RESP

Group RESP Plans are Loaded with Fees

January 21, 2013

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In some of the long-running posts on this blog (for example, see Is a Group RESP Plan Right for You?), Group Registered Education Savings Plan — usually referred to as scholarship plans — cheerleaders (often sales people) continue to post comments on how Group RESP fees are a bargain compared to bank MERs. These cheer leaders conveniently forget that the mutual funds recommended by this blogger and other objective observers for RESPs feature Management Expense Ratios (MERs) of well under 0.5 percent. Parents saving for their child’s education in self-directed mutual fund RESPs at the big banks will find that the MER charged by the mutual funds is usually their only expense.

Let’s consider two new parents George and Simon. George opens up a Group RESP for his newborn and Simon opens up a self-directed RESP. We’ll assume that both George and Simon contribute $2,000 to their child’s RESP for the next 3 years. We’ll also assume that both RESP portfolios are invested in similar securities and the returns are flat over those years. Simon’s total expenses are straightforward to figure out. He invested a total of $6,000, earned Canada Education Savings Grants worth $1,200 and paid about $60 in fees over 3 years ($12 in the first year plus $24 and $36 in subsequent years).

George on the other hand is discovering that Group RESPs are loaded with fees. He counts the many creatives ways in which he is charged fees in a typical plan:

Insurance Premiums

The fee meter starts running before contributions even reach the Group RESP account. George has to pay for group life and total disability insurance. There are no opt-out provisions (except in Quebec) even if George has plenty of coverage through other sources. A typical Group RESP will deduct roughly 1.7 percent of contributions (plus HST) as insurance premiums. So, after deducting $38.50 in insurance premiums, only $1,961.50 is deposited into George’s Group RESP account.

Cost over three years: $116

Depository Fee

Group RESP vendors charge a fee for simply depositing a RESP contribution into the account. The fees depend on the frequency of contributions. Since George is making annual deposits, he will be charged $6.50 plus GST per year.

Cost over three years: $22

Enrolment Fees

And now for the sticker shock! George’s contributions to a Group RESP are used to purchase units. Since George wanted to contribute $2,000 over 18 years, he chose to make annual contributions. In George’s case, 1 unit is valued at $55, so George purchases 35.53 units ($1954/$55 per unit). Enrolment fees for each unit is $100 and over half the contributions of the first three years are used to pay the enrolment fees.

George has purchased 35.53 units, which means enrolment fees cost a stunning $3,553 and the $6,000 contribution over three years is reduced to a balance of just $2,309.

Cost over three years: $3,553

Just as an aside, it is worth noting that $67.50 per unit is paid as compensation to salesperson. In this example, the salesperson earned a commission of $2,407. Is it any wonder that the vast majority of Group RESP cheer leaders are the sale people, not the parents invested in these products?

It would only be fair to point out that some Group RESP plans guarantee a partial refund of the enrolment fee, which would lessen the impact of fee somewhat. However, parents should keep in mind that even a full refund of enrolment fees eighteen years down the line has a significant impact on the bottom line in terms of opportunity cost (income that would otherwise accumulate on the fees is foregone) and inflation (a dollar that will be received in 18 years is worth just 70 cents today if inflation is 2 percent).

Management Fee

Unfortunately, the fleecing isn’t over yet. Group RESPs charge a management fee of about 0.70 percent for investing and administering the account. Eagle-eyed readers will note that this fee alone is greater than the fees incurred in a self-directed RESP invested in low-cost mutual funds. Since enrolment fees eat up such a large portion of George’s contributions over the first three years, the management fees he pays out is also lower than the competition.

Cost over 3 years: $30

Bottom line on Self-Directed RESP and Group RESP Fees

The bottom line over the first three years is quite simple. The self-directed RESP incurred a total cost of just $60. The group RESP incurred a total cost of $3,721.

What about the next three years? The enrolment fees is fully paid up but the Group RESP still remains the fee leader. We’ll continue to assume that rates of return for both plans are zero. The self-directed RESP will incur total fees of $180. The group RESP will incur total fees of $265 (Insurance: $116; Depository fees: $22; Management fees: $127). You be the judge of which plan will cost you more.

RESP Primer – Just The Rules You Need To Know

May 4, 2011

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It costs a lot of money to put a child through University these days and Registered Education Savings Plans offer one of the best ways to save for a child’s education. In today’s post, Mike Holman, the blogger behind the Money Smarts Blog and author of The RESP Book (available on Amazon) explains the basics of RESPs.

RESPs (Registered Educational Savings Plans) have been around for a long time.  Most people don’t have the slightest clue how these accounts work until they have kids – at which point, they need a crash course. This article is that course.

What is an RESP?

RESPs are special investment accounts where the government will deposit a 20% grant (or more) based on the amount of your contributions.  RESPs are intended to be used for educational purposes and there could be penalties if the child doesn’t go to post-secondary education.  RESP accounts are tax-sheltered so all earnings inside the account are not taxed.  Any investments that are eligible for an RRSP are also eligible for an RESP.  GICs, stocks, bonds, ETFs are all eligible.

Where do you sign up for an RESP?

Most financial institutions and financial advisors offer RESPs, but the easiest RESP solution is to visit your local bank branch and set one up.  Bring your SIN card as well as the child’s SIN card and birth certificate.

Be careful of scholarship or pooled RESP plans.  These are typically sold by salespersons who earn large commissions.  If someone calls you or is willing to come to your house to discuss an RESP, you can be sure it’s a scholarship RESP.  These have high fees and restrictive rules.

RESP Account rules

  • Subscriber – The person who sets up the RESP account.  There can be one or two subscribers. The subscriber does not have to be related to the child.
  • Beneficiary – Any children named to the account who will eventually receive payments from the RESP.

There are two types of RESP accounts – individual and family plans.

An individual plan means there is only one beneficiary on the account.  A family plan means there can be more than one beneficiary.  Family plans make it easier to share RESP money between siblings or even cousins.  Some RESP accounts have annual fees, so reducing the number of accounts can save money.

Multiple accounts can be set up for one beneficiary.  It is critical that the subscribers of the accounts communicate so that contributions which are ineligible for the RESP grant aren’t being made.

Contribution Rules

  • No tax receipt is issued for contributions to an RESP account.
  • Every child accrues $2500 worth of "grant eligible" contribution room per year starting in 2007.  Only $2000 worth of contribution room is accrued in years prior to 2007.
  • Any contributions made in excess of the "grant eligible" contribution room are allowed, but won't receive any grant.
  • All "grant eligible" contributions will receive a 20% grant.  This grant might be higher for lower income families or in Quebec.
  • Each year you can contribute up to two years worth of contribution room – one for the current year and one for missed contributions from previous years.
  • Maximum amount of grant per child is $7,200 for their lifetime.
  • The last year a child can receive a grant is the year they turn 17, subject to certain conditions.
  • A special grant known as the Canada Learning Bond is available for low-income families and no contribution is required.  See the Canlearn page for qualifications.

Withdrawal Rules

  • Student must attend a qualified post-secondary educational facility as determined by the government.  This rule is quite reasonable in that it encompasses trade schools and pretty much any kind of training. Here is a description and list of eligible institutions.
  • Only $5,000 of non-contribution money can be withdrawn in the first 13 weeks. There is no withdrawal limit on contributed money.
  • Contributions can be withdrawn tax-free.  Everything else is taxed in the hands of the student.  You can direct your financial institution whether you want to withdraw contributions or earnings.
  • To withdraw money from an RESP account, you just need to show proof of enrollment at a qualified institution.  You can then spend the money on whatever you want (books, tuition, booze etc.) since you don't have to show receipts for anything. Don't be shy about taking more money out of the RESP than required.
  • Only the subscriber can request withdrawals.  The beneficiary has no control over the account.
  • If the child doesn't go on to post-secondary education, the account can be transferred without penalty to a sibling.  Otherwise the account can be collapsed and there will be penalties on the non-contribution
    portion of the RESP account.  Those penalties can be avoided by transferring the non-contribution portion of the RESP to an RRSP.
  • RESP accounts don't have to be closed until their 36th year.  There is plenty of time for the child to use the money.
  • In a family account, ensure that no beneficiaries are paid more than $7,200 in grant money or the government will take the extra grants back.
  • Reduce the amount of equities in the account as the child gets closer to school.

Conclusion

There are a lot of RESP rules and the different RESP phases can be confusing.  The good news is that you don't need to learn the withdrawal rules when you are setting up your account.  And even the contribution limits are not that relevant if you aren't maxing the contributions. It's not hard to get an account set up and then learn more about RESPs later on.

Lack of flexibility a big problem with Scholarship RESP Plans

November 1, 2010

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In The RESP Book (review here), Mike Holman points out the reasons why parents should avoid Scholarship / Pooled / Group RESP plans:

Very, Very expensive. There are large upfront sales fees paid to the salesperson, which are paid from your contributions, and very high ongoing fees. They have restrictive rules that can mean getting less money out of the plan if the child doesn’t go to school.

In my opinion, the biggest and loudest complaints arise from the lack of flexibility in Scholarship RESP plans. First, a lot of parents sign up without fully realizing that they are committing to contributing regularly to their child’s RESP and if they miss contributions all they might lose the Government grants, earnings on their contributions and initial enrollment fees. By contrast, a parent can choose to skip a contribution or two to a RESP held at a bank or discount broker and resume contributions at a later date.

Some parents stick with the contribution schedule until their child is in University and then find out that Group RESP rules are more restrictive than Government rules that deal with RESP withdrawals. One parent found out that his child does not qualify for payments because he switched to another program in the same University. Another found out that her child does not qualify for payments because of a strike at the University. Or heaven forbid, a child should fall ill and miss a significant chunk of the year.

Group RESPs would probably work well if life follows a carefully scripted plan. Unfortunately, stuff happens and then we find out that Group RESPs were not such a great idea after all.