After reading Rob Carrick’s article in the Globe and Mail on a study commissioned by the Federal Government on Registered Education Savings Plans, I went looking for the report. Fortunately, it is available online, provides a wealth of interesting information and explains various RESP options available to parents in a clear and straightforward manner. As Mr. Carrick has highlighted the shortcomings in the design of group RESP plans in his column, I am going to focus on interesting tidbits in the report:
- Participation in RESPs is low: only 35.2% of children aged 0 to 17 years received a Canada Education Savings Grant.
- The Canada Learning Bond provides $500 for low-income families to establish a RESP account and allows for an annual contribution of $100 thereafter but the participation rate is a miniscule 8%. The CLB program has paid out a paltry $24 million to date.
- The biggest “complaint” against RESPs offered by banks and brokerages is that they are not “vigorously” marketed.
- It is shocking that 3.2% of group RESP plans were cancelled or terminated in 2006. Even more shockingly, 1.9% of group scholarship plans were closed by the group RESP vendors and subscribers paid the price: “When the group scholarship provider closes a group plan, the subscriber can reclaim the contributions, and these are then returned net of fees and without the investment income. Closing also means the grant and bond are repaid to the government, and these cannot be earned back later if new contributions are made for the same beneficiary.”
- The report notes two benefits of group scholarships: the mandatory contribution schedule may force some people to save for their child’s education and the proactive marketing of these plans may result in higher participation in RESPs.
- Corporate governance of scholarship trusts leaves much to be desired and there is no disclosure of executive compensation.
- The criticism that scholarship trusts have high fees is justified. The report notes that in 2006, some 20% of gross contributions went towards fees. Granted some of the enrolment fees may be refunded but the present value of the refund is quite small.
- If a group RESP subscriber is unable to continue contributing, they can transfer to an individual savings plan instead of terminating the program and keep the principal, grants and income. Termination, on the other hand, will result in refund of contributions less the enrolment fee. The report points out that 1.9% of plans were terminated even when a better option is available.
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14 responses so far ↓
1 Big Cajun Man // Aug 26, 2008 at 9:28 pm
My major complaint with my RESPs (held in TD Mutual fund section), is taking money out of it, is a ROYAL PAIN IN THE TUCHOS! I must go into my branch and show that my child is at an acredited school and then they will give me some money.
I am glad that I put our money in the RESPs now, but I would agree RESPs are not well understood or marketed to folks either.
2 moneygardener // Aug 26, 2008 at 10:43 pm
The participation rate at 35% is actually higher than I would have thought.
3 MultifolDream$ // Aug 27, 2008 at 12:29 am
I do not know whether the RESP is “vigorously” marketed or not but I have seen information about it everywhere - in the press, in the banks, on the web … even at Granby Zoo …
Just most of the Canadians 1) do not read, 2) do not plan for the future and 3) do not take an action
4 Four Pillars // Aug 27, 2008 at 9:04 am
RESPs are a loss-leader for all the major financial institutions - they only offer it so they have a complete lineup of products.
I’ve done a lot of posts on RESPs and I really think that a better system is just to give money to students who are actually going to school (or about to) in the form of grants/scholarships. This would be a lot simpler than the existing system which has a huge overhead cost because of its complexity.
From what I’ve read the original intention of the RESP program was to help low and middle income families - with the emphasis on the low income. In actual fact it is the middle and high income families that get most of the benefits because they can save money to contribute and get grants, which is pretty difficult for low income families to do - regardless of how large the matching grant is.
5 Chuck // Aug 27, 2008 at 10:15 am
I can understand the cancellation and termination numbers
RESPs are also considered a matrimonial asset. Imagine a family with a 12 year old who have put in the $2000 max every year. There’s now over $24k in contributions alone, which any divorce lawyer will claim should be divided between the parents.
My wife lost her RESP when her mother cashed it out to pay for her divorce.
I’m sour on my daughter’s RESP (Heritage) because we could have gotten a better return putting the money into ING direct. At least my son’s is invested elsewhere in index funds.
6 florch // Aug 27, 2008 at 11:35 am
There are a number of ways that low income earners can help themselves and leaving free money on the table is very telling as to why they are low income in the first place. You can read that however you like. Each way you read it possibly applies to a different reason or excuse. Maybe some don’t know, maybe they’re too lazy, don’t care, or don’t value education.
The part about 35% participation rate may be encouraging, but doesn’t say how much they contribute or for how many years.
7 Canadian Capitalist // Aug 27, 2008 at 1:33 pm
florch: It is definitely worth asking if the costs of administering a program that has paid out $24 million so far can be spent in other areas.
Chuck: It’s interesting that RESP funds are matrimonial assets (makes sense). One other reason why flexibility is so important. I haven’t seen anything so far to convince me that group plans are superior. The advantages of attrition are eaten up by the costs, so a self-directed plan is likely as well, if not better.
Mike: As a public policy, CESG is definitely questionable. Most of the people who participate will save for their kids education regardless. But I doubt it is going away.
I think (I may be wrong) “participation rate” means the percentage of children who have ever received a CESG, not necessarily in 2006. In that light, 35% is pretty low.
8 charlie A // Aug 27, 2008 at 10:16 pm
My main issue with RESP is that they are not self directed.
9 florch // Aug 28, 2008 at 3:07 am
RESP’s can be self-directed, mine is.
10 Ed // Aug 28, 2008 at 7:46 am
Four Pillars - having worked a little in Student Financial Aid policy, the benefit to setting up an RESP for your kids goes far beyond the CESG. The research shows that the biggest determinant of whether or not a kid goes on to post-secondary education (PSE) is parental expectations - not financial means.
The idea behind the CESP is that having an education fund around predisposes kids and their parents towards PSE. In other words, if you’ve been conditioned to think you’re going on to university or college all your life, you’re much more likely to go than if the first time you think about it is when you talk to a guidance counsellor at age 17.
Incidentally, giving “money to students who are actually going to school (or about to) in the form of grants/scholarships” would just exacerbate the problem that you’ve identified (e.g. the aid flows to upper income families).
11 Four Pillars // Aug 28, 2008 at 8:23 am
Ed - great points about the expectations.
As far as grants go - what if the low-income student could determine early on (ie grade 11) that they will qualify for funding for PSE. That might help encourage them.
12 Labour Day Weekend Roundup - Aug 31, 2008 | Million Dollar Journey // Aug 31, 2008 at 6:32 am
[...] Canadian Capitalist has an interesting report on RESPs. [...]
13 RESP // Sep 21, 2008 at 8:38 am
RESP can be self directed. Usually the best option if you know what your doing.
14 Carl // Nov 10, 2008 at 5:02 am
Thanks for the link to the report. Quite a good read! I’ve been reading intensly on the subject since friday, and didn’t know what was the best financial product to use. I’ve been offered CST and Heritage plans, but after reading both prospectuses and this report, I’m going to go for a self directed RESP through a direct brokerage account. At least I’ll know what my kid is going to get at the end (ok… it will depend of my choices of investments, but I’ll know why he gets more or less…), something I couldn’t be able to know with CST or Heritage even after reading the report!
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