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The Advantages and Disadvantages of Group RESPs

Last week, we discussed some of the reasons why you should get a registered education savings plan (RESP). But before you rush out and open an RESP, there are pros and cons with a certain kind of plan: Group RESPs.

There are the three different types of RESPs to choose from. Before getting into the advantages and disadvantages of group RESPs, here’s a quick rundown of what plans are available.

Family plan—In a family plan, one or more children related to you can receive the savings. They can be your children (either by blood or adoption), stepchildren, grandchildren (including by adoption), sisters, or brothers. Having a family plan means that interest income or capital gains can be shared by the children and the Canada Education Savings Grant (CESG) can be used by any beneficiary. You can open this plan at a financial institution, make your own investment choices, and decide how much money to contribute.

Individual plan—This plan can be used for single-child families, families that want an individual plan for each child, or if you’re saving for a child who’s not related to you. Like a family plan, you can get this plan at a financial institution and choose both the investments and how much money you want to contribute.

Group plan—A group plan, also known as a pooled or scholarship plan, is intended to be used for just one child and he/she doesn’t need to be related. In this type of plan, your savings are combined with others. But unlike a family or individual plan, you don’t choose the investments and you must contribute a certain amount over a specific period of time. You can only get this type of plan at a scholarship plan dealer.

Group RESP pros

There are some advantages with group RESPs. For instance, you’re forced to save money because you agree to buy a certain number of units (like shares) on a regular basis. If other people leave the plan early, you could receive a share of their earnings. And if you’re unsure how to invest, someone else will take care of all the investment decisions.

Group RESP cons

But while there are some advantages of group RESPs, there are also many disadvantages.

Group RESPs will often invest in only fixed-income products (for example, GICs and bonds). In today’s low-interest rate environment, that’s not going to produce very high returns if you’re investing for five years or more.

You also must make regular contributions. But if you miss a contribution for any reason, you could be forced to pay a penalty and interest on the contribution to stay in the plan. Your plan could also be terminated and you might have to give up your investment earnings.

While there are a number of similar fees you need to pay a financial institution or a scholarship plan dealer, there are also some different fees associated with both.

Financial institutions will sometimes charge a fee for opening an individual or group RESP but the fees may be waived if you have enough in savings or have multiple accounts. And financial institutions and scholarship plan dealers will charge a fee if you need to change the beneficiary or transfer money to a different RESP.

You may also need to pay a fee to your financial institution to purchase stocks, exchange-traded funds (ETFs), or certain types of mutual funds when you buy or sell them. You’ll also be charged what’s called a management expense ratio (MER) for mutual funds, index funds, and ETFs. If you choose index funds or ETFs, you can the MER is much less than it is for mutual funds. But scholarship plan dealers also charge a lot of fees, such as annual administration, deposit, and trustee fees.

Scholarship plan dealers will also often charge a large amount of fees upfront because the salespeople selling these plans receive a commission. In one case, a mother in B.C. contributed $2,000 to a group RESP but about 60% of those savings went to pay upfront fees in the first few years. While some or all scholarship plan dealer fees may be refunded when your child starts attending a post-secondary institution, the money won’t be worth as much later due to inflation.

The bottom line

Although group RESPs can be convenient, the disadvantages clearly outweigh the benefits because of the restrictions and huge upfront fees. If you’re unsure of how to invest, you can always buy GICs and put them in a family or an individual RESP. Alternatively, you could open up an account with a robo-advisor (for example, Wealthsimple, BMO SmartFolio, Justwealth, Nest Wealth, and WealthBar), which is a low-cost option that’ll build an investment portfolio for you. And if you’re knowledgeable about investing, you can save a lot of money by doing it yourself.

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Flickr: KMR Photography