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.

This article has 25 comments

  1. Wow! Those fees are staggering. I never opened an RESP for my sons because of costs. But, I don’t remember the costs being that bad. Either I was oblivious, or these products are getting worse.

  2. These kind of fees are sinful robbery of the educational funds of Canadians. Lets hope most Canadians know enough not to touch these Group RESPs. We used a Self-directed account with TD Waterhouse and have paid no deposit or annual fees.

  3. The only thing worse than having to pay these fees is the inability to access all the funds in their plan. I’ve got 3 younger advisors(in their mid-20′s) who had these plans set up for them when they were children through different group resp providers. All 3 were unable to access all the funds in their plan due to restrictions that kept popping up. Great article.

  4. Not only that, but when your child is starting university, many Group RESP plans have restrictions on what they will pay out to your student. I am aware of a family that were ‘declined’ payments, because their child was taking an honours program, which had a limit of 4 classes per term instead of 5. The plan arbitrarily decided that made the student part-time, vs. full time and declined payments. The plan said they were not interested in the govt rules defining part vs. full time, they were just not going to pay.

    My son takes 4 courses per term, and still qualifies as full time. He has a disability and was recommended to keep his workload down with fewer courses along with the other things the university does to provide him access and assistance. If I had a Group RESP I could have had significant problems accessing the money I had been putting away. Luckily, I have a self-directed plan which gives me full control on investment choices, and spending plans.

  5. @Klippenstein: I concur. TD Waterhouse may charge an annual fee for some clients but clients with large accounts with the broker should try and get these waived.

    @Sim Sahi & @HeidiPG: I totally agree. Inflexibility is a big negative with these plans. Parents who have to stop contributing or students who do not fulfill tighter Group RESP rules face big penalties. Way back when these plans were the only ones available for saving for kids’ college but now with pretty much every bank and broker offering self-directed RESPs, Group RESPs are not very attractive for many reasons.

  6. No kids yet, but self directed is defintitely the way to go!

    Let me guess which method the banks have educated their reps to promote….

  7. I had a kid last year and was surprised to be cold called within two weeks by Universitas. Where did they get the info that I just had a child. Anyway, I listened to the pitch and thought it would be better to try on my own after I had them explain the fees, which she did not do clearly but a trip to the website let me know that these weren’t for me.

    Even more surprising, the vast majority of our pre-natal group had signed up with them. This included an accountant and other professionals. I guess their business model is to get you while you are tired with a newborn.

    I also spoke with a few reps and a local “show” and I am amazed by a few things:
    1. They disguise fees or are not completely transparent about them.
    2. They consistently touted the CESG as if they were getting that return for me which was very disingenuous.

    One rep couldn’t believe how low the fees an e-series funds were.

    In all, the way these are presented makes me sure that we need better consumer protection when it comes to financial products.

    James

    P.S. I had not seen that earlier post and the reps certainly did descend. It would be interesting to see how many different people were writing from the same IP address.

    • @ James – most likely the hospital sold them your information, or they bought it. I went through the same thing when my son was born. I ended up having to block the phone number from getting through to me. It was horrible, and quite revealing of the predatory nature of these companies.

  8. @Cal: In my experience, banks do very little promotion of RESPs (when compared to other products that they sell). In fact, it is not the easiest task to set up a TD Mutual Funds RESP account to invest in e-series funds. A cynic would say that it’s because TD would rather have one invested in its higher fee mutual funds.

    @James: There were reports in the newspapers a while back that hospitals provide information to new parents to certain businesses which includes Group RESP providers. I’m not surprised that the typical agent who sells RESP products is somewhat clueless. These products are very complicated.

  9. So the takeaway is that you’ll pay lower total fund management fees with a Group RESP. Sounds like a smart move :)

  10. If you contribute $2500 a year to your self directed RRSP, and get the $500 a year in grant money, and simply use rolling 5 year GICs to guarantee your funds, at 2.5% you would have $53,000 after 15 years once the grant is maxed out ($36k in contributions, $7.2k in grant, $10k in interest). Too easy, low cost and guaranteed – I would avoid any RESP plan like the plague.

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  12. As these figures are public in RESP prospectus, can we have the name of the RESP plan referred to in the article ?

  13. This is the most important article on Group RESP fees I have ever seen and will definitely help many Canadian parents to avoid getting into something that will cost them a fortune down the road, especially on the hard-earned money saved for their children’s education. I was talked into buying the units of a group plan by an agent when my daughter was just born and the agent, of course, forgot to fully disclose the fees and the potential problems down the road. After I read the contract (something more than 30 pages) carefully, I found it was going to be a trap and will only make money for the people who sell and manage the plan, not to mention the promised return is highly questionable. Luckily, there were options to either buying into a managed RESP plan offtered by a bank or doing a self-directed mutual fund plan at that time so I cancelled the purchase immediately. I feel my decision was so right after reading this article. With the introduction of low fee mutual fund (like e-series from TD waterhouse), it makes more sense now to manage your own RESP plan. It is not time-consuming or difficult to choose a few funds to create a conservative or balanced plan but if one cannot take any risk, one can simply buy a rolling 5 year GICs as the Canadian Divident Blogger suggested.

  14. @Canadian Dividend Blogger: Agree with your take. It should be kept in mind that Group RESPs mostly invest in fixed income. So, a RESP invested in GIC will provide similar returns.

    @mfau: The RESP prospectus referred in this post is from Knowledge First Financial.

    @Bargain Hunter: I went the mutual fund route for my own kids. It maybe takes a total of 30 minutes per year to manage the three RESPs. Parents who are uncomfortable with volatility can of course choose to go the GIC route.

  15. These Group RESP are mostly called Scholarship plans i think . .. did not see the words – scholarship plans mentioned anywhere .. . .

    Just bad investments .. . and the amazing thing is the people selling these scholarship group RESP plans are not required to be licensed at all – at least those who are selling MF have to be licensed

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  17. Sounds like the group plans are not worth the headache and hassles. Thank goodness I opened a self-directed plan when my kids were born and loaded it with government and corporate long-term strip bonds (5-6% per year guaranteed) that will mature just before my children get to university. No fees (other than the initial one-time commission the online broker takes from the spread), don’t have to worry about them for years, they have increased every year, and no rules (unreasonable or otherwise). Only drawback these days is the low interest rates. I would stll do it again though, even now.

  18. The government report How the group scholarship plans work ( http://www.hrsdc.gc.ca/eng/publications_resources/evaluation/2008/industry_practices/page10.shtml ) has one of the most lucid descriptions of how these plans work (does the word scheme have negative connotations?):

    “At its core, the group scholarship plan is a scheme that concentrates gains on plans that survive through the contribution period and meet various restrictions. Beneficiaries receiving scholarships receive not only the investment income earned on their own contributions, but also a share of investment income earned in plans that do not result in a claim on the pooled investment income, or in only a partial claim. Payments to these beneficiaries include the grant and bond deposited in their own plans, and other enhancements. Investment income of a group plan becomes available for distribution to beneficiaries of other plans in the same cohort in three situations: First, the subscriber may close a plan and withdraw contributions made to date – an option that exists with individual and family plans as well.

    Second, the provider closes a plan when the subscriber fails to make contributions on schedule and fails to make catch-up payments or exercise other options available. Third, when all contributions have been made according to schedule, the beneficiary may fail to qualify for a full scholarship under the rules of the plan, rules that are more restrictive than the rules established by the government. When the investment income in a plan becomes available for distribution to other plans, the grant and bond are repaid to the government.”

  19. Where in the world did you get all this wrong information? You should be ashamed for working for mutual funds and providing people with such garbage to ensure they get a more inferior product that can cost them a loss

    • Canadian Capitalist

      Pray tell us how Scholarships are superior products. I like to hear a good joke but I’m sure many parents who signed up for scholarship plans won’t be laughing.

  20. if you don’t like the comment you pretend it was already sent and it is a duplicate? You should be taken off the net

  21. The nice thing about Canadian Capitalist is that he does not sensor the comments which is far more than I can say about some other bloggers.

    • Canadian Capitalist

      @James: I do rarely quietly delete comments when they cross a line. For e.g., recently a comment claimed that a real person X is a crook. I also sometimes edit comments that have unsuitable language. Such incidents are few and far between. Our readers make this a remarkably civil place.

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