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moneysense.ca, 9/09/08
The MER on Group Scholarship Plans
Ellen Roseman’s recent column and blog post on group scholarship plans generated a lot of comments, including the following from a group RESP seller on how the fees of group RESPs stack up against bank mutual funds:
Banks promote their family of mutual funds as the investment vehicle for just about anyone who wants to save for their child’s education with average MER’s of 2.65%. Go to a bank and ask to see for yourself, like I have. By the time junior is off to college or university, the total fees paid by the family to the bank is about 300% higher than with scholarship plans and that’s before we even calculate the erosion of compounding interest by this annual fee that is charged.
While I’ve never been a fan of high-cost mutual funds, the claim that the MER on group scholarship plans works out to 0.9% can only be justified with a lot of fuzzy math. At first glance, it doesn’t sound unreasonable: the Canadian Scholarship Trust, for instance, charges an administration fee of 0.5% and a portfolio management fee of 0.10% to 0.30% on plan assets. There are some miscellaneous fees such as depository fees and trustee fees that we’ll ignore for the purposes of this post. The total administration and portfolio fees, roughly, totals 0.90%.
The typical sales pitch is that though there is a steep enrolment fee charged initially, it is refunded partly or in full. But attention must be paid to the details — the enrolment fee refund is in nominal dollars, without any adjustment for growth and inflation. A promise to repay $200 eighteen years in the future is only worth $83 in today’s dollars at a 5% discount rate. This is a real cost that must be accounted for in calculating the MER of group scholarship plans.
I constructed a spreadsheet with the following assumptions: (1) A rate of return of 5%. (2) Annual contributions of $105. (3) An enrolment fee refund over 4 years. A self-directed RESP earning 5% would total $3,101 after 18 years. The group scholarship plan would deduct an enrolment fee of $100 from the first year’s contribution and $50 from the second and third years. At the end of 18 years, the plan should add back the present value of four future enrolment fee refund payments. The difference between the rate of return of the self-directed RESP (5%) and group scholarship plan is a fair estimation of the impact of enrolment fees:
At full refund, the group plan earned a return of 4.05%.
At a 50% refund, the group plan earned a return of 3.75%.
At no refund, the group plan earned a return of 3.4%.
So, the total impact of all the fees on a group scholarship plan is of the order of 2.15% (1.25% for the impact of the enrolment fees and 0.9% for other fees). While that compares favourably with high-MER mutual funds, it is certainly not 3 times cheaper. And parents have a much better option than having to choose between Tweedledee and Tweedledum: they can walk down the street to a TD Canada Trust branch and open a RESP account and invest in TD e-Series mutual funds for a total cost of less than 0.5%. Now, that is more than three times cheaper.
moneysense.ca, 9/09/08
Well strictly speaking, if you walk down the street you’ll be able to open a TD Mutual Funds account, and then you’ll need to print out forms from the Internet and mail them in to gain access to e-series funds
Cause they don’t want to deal with e-series funds in person.
Great post CC. Perfect timing as I was in the process of doing more research on the Canadian scholarship trust. The validity of this program seems to be a hot topic.
CC, thanks for doing the math on these plans. The issue of nominal vs. real returns is one that is truly confusing to most investors, but it is a point that has to be made.
The return of the enrollment fees in nominal terms is the equivalent of depositing $1200 in a bank account for almost TWENTY YEARS and then getting nothing back but the original $1200 – not a penny of interest. Hardly a good deal, if you ask me.
The other issue you don’t mention with regard to the Group RESP plans is that, on top of the high fees, they also have extremely low returns. The returns are “enhanced” by a survivor’s bonus (the people still in the plan after X years get a share of the money lost by the people who cancelled the plan over those years). Personally, though, I don’t like the idea of my kids’ college fund earning returns based on moneys lost by other parents trying to save for their kids.
I’ll keep my self-directed RESP. I’ve been perfectly happy with it, and I’ve made several changes (both up and down) to the contribution rates over the past few years – none of the changes have required more than a 5-minute phone call to the bank. Try doing that with a CST or other Group RESP plan.
Charles: Yes, you’re right, of course. When I opened a TD Mutual Funds account, the rep didn’t even know what e-Series funds were.
FT: Good luck with the CST prospectus — it should be a fun read
George: Good point. I’ve made it on other posts and didn’t repeat it here. It makes no sense to me that a very young child is 100% in fixed income assets. Though, the prospectus mentions that 25% is of the portfolio is invested in index-linked notes.
Beyond the math of the higher MER is the less-quantifiable factor that these scholarship plans are all calculated based on full, non-interupted participation in the plan. Life doesn’t work that way; however and financial circumstances do change despite the scholarships implied assertation that one can always plan out – with perfect certainty – the next 17 years of their life.
If you later want, or more importantly need, to suspend contributions or cancel the plans, you can pay dearly.
Again it is hard to quantify this element, but lack of flexibility can sometimes be much more costly than anything else.
My advice – avoid these plans like the plaque.
We’re dissatisfied Heritage plan members. The plan when we enrolled was supposedly investing in safe interest bearing investments. However when I review the annual reports, I’d be able to get better returns putting the money into ING. The difference is much more than just the 0.56% management fee taken from the porfolio.
Thankfully money was tight when we opened my daughters plan so only a small amount goes there. I wised up 2 years later and opened a family efund RESP at TD CT.
Rob: I concur with your observations that there are much better alternatives. The report released last week (mentioned in the post below) shows how important flexibility is: 3.2% of plans were cancelled or terminated in a single year, which would imply that a significant percentage of plan subscribers are giving up early.
http://www.canadiancapitalist.com/2008/08/26/interesting-report-on-resps
Chuck: The expenses of these plans are front loaded because unlike a mutual fund that charges a MER every year, the enrolment fee has the biggest impact in the initial years. Your TD RESP is likely to do much better than any group plan out there.
Rob, I agree. Everyone should avoid these funds like the plague. I am a sucker of the CST group RESP for my daughter. I have a TD E-Funds RESP for my son. Our family recently had to stop contributions to the RESPs while my spouse starts a business after going to school herself. Very suddenly my enrolment fees of the plan are no longer on my statement (as expected, and according to the agreement with CST) making the balance drop by $2100.
The TD account, we simply logged in online and stopped the pre-authed payment plan. No harm, no foul. When we want to start back up I just re-start the deductions and we’re on our way again.
Traciatim – that’s too bad and a story I have unfortunately heard many times before.
I don’t know how much you had in the fund and what percentage therefore $2100 represents, but I’ll bet it is high. $2,100 dollars – robbery, and nothing else.
As a financial advisor, I could make a fortune marketing this garbage because it is a very easy sell, but I don’t because it is crap. The people selling this stuff should take a long hard look at themselves in the mirror.
@Rob, it was about 28% of the value as I last saw it, which is a huge chunk for us. I doubt that I can catch up payments at this point since it’s been about a year now. I’ll call them when we’re ready to go again and see what my options are. If there is no way to get back on track I’ll just close it up and open a new TD E-Funds account, or whatever sounds good at the time that’s cheap.
Lets face it though, I was 22 and financially illiterate when i signed up. I just had a daughter and the CST sales pitch was in our info pack from the hospital. My parents couldn’t afford to pay for my schooling and I wanted to be sure I could help with my daughters so I figured I was doing a good thing.
I guess a lot can happen in 18 years. Please, for anyone reading, steer far clear of group RESP providers.
It was via the hospital that we got on a list for a group RESP (Heritage I think.) I wonder why the hospitals do this? We got a cold call and set up the appointment to hear about their products. I didn’t know the difference between the group plans and other RESPs at the time. The sales pitch was good for what it covered, but it left out some info that I wanted. After reading the material the rep left I wasn’t going to sign up. The RESP company was an NPO, but the sales force was a private for profit entity. After reading and rereading I finally managed to piece together that the upfront fees were 20%. And I realised what George did, the only way to come out ahead with these things is if other people drop out. There’s not enough vulture in me for that to be appealing.
[...] Canadian Capitalist examines the claims about just how low the costs are on Group Scholarship Plans. [...]
[...] fees will always [...]
[...] The MER on Group Scholarship Plans : Canadian Capitalist [...]
Interesting article.
I agree with whats been said by most other comments. Avoid group plans like death.
Self directed, if you know what your doing is the best way to go.
The last post on here appears to be Sept 10, 2008. I wonder how all of you and your self directed RESP’s did in Q4 of 2008? That 30% chunk of change missing from your kids RESP probably hurt a little . . . Heritage, as an example, returned 5.23% in 2008. I like the fact that I dont have to worry about managing my money. I view my RESP as an 18 year investment. Why would I stop paying all of the sudden?
My self-directed RESP did just fine in 2008. It dropped by about 18%, but that’s to be expected during a down market. I fully expect to gain back the losses and then some over the next 18 years or so. A self-directed RESP invested in bonds would have all of the advantages you like in the Heritage plan without any of the drawbacks.
It isn’t reasonable to compare different investments based on a single short time period, especially if the different investments are for long-term objectives like post-secondary education.
As to reasons why you might stop contributing to an RESP over the next few decades, I would think that a job loss, disability, or some other major medical issue would all be good reasons to suspend contributions, at least temporarily.
With a pooled RESP plan, you lose the flexibility to halt contributions if your life circumstances change.
I wouldn’t sign a contract for a cell phone or my TV service that obliged me to pay a fixed amount for 15+ years – why would I sign up for an investment that does exactly that?
D.H. I agree with George, likewise my index fund RESP for my son hasn’t gained money over the past year which is an unfortunate symptom of a bad year for stocks. Similarly my group RESP plan is down my enrollment fees since we stopped paying in to the kids plans for my spouse to go back to school and then start her own business.
With my self directed plan I simply logged in and click on my pre-auth payment plan and hit cancel. It cost us 2 grand of lost enrollment fees from my group plan.
I also assume you will be back posting about your 4-5% return (2% in CST where I am) when stocks have a good year sometime in the next 15 years and return 15% in a 12 month period?
18 years is an awful long time to tell someone you can pay a certain amount of cash. I’ve learned that a lot can change in 18 years and would far rather have the flexibility of a self directed plan, using whatever low cost investments that your comfortable with.
D.H.: Like George and Traciatim point out, I’d be really in trouble if my kids had gone to University in 2009. Fortunately, they are only 3 and if my calculations are correct, I’d be needing the money in 15 years, not tomorrow. I’m perfectly willing to live with fluctuating portfolio values in return for the possibility of earning higher returns.
BTW, that Heritage return, is that net or do scholarship plans still report make-believe returns hoping the tooth fairy would pay the innumerable fees?
Few points.
First of all, the Heritage return is net of fees, and their 10 year average is 6.15%. I would say that is pretty good on safe money. The ten year return of Money Market Funds is 2.5%, CSB’s 2.7%, GIC’s 3.5%, and Bond Funds is 4.6%.
Canadian Capitalist: you are perfectly willing to live with fluctuating returns – some people are not. Some people like safe returns – Period. There are many people who invest in CSB for their children, and their own retirement. To promote etf’s as the end all, be all for everyone is insane. It requires the person to do some work, and have some sort of financial knowledge. Some do not, nor do they want to lear. This is why the banks and Financail Planners make so much, as they know this. To say, wihout any doubt that your returns will beat a pooled plan is to say that you know the future. No one does, and timing the market is not something everyone is comfortable with. (not saying that it is bad to try, just that not everyone is comfprtable with it.)
When it comes to safe money, and managed funds, the pooled plans do quite well. As far as being a vulture, taking interest left by other families, count my kids in.
What happens to the interest on an RESP at a bank when you pull all the money out after 6 years?
I find it funny that everyone here promotes TD e-series, and commnets on how great they are versus managed funds, and yet a financial planner hops on here, says how he doesn’t like polled plans, and his stuff is better, and no one comments on how his products compare versus etf’s. I really find that odd.
I have sat down with accountants, bankers, and financial planners and they have invested with thier own children with XXXXX*. As a matter of fact, I switch a lot of people from banks and mutual funds. (not etf’s, but they are not for every one either) There is no one product that is the best for every person. Everyone has to feel comfortable with their decision. I understand etf’s, mutual funds, and many other investment options. I invest with XXXXX* with full knowledge and I am quite happy with it.
I have had people decide that they want to invest in real estate, rather than an RESP. Should I tell them that isn’t good? Of course not. It is not my cup of tea, as I don’t want to be a loandloard, but it is fine for them.
Most of the people I sit down with have financial planners, or invest at the bank. When I show them the differences, they like what they see. Eveyone is intitled to their opinion, and yours is clear. That doesn’t mean that people not following you advice are wrong.
I wonder if people will read these blogs, and get scared of pooled plans. They will also get scared of banks and mutual funds. They will plan to research and learn about etf’s, but they put it off. 5 years go by, they haven’t done anything, so they head to the bank. I wonder if there blogs will ahve helped them?
XXXXX – Deleted per commenter request
Mark – we seem to have a stream of comments on a variety of websites.
And to answer your question: I have found CC and other blogs to be of great value. I think I like the fact that CC and others want to help me learn, whereas you imply that it’s easier to let others live in ignorance. Why wouldn’t you want your clients to do some work, and gain some financial knowledge, paraphrasing your words above.
And “As far as being a vulture, taking interest left by other families, count my kids in. ” Count my kids OUT. I want them to pull themselves up by their bootstraps, and not pull themselves up by pulling others down.
Lastly, since you bring it up here again, I’ll answer your question on how my funds are doing.
@ DH – My RESP with TD efunds (couch potato classic, 80% equity/20% bonds) was started in Dec 2008 with $2500 and then over the past year I’ve put in just under another $2500 (one more biweekly payment to go). It’s current value is $6,569. Part of that is the 20% bonus from the government, and though I don’t know how to calculate it correctly (anyone?) I think that’s about a 4.63% annual return outside of the government grants.
Can you tell me what my available account balance would be, today, if I made a $2500 investment in a scholarship plan in Dec 2008 and $2500 spread out over the past year as well? (so I paid $5000 total)?
Geoff,
First of all, I appreciate this website, and have told CC that before. I was only commenting on the fact that, for some people, the information here, or lack thereof, may cause confusion, and lead them to put off a decision that may be better made today. Can we assume that, my being in the industry gives me a little more insight into what people are doing, and what guides them in making their decisions, than you have? My comment was based on my experiences, which are also those of hundreds of other families. (This includes many people that do not invest with Scholarship plans. I get to hear their stories as well.) I have seen a lot, and I can assure you than not everyone in Canada shares your exact opinion on everything.
We do have a stream of comments, on a variety of posts. This begs the question as to why you are asking the same questions that you did elsewhere, when I have already addressed them elsewhere. I have also posted a ton of information, which also begs the question as to why you misrepresent what I am saying. (Is it because you don’t understand my point of view, or are you deliberately trying to twist my words?) I have been entirely clear. In the future, (with other people) if you have a question – ask; don’t assume you know the person’s answer before they give it. Once answered, if you are uncertain to the exact meaning, ask for clarification.
I had started to post on these sites to clarify some glaring mistakes/incorrect assumptions/outright falsehoods. I will state (yet again) that I am not here to convince you that you should be in a Scholarship plan. Everyone should do what is comfortable to them.
I have spent a lot of time forming my posts, to ensure accuracy, and to not offend anyone. Again, my only intent is to make sure correct information it here. That you disregard/ignore the majority of my comments, keep asking the same questions, (which are obviously bait questions) and obviously twist what I am saying, amazes me. I have tried to make sure I don’t offend, and in that same spirit, I am making this statement. Geoff, I won’t respond to any more of your questions, as we are apparently not having a friendly debate. I understand your point of view, and I respect it – you may or may not understand mine, but you obviously don’t respect it. Future words (and I expect these ones included) are just a waste of my time. I apologize if this post is not as polite as I normally am, but I don’t want you to misunderstand my points, so I will not be subtle.
par⋅a⋅phrase
–noun
1. a restatement of a text or passage giving the meaning in another form, as for clearness; rewording.
2. the act or process of restating or rewording.
–verb (used with object)
3. to render the meaning of in a paraphrase: to paraphrase a technical paper for lay readers.
–verb (used without object)
4. to make a paraphrase or paraphrases.
Do not ‘paraphrase’ my words again. You are not good at it, as you can see from the definition above. People can easily read my comments and realize that is the case. You have added your own ‘spin’, and I find your obvious misrepresentation of what I have said to be the equivalent of lying. I have never said, nor implied that I “wouldn’t want my clients to do some work, and gain some financial knowledge.” Please reread my comments, and I hope you will see your error. This is why I started posting – misinformation.
I never ‘brought it up here again’, and I have addressed it elsewhere, so your re-asking here makes me question your motives, ethics, and/or sanity.
To anyone else, feel free to ask a legitimate question, and I will give the best answer that I can.
Cheers,
Mark
Mark, I think ultimately you’re just upset that I’ve asked some questions you can’t answer, and really dislike the attrition aspect of group plans that you embrace. Which is fine, life goes on.
I have no agenda, no bias. But what I care about is the poor beleagured father/mother who comes on here looking for resp info at 2am after getting waylaid in the hospital by resp companies, as I was in July 2007.
I like that you come on here, explain who you are if not your company (don’t know why really but ok) and engage in discourse… to a point. However, your comments are often inconsistent, and your attempts to explain them haven’t been great. If you feel I paraphrased you poorly, I apologize. But you still haven’t answered a simple question on any forum:
If I put in $2500 in Dec 2008, and $2500 spread out monthly in 2009, how much is your company’s group resp plan, today?
seems like a marketing stunt by TD; there are pros and cons to everything. the banks have always taken from my pocket. maintaining a savings account cost 5$ month, them managing something CANT b free.
Just to play Devil’s advocate here a bit. I’m the type of person that Mark is talking about. I want to make good financial decisions and I go through bursts of reading blogs like this. But in reality I still haven’t made any decisions. I’m generally risk-adverse and 2008 gave me a good scare. I was happy to have the bulk of my RRSPs sitting in a bank earning 2% when I was seeing my work group plan losing 20%.
I have the CST plan for my son and I’m looking at options for my daughter. I feel I should go for the TD e-series, but I also like leaving my evenings for playing with my kids instead of balancing my portfolio…