Think Twice About Group RESPs
Contributing to an RESP is a great way to save for your children’s education. But be careful, as there is one type of plan that sometimes give RESPs a bad name. These are group RESPs, or Scholarship Trusts. They are heavily marketed to new parents and immigrants. Group RESP dealers employ commissioned sales representatives to promote and sell their products. The firms are small, lightly regulated and their salespeople often use high pressure sales approaches.
One of the more shocking violations took place in Toronto where a RESP dealer representative purchased more than 12,000 maternity patient records that a hospital clerk had stolen. The clerk was fined $36,000.
Group RESPs also come with a long list of fees and complex rules. An investigation by the Toronto Star into one of the largest group RESP providers found close to 500 complaints from customers who lost some or all of their contributions for violating contribution rules.
These group RESPs offer much less flexibility as compared to the individual or family plans offered by your bank, credit union or independent financial advisor. Here’s why:
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. All of the investment decisions are made for you. You usually must agree to make regular contributions to the plan over a set period of time. 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 children’s education funds or your enrollment fee. They often have additional rules about how much and how often your child can withdrawal and which education programs are eligible. These plans can also disallow transferring money to another family member if one child decides not to go to school.
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, as these RESP contracts sometimes have termination clauses that may leave you with nothing.
RESPs are still a great savings tool for your child’s education. One of the biggest benefit is the government grant that matches 20% of your contributions up to a maximum grant of $7,200 for each child beneficiary. There are also Canada Learning Bond grants for lower income families.
If you are looking to set up a RESP for your children why not consider setting up a family plan for full flexibility. You usually don’t have to make a minimum deposit when you open the plan and you decide when and how much money to put in. And you decide how to divide the funds among your children.
Funding post-secondary education for your children is costly today. Seek out a trusted financial advisor to help maximize your family’s savings while giving your children a boost toward their future.