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:
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
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
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).
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.