Most parents should know that contributing to an RESP is a great way to save for your child’s education. But there’s one type of plan that gives RESPs a bad name. Group RESPs, or group scholarship trusts, are heavily marketed to new parents and immigrants at doctor’s offices and trade shows. These RESP dealers employ commission-based sales representatives to aggressively promote and sell their products. The firms are small, lightly regulated, and their salespeople may often cross ethical lines.
One of the more egregious violations took place in Toronto where a hospital clerk admitted to stealing more than 12,000 confidential maternity patient records and selling the information to an RESP dealer representative at Knowledge First Financial. She was fined $36,000.
Group RESPs also come with a long list of fees and complex rules. An investigation by the Toronto Star into Heritage Education Funds, one of the largest group RESP providers in Canada, found close to 500 complaints from customers who lost all or some of their contributions for violating contribution rules.
In January 2018, Knowledge First Financial purchased Heritage Education. Birds of a feather…
Avoid Group RESPs and Scholarship Trusts
Let’s be clear that group RESPs aren’t necessarily a scam – they’ll work just fine if you see the plan through to the end – however parents need to be cautious and read the fine print before signing up.
The flexibility of a group RESP is much different from the individual or family plans offered by your bank or credit union. Here’s how they work:
With a group RESP, your contributions are pooled with those of other people. The money your child gets is based on the amount of money in the pool and the total number of students of the same age who are in school that year. Funds are invested mainly in fixed income, such as bonds.
Usually you’ll need to sign a contract agreeing to make regular contributions to the plan over a set period. Group plans are offered and administered by scholarship or group plan dealers. They may be more expensive than individual or family plans, depending on your investment choices.
Group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when they need it for school.
Here are the five main providers of group RESPs:
- Canadian Scholarship Trust Foundation
- Universitas Financial
- Heritage Education Funds
- Knowledge First Financial
- Children’s Education Funds Inc.
What To Ask Before You Open An RESP
Some group RESP providers have fallen under scrutiny from the Ontario Securities Commission for providing misleading plan documentation. Before you choose an RESP provider, make sure you read the fine print and ask about:
- Fees for opening an RESP
- Fees for withdrawing money from a RESP
- Fees for managing the RESP
- Fees for services and commissions
- What happens if you can’t make regular payments
- What happens if your child doesn’t continue his or her education
- If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type?
You can withdraw from a group RESP contract and get all of your contributions back in the first 60 days after receiving a prospectus. If you’re past the 60-day point, you might be better off seeing the plan through to the end. Otherwise you might pay fees upwards of $800 to $1,200 to collapse the plan during the first few years.
When our youngest child was born we signed up to receive free samples and coupons from a few different websites. A short time later we got a phone call from someone who asked if we received samples of baby formula. It turns out he was a group RESP salesman in disguise and he wanted to come to our house to discuss setting up a plan.
We avoided a group RESP plan and instead chose to open a family RESP account at our bank. Both of our children are named under this plan, so if one decides not to pursue a qualified education program, we don’t have to worry about closing an individual RESP – the benefits are simply shared by the children that do qualify.
As a young family with lots of competing financial priorities, we only contributed what we could afford – between $50 and $200 per month – for the first few years. We bumped that up as the kids got older and now we max out our annual contributions at $2,500 per child.
We like the self-directed RESP because we’re not tied to a specific contribution every month, plus we have the flexibility to contribute lump sums whenever our finances allow for it.
The lesson here is to avoid Group RESPs and Scholarship Trusts. Open an Individual or Family Plan RESP at a bank or credit union, not from the guy chasing you down in the maternity ward.