RESP – Register Education Savings Plan Woes

The RESP Group plans account for a third of the $18 billion that Canadian parents have socked away for their kids’ post-secondary schooling since the federal government created the RESP program in 1998. They are run by organizations that manage the RESP assets on behalf of parents, with names like the Canadian Scholarship Trust Foundation, USC and Heritage Education Funds.

The catch: the pooled plans, which have had a reputation for aggressive marketing campaigns, including ads in hospitals and dentists’ offices, come with long lists of fees and complicated rules. The plans are now the subject of a growing wave of complaints from parents and scrutiny by regulators The group plans typically include significant barriers for those who want to stop contributing, including a sharp reduction in the final payout from the plan toward a child’s post-secondary education.

Parents may transfer their RESP to another dealer, such as a bank, but most group plans will first deduct all the profits made on the parents’ contributions, which can grow to a substantial sum over the years. Those who want out also typically have to pay other fees, like an enrollment fee that often amounts to hundreds or thousands of dollars, a “depository” fee, and a transfer charge. The pooled RESPs are also facing a lot of other scrutiny. Another examination of the sector has been going on, this one by the Canadian Securities Administrators, which represents all the provincial securities regulators. The earlier review concluded with a damning report that revealed a litany of serious shortcomings, including: poor oversight of salespeople, who did not disclose fees properly and passed themselves off as working for a nonprofit organization when they actually worked for commissions; deceptive marketing material that falsely suggested government regulators had endorsed the plans; inflated rates of return that relied on “creative calculations to make the returns appear higher”; and lax record-keeping.

Even after the reforms, however, the grumbling from parents did not go away. At the Financial Consumer Agency of Canada, an Ottawa government regulatory agency that investigates complaints against federally regulated financial institutions, spokesman John Kane said a growing number of Canadians are calling to complain about RESP dealers of all stripes. The issues most commonly raised are the usual sore spots involving the group plans: fees and problems with accessing funds in a plan. (Self-directed RESPs typically involve minimal or no fees and impose no restrictions of their own on getting to the funds, apart from those of the federal RESP program.)

According to the Ontario Securities Commission these are what you would have to expect if you are considering a Group RESP. Investment decisions are made for you. Contributions are made according to a set schedule, which is determined when you open the plan. If you miss a contribution to the plan, your account may go into default and your plan may be terminated. If you are allow to stay in the plan, you may have to pay extra fees and interest on the missed payment. The interest owing can grow over time to an amount that is difficult to pay. Fees you are expected to pay:

• Enrollment fees (Usually 1st year contribution is eaten up by this fee, and up to 50% of 2nd year until fees are all paid)
• Administration fees
• Investment management fees
• Depository fees
• Trustee fees

Because fees are deducted from the early contributions, this will decrease the earning power of the investment. These plans have more restrictions than other types of plans on how much and how often you can make withdrawals. i.e If your child decides to go to summer school to fast track, you may not be allowed to withdraw any of the funds to pay for summer school.

Now the good news is that there are plans, self directed plans through banks and mutual fund dealers where you have control of the contribution amount, the type of investment and most important of all,the funds being available when needed. This being said, your child will receive the government grants and none of that will go to pay fees. Most mutual funds do have a fee, a fee that is diminished until it is zero after seven years. Think about it, your child’s RESP will be there longer than seven years therefore no fees!

What does this mean to you as the consumer? Read the prospectus and ask questions!