Group RESP Plans are Loaded with 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).
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.