Is a Group RESP Plan Right for You?
First off, I would like to thank frequent commenter Mike for suggesting this topic. Though I have set up a self-directed RESP for my boys, I had not researched scholarship plans in detail. The little I did read about them suggested that I should stay away. Nothing that I learned while researching this post made me change my mind.
How do these plans work?
In a Group RESP plan, contributions are pooled together and invested in fixed income instruments. For an overview of how a Group RESP plan works, you can refer to pages 25 to 32 of this prospectus.
What are the fees involved?
You should keep in mind that there is no such thing as a free lunch. Scholarship plans are heavily promoted at doctor’s offices throughout the country. They also employ agents to sell their products. Guess whose pocket these expenses come out of?
In a typical plan, you’ll pay an enrolment fee of $200 per unit. If you enrol your newborn in a group plan, you are agreeing to invest $105 for each unit every year. The enrolment fee may be refunded to you, in portion or in full, when your newborn enrols becomes a qualified student. Note that you won’t receive any earnings on your enrolment fee.
You will also pay depository charges, administration fees, trustee fees, custodian fess and investment fees. These fees alone (excluding the enrolment fee) add up to more than 0.60% of total assets.
What are the advantages of a Group RESP?
When a contributor withdraws from a group plan, only the initial investment (less enrolment fee) is returned. The earnings on the investment stay within the plan and is shared by children who become eligible to receive payments. If the earnings boost from forfeited income were much larger than the total fees, you would benefit from a Group RESP.
What are the drawbacks of scholarship plans?
Lack of Flexibility: For most people, saving for their child’s education should have a lower priority than saving for their retirement or paying down their mortgage. If money is tight (a job loss or unexpected emergency), you should be able to skip a contribution to the RESP. Your flexibility is limited if you originally signed up for a regular contribution schedule. Also, you’ll derive full benefit from the program only if your child attends a four-year degree program.