The more I learn about group RESPs, the less I like them. In the comments thread on an earlier post on Group RESP plans, a reader referred to the prospectus for the years 2000 to 2007 filed by the Canadian Scholarship Trust filed with SEDAR. I was initially excited to lay my hands on so much information - at last, I could compare past results of Group RESP with a self-directed RESP that holds fixed-income securities and make an apples-to-apples comparison between the two for a number of time periods in the past. The results would be interesting and hopefully conclusive.
Alas, it was not to be. While it’s possible to find out contribution information or EAP (education assistance payments that is made over four years to eligible students) information, it is hard to obtain both for the same plan. For instance, consider the 2007 prospectus. The Group RESP plan marketed by Canadian Scholarship Trust is called “Group Savings Plan 2001″. The contribution schedule is available in the prospectus and tells us that buying one unit for a newborn would cost $105 per year, for a 1-year old $115 per year etc. The oldest child that can be enrolled in the plan would be 12-years old for a contribution of $1,100 per year. While, the prospectus mentions that EAP of $600 was made for the 2006 year, the “Group Savings Plan 2001″ was offered only in 2006 and 2007, which means the oldest child enrolled in the plan in 2006 will be eligible for EAP in 2012. The Group plans offered in years 2000 to 2002 was called the “Optional Plan”, in years 2003 to 2005 was called the “Group Savings Plan”. So, it’s nearly impossible to tell how the plans have performed over the years.
The defendants of Group RESPs point out that the portfolio is invested in an “ultra-safe” manner. But, guess what? According to the prospectus for the “Group Savings Plan 2001″, about one-quarter (24.8%) of the assets is invested in index-linked notes. A fair comparison of group plans with self-directed RESPs, going forward, would be a 75% bond and 25% equity mix. I’m convinced more than ever that a self-directed RESP invested in a diversified portfolio in a low-cost manner is more flexible and almost certain to outperform any pooled RESP plan available today.
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20 responses so far ↓
1 Four Pillars // Apr 30, 2008 at 11:04 pm
Definite ripoff.
I just can’t understand the “safe investing” and “guaranteed” arguments - guaranteeing the principal is extremely easy - just buy mostly gics in a self-directed resp.
2 Cash Instinct // Apr 30, 2008 at 11:08 pm
I do not see ANY reason why to go with Group RESPs when RESP accounts can be obtained for free with options such as TD efunds.
Group RESPs charge a lot of fees and steal your money if your child decides (or can’t) not to go to school after high school. The conditions of the program must be looked very closely before adhering. They lock people into staying in their programs with high penalties.
I would not consider Group RESPs even if their performance was better than mutual index funds.
3 Canadian Capitalist // Apr 30, 2008 at 11:17 pm
Mike: I guess I didn’t pay attention before but I, for one, was surprised to see 1/4th of Group RESP assets in index-linked notes. Wonder if anyone is able to read the old WordPerfect prospectus. It would be nice to do an apples-to-apples comparison with self-directed plans.
4 Michael James // Apr 30, 2008 at 11:46 pm
I never did open an RESP for my kids because when I investigated a long time ago, there weren’t any truly self-directed RESPs that I could find. My kids are now too old, but I’m curious: are there any RESP accounts that allow the investor to choose his own ETFs or stocks without limitations?
5 Traciatim // May 1, 2008 at 8:38 am
I think regular readers know my position on CST from my other posts so I won’t goin to too much detail but I consider myself ’suckered’ by CST when my first child was born. I was 21 at the time, and a little impressionable. I should have shopped for options, but it seemed like a fine idea as explained.
Looking back it was a terrible plan, sure it’s safe but don’t expect to see any great gains. You would probably do better with a GIC RESP ladder . . . less fees and even safer.
6 Four Pillars // May 1, 2008 at 8:41 am
CC - that is surprising that they would have index-linked notes although I guess it makes sense since a fund like that should be able to handle a bit of volatility in part of the fund.
MJ - self-directed RESPs let you invest in whatever you want. I think the only limitations are the same limitations that apply to RRSP- eligible securities ie you can’t have art, old cars etc in them…
My observations of group RESPs:
Very high fees - I took a close look at CST’s prospectus last year and it appears that the MER for their investment fund was approximately 5%. I calculated this by dividing the sum of the administrative fees and investment management fees by the fund total. To be honest, I didn’t think their fees were out of line since RESPs are very difficult to administer - the problem was more the small fund size ($491 million) which is a relatively small mutual fund.
The salespeople lie: This is second hand info, but I’ve read quite a few comments by group resp clients who say that the salesperson says there are no fees and that the fund is non-profit. This is a lie - most mutual funds in Canada are non-profit but the companies that administer them and provide investment management to them are for-profit. To say the resp plan is a non-profit and doesn’t charge any fees is just not true.
They sell the “guarantee” - this is similar to all the very expensive “guaranteed” products available from insurance companies which guarantee your principal. You pay a lot of money for basically nothing.
7 Al // May 1, 2008 at 8:52 am
A group RESP salesperson got my name somehow after my twins were born. We made an appointment since I didn’t know much about RESPs at that point (I had read the gov’t pubs, but not shopped product). The sales pitch was very good. After it was done, however, something didn’t feel quite right. I took all the printed info she could provide and read in depth. As already said, what a ripoff.
Interesting details:
1) Commission came off upfront, around 20% if I remember correctly.
2) It was a non-profit that held the assets, but they paid high fees to the for-profit sales company.
3) They advertised an attractive rate of return, but it was based plan members that received ’scholarships’. These ’scholarships’ were funds that departing plan members left behind. If you didn’t do things just right, no ’scholarships’ and abysmal rate of return (not published).
I ended up with a medium MER, well diversified TD mutual fund instead.
8 0xCC // May 1, 2008 at 9:28 am
Michael: http://www.google.ca/search?hl=en&q=%22Self-directed+RESP%22&btnG=Google+Search&meta=
http://www.tdwaterhouse.ca/services/respfeatures.jsp
http://www.rbcdirectinvesting.com/RBC:SBnCGI71A8UAJ8A0zkg/resp-account.html
http://www.cibc.com/ca/education/index.html
http://www.scotiabank.com/cda/content/0,1608,CID5655_LIDen,00.html#Registered
http://www4.bmo.com/investments/0,4629,35649_23994846,00.html
The key is to look for a ‘Self-directed RESP”. Most of these carry an annual fee if your account value is lower than $20-$25k (which is pretty nice for the banks because there are annual contribution limits which mean that for the first few years of an RESP they are guaranteed to get their annual fee).
9 Canadian Capitalist // May 1, 2008 at 9:51 am
Michael: Like others have commented pretty much every discount broker offers a Self-Directed RESP account that could hold pretty much anything. The only drawback, as oxCC has pointed out, is the fees, which are quite steep considering most RESP accounts are quite small and likely to be that way for many years initially. For our kids, we opened a TD RESP account and though the fund selection is quite limited, it’s enough diversification for a small portfolio.
10 Michael James // May 1, 2008 at 9:55 am
Thanks to Mike and 0xCC for the useful information on RESPs. I guess it’s been a long time since I checked on them and found that I was limited to expensive (high MER) investments. There appear to be many truly self-directed choices now. $50/year is a little steep initially, but wouldn’t be too bad after a few years. Maybe I’ll open one for my grandkids within the next decade.
11 Big Cajun Man // May 1, 2008 at 10:39 am
I did open RESP accounts for my 3 daughters and my son. I think it was a worthwhile investment vehicle but I will be moving my Son’s RESP to a self-directed one in the next few months as well. The investments that I put the Girls’ money in were way too conservative, but then again, I have been so badly burnt with investment stupidity (of my own doing) that I wanted to make sure we didn’t LOSE any money.
–C8j
12 Kathryn // May 1, 2008 at 11:00 am
I opened an RESP for my two kids in 1998 & 2000 (the years they were born) through CST and I consider that decision my biggest financial regret. My son is now 10 and has serious learning disabilities and may never go to university. Yet every month, month after month, I continue to pay these people so that I can get my $2400 back in fees when he turns 18. I will never make interest off these fees. If only I had invested it myself. And in the end all of the interest they earned off of my fees and deposits will go to other plan members and I will have to pay back the grant. If I had a family plan, I could pass it on to my daughter. What can I do now? Can I have it transfered to her?
13 Chuck // May 1, 2008 at 11:29 am
We took a minimal group RESP with Heritage. I’m glad we decided to take their smallest plan with a wait-and-see approach about investing more with them.
We received our latest fund report. The funds are earning barely over 2% net of management fees. I could have done better had I put the money into GICs at the bank.
Makes me feel much better than 80% of our one child’s funds and 100% of the others are invested in a much better plan.
14 Canadian Capitalist // May 1, 2008 at 11:53 am
MJ: The TD Mutual Fund RESP accounts that I opened for my kids that allow me to invest in TD e-Series index funds do not charge any administration fee. The only fee is the MER that range from 0.3% to 0.5%. IMO, they are an excellent option for the initial years and can then be transferred out to the true self-directed RESP account. I’ve written about them in other posts: Link.
Kathryn: The CST prospectus mentions that you are allowed to change the beneficiary:
“You may change your Beneficiary at any time up to Maturity as long as the new Beneficiary is under age 18 and you have provided a social insurance number for the new Beneficiary”.
I’d recommend calling them and talking about your options.
15 Four Pillars // May 1, 2008 at 1:45 pm
Kathryn - you are allowed to transfer an resp to another person. If the beneficiary you are transferring to is a blood relative of the original beneficiary then you can keep the grants and earnings etc.
Keep in mind however the lifetime limit of $7200 of grants per child still applies, so any grants in excess of that amount will have to be returned.
These are the government resp rules so CST might have more restrictive rules. Like CC said, give them a call.
16 Kathryn // May 1, 2008 at 3:55 pm
That is the best news I’ve heard in a long time. And we do have the room. Thanks!
17 Canadian Personal Finance Blog » Blog Archive » Random Thoughts // May 2, 2008 at 6:46 am
[...] our friend over at Canadian Capitalist did a piece on Still Sour on Group RESPs where he continues his discussion on the topic of Group RESPs. I added my own comment to this [...]
18 Al // May 2, 2008 at 7:29 am
Kathryn,
If I recall, there are a lot of learning opportunities that apply to the RESP plans. Your 10 year old son might not find university suitable when the time comes, but he may still wish to seek additional education from a trades school or the like. It could be worthwhile looking around for what else is out there.
19 Experts on Credit // May 2, 2008 at 6:04 pm
An RESP sounds like a nightmare.
20 Traciatim // May 2, 2008 at 8:36 pm
Experts on Credit, actually they are normally by far the best way to save for a child’s education. Where else can you get a guaranteed 20% return? Group plans take advantage of people who don’t know any better and then excessively charge them fees, which is why I don’t like them. Especially when there are simple and efficient ways to set them up that doesn’t take any more knowledge than setting up a group plan.
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