most recent financial statement which testifies to this fact.

My son’s plan is for 19.1 units, in a monthly plan of $181.45.

The Illustrated Maturity Value of my CST RESP Savings:
Principal Refund $33,012
Enrolment Fee Refund $1,910
Canadian Education Savings Grant $6,974
Education Assistance Payments (EAPs) $45,840

TOTAL: $87,737 (plus income earned on CESG)

It is clear that a 19.1 unit plan, at $2400/unit does yield $45,840. It does not include the grant - this is shown as coming in separately, as is the interest on the grant.

This was all clearly explained to me by my CST advisor and it is also in the Plan Illustration that was presented to me during the meeting.

I know you are really wanting to stick to your guns about the EAP payout of $2400 containing the grant, but the reality is that it doesn’t. To give out information that states otherwise is misleading and as you can attest, has created a whole blog of controversy about the CST plan. This is a great error on your part, but is understandable as the Prospectus is not very clear on p. 6. You have to read more of the Prospectus, specifically p. 30 where it is more clearly outlined.

I called my CST advisor to make sure I was correct in my understanding and she attested to it, again, referring me to my annual financial statement from CST, where it is all there in black and white.

I hope you take the time to read the Prospectus and clearly come to understand where you have been mistaken. Otherwise, call their Head Office, I am sure they can help you with this area of confusion.

As much as you may not want to accept it because of all the efforts you have put in to discredit the CST plan, I hope you can humble yourself to the fact that you were mistaken and recognize that this is in fact a most excellent RESP.
98 Canadian Capitalist // Apr 8, 2008 at 6:59 am

shawn: I don’t believe I’m mistaken at all. I don’t mix past results and assume it will be the same in the future. However, let’s actually do an apples-to-apples comparison. What was the per-unit price for someone who enrolled in a group RESP in 1989 with an eligibility year of 2005? And what was the total payment per unit, including the CESG and the interest on the CESG for eligibility year 2005.
99 Traciatim // Apr 8, 2008 at 7:23 am

Shawn, I’m not sure where you are getting these fabulous returns in CST, I’ve been in there with my daughter since 2002. I’ve stopped contributions to both my kids RESPs (I have a TD E-Funds one for my Son, 3, and the CST one for my daughter, 6) due to other financial trouble so I’m probably not the best in comparison, but here is a post I made a while back:

“I actually do have a CST plan for my daughter. I’ve been contributing for just around 5 years now at $105 a month. Our first contribution was April 2002. That’s put us at about 59 months of contributing. If you do the math that makes my contributions about 6195, plus the 20% that the government should be topping off would be 1239. That means my 7434 has been working over 5 years to net me a whopping $7149.51.

Yes, that’s not a typo and you read it correctly. I just logged in to my account to get the ‘Current Balance as of 28-MAR-2007′.”

So that’s either a negative 3.8% return, or if maybe for some strange reason that doesn’t include my $2100 in fees it would be 24% in 5 years, or something like 4% return over the 5 years you’re claiming in the chart above.

Also, the 2007 performance was fairly terrible, at 4% - fees.

Plus, I’m not sure how CST skirts around the rules, but according to HRDC the EAP includes the CESG:
http://www.hrsdc.gc.ca/en/hip/lld/cesg/promotersection/Infocapsules/ICE17.pdf
100 shawn // Apr 8, 2008 at 3:08 pm

Traciatim and Canadian Capitalist: The returns are found in the 2007 Prospectus, p.66, clearly stating the $600 EAP for years 2006, 2005, 2004. I called the CST Head Office and was told that the 2007 EAP was also $600, so you are looking at a return of $2400/unit (as a unit is paid out in 4 installments/EAPs, $600 per EAP) and this is the BASE
INVESTMENT RETURN including attrition and the top-up from the non-profit Foundation. THE GRANTS ARE NOT, and I repeat, ARE NOT INCLUDED IN THIS FIGURE.

Obviously, this makes sense as people are eligible for grants ranging from 20-40% as well as the Canada Learning Bond, so they don’t lump in all the grants together into the group EAP. Parents are going to qualify for different grant percentages depending on their personal income, so those figures come in separately. When the money is payed out to the child, it is called an EAP as on p.6, but it is the $2400 EAP plus the eligible grants received for that particular child.

This should really make perfect sense to you now, and if not, as I did, call their Head Office at 1-877-333-RESP and ask about the EAP amounts listed on p. 66 of the 2007 Prospectus. They were very clear that the $600/EAPs did not include the grants.

So, as I calculated on the compounding calculator, the CST plan that I have, Group Savings Plan 2001, is registering compounding returns at about 8.7%, based on the past performance of the last 7 years.

You’ve given me more work, CC, to determine what the plan paid out from 1989-2005 since I have come to understand that that was a different plan and my 2007 Prospectus didn’t have the details on that plan. Needless to say, I called the Head Office Number again and they were very helpful. They told me that the plan running at that time was called the Founders Plan and the returns were paid out in 3 EAPs rather than 4.
2005-$900
2006-$800
2007-$800

So the total EAP is $2500/unit in the plan, and again this is without the grants. The grants would again be done on an individual plan basis due to the grant categories. I also found out that the enrolment fees, still at $200/unit are not returned in this plan, and that they started returning the fees in 1991. And the price-per-unit at that time, for a newborn annual plan was $116/unit.

For an investment of $1000/year starting in 1998, you would have had to purchase 8.621 units as units were $116 for a newborn. Now annual newborn units are $105.

EAP return: 8.621units x $2500 = $21,552.50
Principal - Enrolment Fees: $17000 - $1724.20 = $15275.80
Grant: This will vary, so I would rather not add this into the equation so that we can solely look at the investment return of the Principal. This is the best option for comparing accurately.

So we have $21,552.50 + $15275.80 = $36828.30

Putting that figure into a compounding interest calculator for $1000/year for 17 years and you get a compounded return of 8.1%. That would be your apples-to-apples comparison. Then there’s the grant that came in 1998 and the grant increases of 2004, which will be dependent on family income.

That pretty much sums it up. The biggest part that you are missing is actually looking at the EAP payouts, which give you the basis of understanding the actual compounding returns of the plan. I am glad my CST advisor was so helpful in illustrating that to me. I count myself to be fairly savvy at math and finance, so this was totally up my alley to pursue in it’s finer details.

So my question is, where else can you get a safe, protected principal RESP investment with compounding returns in the 8.1-8.7% range? I couldn’t find it anywhere else, which is why I happily signed on with CST.

Traciatim: As to your on-line account, what you don’t see is the realized and unrealized gains that are part of a bond portfolio. This was clearly explained in the annual statement mailing I received a month or so ago, and my CST advisor also told me to be aware of this when looking at my statement. And yes, those enrolment fees do come out of your account in the first 3 years. Regardless, your initial investment amount still grows at approximately 8% right from the start, as if the fees had never been withdrawn.

As to the 4% return last year, my financial statement came with the Annual Report 2007, which gives us the finer details to that return. “In 2007, our investment performance for our group scholarship plans was 4%, which exceeded the all-government fixed income benchmark of 2.1%. This provided with $64 million in investment income and $31 million in value added over the benchmark”. Also, you need to remember that the 4% return is solely the value of the entire investment portfolio if they were to sell it at October 31, 2007, which is precisely when the markets, bond markets included, were being hit by the sub-prime mortgage crisis in the US. The actual bonds being held by CST are growing at much higher returns, as per what is shown in the Prospectus.
101 Canadian Capitalist // Apr 8, 2008 at 4:00 pm

Shawn: Thanks for your detailed comments.

Here’s what I did: I used the above numbers and a table of bond returns from 1988 to 2007. I assume that there is a fee of 0.5% for the bonds even though you can do better by simply buying GICs. I assumed a self-directed RESP contributing $116 for 17 years and no CESG. The parent withdraws the nominal contributions in Year 18 ($116*17 minus $200) and I assume that $900, $800 and $800 are withdrawn from the self-directed RESP.

The self-directed performed significantly better than the group under the apples-to-apples comparison. The self-directed has $397.98 per unit left over. I’d be more than happy to share the spreadsheet with you, if you wish.

What happens when you reduce the fees to 0.25%. You are left with $537 more in the self-directed RESP. What if fees were zero? (It can be with GICs because you can get higher returns by giving up liquidity). You’ll be left with $683 more.
102 shawn // Apr 8, 2008 at 9:12 pm

Hi CC,

Well, I am having a few problems with your calculations.

First of all, you said “I assumed a self-directing RESP contributing $116 for 17 years and no CESG”. I imagine you mean you took a monthly contribution of $116, is that so? Meaning an annual plan of $1392? If that’s the deal, then we didn’t compare apples-to-apples as the calculations I made above were on an annual contribution of $1000. The $116 I referred to is the per-unit price for a newborn - thus giving me the 8.621 units.

What you need to chart is an annual contribution of $1000 for 17 years. I find it hard to believe that you are seeing higher results in a self-directed fixed income/bond fund than what CST can offer.

What I have shown in my calculations is that the CST plan, both in it’s older plan running from 1989-2005, and in it’s newest plan, running from 2001, are yielding annual compounding returns between 8.1 - 8.7 %.
103 Canadian Capitalist // Apr 8, 2008 at 10:18 pm

Shawn: No, the $116 is the contribution per year per unit. I did all the comparisons on a per unit basis. i.e. the self-directed RESP subscriber contributes $116 every year from 1988 to 2004 (17 years). In 2005, he withdraws $1,172 (similar to a group RESP withdrawal of contributions less $200 enrolment fee). In addition, he withdraws $900 in 2005 and $800 in each of 2006 and 2007. That’s the exact equivalent of what a group RESP subscriber would have experienced.

I assume returns were the same as those provided by a benchmark of all Canadian bonds less expenses of 0.5%. If you wish, I can send the spreadsheet to you.
104 Bryce // Apr 9, 2008 at 11:43 am

Shawn: Congratulations on saving for your son’s education.
105 shawn // Apr 9, 2008 at 12:02 pm

Canadian Capitalist:

I think it would be of interest for other parents to understand the comparison we are making here, so how do you propose you could better illustrate your side of the argument.

Your side is that if you had opened an annual RESP plan of $116, (which we would do better in the comparison to say $1000/year as fixed-income investments yield higher returns with the higher contribution levels). So you open a fixed-income RESP fund in 1989, $1000 per year, and you continue it for 17 years. We know your principal coming back will be $17000. What is your growth on your principal in terms of dollars and then, what would have been the annual compounded return?

As to my own research on the benchmark returns of Bond funds, back in 1989-1991, returns were in the 9-11%, but from 1992 onwards they went from 8% down to 4%. And we are putting in funds of only $1000 per calendar year, not all up front in 1989, so those lesser rates of return obviously will be affecting the performance.
106 Canadian Capitalist // Apr 9, 2008 at 1:21 pm

Shawn: Let me second Bryce and say that it is important that we save for our kids’ education and despite our difference in opinion on which would be the best way to do that, let me applaud you for saving in the first place.

The bond return data I used is the one available from Libra Investment here. The returns are total annual returns for All Canadian Bonds less an assumed fee of 0.5%.

Okay, let me assume an investment of $1,000 every year for 17 years starting in 1988. In 2005, a principal withdrawal of $15,276 is made ($17,000 in contributions less the $200/unit enrollment fee). Moreover, in 2005, 2006 and 2007 EAP withdrawals of $7,759, $6,897 and $6,897 for a total EAP payments of $21,533. So far, this self-directed portfolio is exactly the same as a group RESP program.

The question now is if any money left over in the self-directed RESP. If it is, the self-directed has better returns. If not the Group RESP is superior. The answer is, yes, money is left over - about $4,600.
107 shawn // Apr 9, 2008 at 1:22 pm

Just to be clear, apples-to-apples comparison here, the bond funds we need to refer to are government bonds, not corporate bonds, and the years invested are from 1989-2005.
108 Canadian Capitalist // Apr 9, 2008 at 2:03 pm

You can access the spreadsheet here (silly me, I forgot about Google Docs):

Spreadsheet

The bonds are a universe of all Canadian bonds (SCM Universe of federal, provincial, including investment-grade corporates). Current weighting of corporates in the bond index is 28%. Note that the investment policy of CST says that 20% of income from the portfolio can be invested in investment-grade corporates. Also, I believe this is th easiest comparison. Feel free to use long bond returns in the initial years and short bond returns in the later years to simulate how direct bond holdings are likely to behave. If I do that, I am left with $7,500 more.
109 shawn // Apr 9, 2008 at 2:30 pm

Well, that is clearly not an apples-to-apples comparison. We need to look at the annual coupon rates, not the annual evaluation of the portfolio. This is why you have varying rates in that spread sheet from 22.1 % to - 4.3 %!!
110 Canadian Capitalist // Apr 9, 2008 at 2:51 pm

Shawn: The returns used are total bond returns when a portfolio of bonds are bought at the beginning of the year and sold at the end of the year. That’s a fairly good approximation of how a bond portfolio has likely behaved over 17 years. It’s also what an individual investor buying a bond fund or built a ladder of bonds would have experienced. Also, that’s exactly what a group RESP would have reported in its portfolio because they’ll mark the bonds to market and report the total value of the portfolio in client statements every year. If you believe that this is not an apples-to-apples comparison, we’ll have to agree to disagree and let readers determine which way is best for them.
111 Leo // Apr 10, 2008 at 3:42 pm

I’m new here and have had a very interesting time reading everyone’s comments, although I went a bit cross-eyed with all the numbers being thrown around….I want to put my two cents in. I think we need to look at the big picture here…..
There is really no way of investing your money without some element of risk. So, the decision is how much risk you are willing to take. In my opinion, your children’s education is not an area of investment where you want to risk too much. This is not play money, this is money that has to be there when my kids go to school, so I take the view that this money should be invested with as little risk as possible.

I went to University on the CST Plan, so it followed that when my children were born, I also put them into the CST Plan. I admit that I did not investigate other options because my experience with CST was good. However, I did ask questions when I put my kids in the plans and the answers were acceptable to me.

As far as I can see, the only element of risk to investing in the CST plan are the enrolment fees. However, unlike self-directed plans where market fluctuations are completely out of my control, the loss of fees in the CST plan are completely under my control. I’m the type who weighs the risks and the control factor, and decides accordingly. As long as I choose an amount comfortable to me and I stick to it, then I will not lose those fees. Kids can do almost any type of schooling with an RESP (unlike when I went to school), so there is really no possibility that I’ll lose my fees because my kids don’t go to school. Besides, the only way this could occur, is if both of them didn’t go to school because plans and fees are transferrable between kids. If that were to happen, I’d be far too upset with the prospect of both my children not receiving an education, than any loss of fees. More importantly, no self-directed plan I’ve seen has returned fees, so I’d be in the exact same situation in a self-directed plan if my kids don’t go to school. Fees are part of doing business and I know banks and mutual funds take their fees in the form of MERs . In the long term, I’m sure the amount would be similar to what I’ve

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RESP Basics

November 9th, 2006 · 150 Comments

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