Saturday, January 18

Group RESPs Are The Worst Way to Save for Your Child’s Education

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Group RESPs are a popular but terrible way to save for your child’s post-secondary education.

Not all RESPs are created equal, and there are three you need to know about:

  • Individual RESPs
  • Family RESPs
  • Group RESPs (sometimes called Scholarship Trusts)

Individual or Family RESPs are held and controlled by the family that opens them. Group RESPs serve a group of families. And they are a terrible investment. 

What is the Registered Education Savings Plan (RESP)?

The Registered Education Savings Plan (RESP) is yet another awesome tax-advantaged savings account available to Canadians, like the TFSA or RRSP. This account is designed to help and encourage parents to save for their child’s post-secondary education.

One of the biggest advantages of the account is free government grants that match 20% of your contributions, to a maximum of $500 per year. This is called the Canada Education Savings Grant (CESG), and you can receive a lifetime maximum of $7,200 for your child’s post-secondary education. Just think: that’s $7,200 less in student loans your child will have to borrow. Nice, right?

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Like the TFSA or RRSP, you can invest your child’s RESP in things other than a savings account. When you invest an RESP in mutual funds, stocks, or ETFs, you can earn a higher return. Thus giving your child even more money for their future education. The RESP itself has a lifetime contribution limit of $50,000, but interest, dividends, and capital gains can make this amount grow to much more.

To maximize the power of your investment, open an RESP with Wealthsimple.

Any amount you save will help your child, so don’t shy away from opening an RESP even if your budget is so tight you cannot afford to put more than $25 or $50 per month into the account. You have approximately 18 years to save for your kiddo’s education, which is plenty of time for even small amounts to make a difference!

What’s the difference between Group and Individual RESPs?

I have only one word of caution: make sure to open an individual or family RESP. Steer clear of Group RESPs or “Scholarship Funds”.

Individual and Family RESP

An individual or family RESP is an account you open and manage at your bank. When you open an individual or family RESP for your children, all the money you put into it is allocated directly to them. When it comes time for them to enroll in post-secondary, they are the only ones that get to withdraw from the account and they are the only ones all the savings you’ve worked so hard to set aside can go to.

Group RESP or Scholarship Fund

A group RESP is typically provided by a company, not by a bank. In a group RESP, often called a “scholarship fund”, the money from multiple contributors for multiple children of a similar age is pooled together. Everyone agrees to keep up contributions, as well as put in their CESG grants, to help the entire pot grow.

When the children grow up and attend post-secondary, they all get a piece of the pie. There’s usually more of the pie to be had. This is because number of parents will have had to withdraw from group RESP over time. Usually because they couldn’t keep up with contributions or they came to their senses and decided to manage their child’s RESP themselves. However, the fees they paid and most of the contributions they made stay in group RESP, benefiting the people that remain.

Scholarship Funds in Canada include:

  • The Heritage Fund
  • The Canadian Scholarship Trust Foundation
  • Knowledge First Financial

There’s no real benefit to choosing a Group RESP over an Individual RESP for your child. Group RESPs do not typically outperform individual RESPs, though they’ll claim to. However, most of the “return” on Group RESP and Scholarship Fund contributions is actually the result of the Canada Education Savings Grant coupled with the fund’s exorbitant fees.

Your baby deserves better than a group RESP

Group RESPs are the new thing that makes me extra rage-y, much like MLMs, gifting circles, and payday lenders. Group RESPs/Scholarship Funds actually have a lot in common with MLMs and payday lenders.  They all target economically vulnerable people with wild claims that they can solve all your financial woes with ease. This is a telltale sign they’re about to make your financial health much, much worse.

There is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation – Human Resources & Social Development Canada

Fees ruin returns

The main wealth-killer in group RESPs is their fees: enrolment fees, sign-up commissions, and so on. These come hard and fast in the first few years that you open the account. This means your contribution barely grows. Like for this mom who put $568 into a group RESP and then received a statement that her balance was only $66. That’s $502 up in smoke!

Fees are also on the other end threatening to kill your investment if you dare take it out early. If you realize your scholarship fund is underperforming and you want to go elsewhere, taking your money out can mean losing almost all of it. Like this mom who wanted to withdraw $3,000 from a group RESP, only to learn she’d spend $2,000 in fees to do so.

Not all post-secondary studies are covered

Another major downside is group RESPs can be specific about what type of post-secondary education they cover. The Canadian government allows for RESP funds to be used for more than college or university. Your child can also put them towards part-time studies or trade school.

However, a group RESP might have stricter rules. This means you could diligently contribute to a group RESP for 18 years, only to find your child wants to become a hairdresser, enrolls in beauty school, and is told the scholarship fund won’t be covering that. Not cool.

You have 60 days to pull your money out of a group RESP once you sign up, but once you’re past that mark, it becomes so expensive to leave you might want to sit and tough it out and hope your child grows up to attend a traditional post-secondary institution.

Watch out for financial salespeople pushing Group RESPs

In my city, a couple hosts free baby budgeting workshops at a local post-secondary institution. They seem to be very nice people, the college gives it an air of legitimacy, and every expecting parent wants to know how to afford their new little bundle of joy. However, if you look closer, you’ll see the couple teaching the free baby budgeting workshop are work for one of the largest financial brands that sell group RESPs.

How much do you want to bet their “free” workshop includes a hard pitch for the horrendously expensive lousy group RESP they make huge commissions from every sale of?

People selling Group RESPs are shamelessly aggressive about it. They troll birth classes and maternity wards, looking for new parents who want the very best for their new baby. They con them into a bad product under the guise of helping them provide for their child’s education. They send pamphlets out with free coupons for formula and diapers. They randomly approach very pregnant women and thrust their business cards in their face. It’s as bad as cord blood banking, except you never expect stem cells to pay you back.

How do I save and invest properly for my child’s future?

Step one: steer clear of Group RESPs and Scholarship Funds. This alone will ensure your child will actually have savings for their post-secondary education in their future.

Step two is a matter of setting up an account at a trusted institution. It’s important to invest your money to earn the highest return, but if you’ve already got a newborn to master, you might not feel confident taking on the stock market. It’s ok to start with a savings account and move to a mutual fund or ETF portfolio later. But if you want the easiest pathway to wealth, open an RESP with Wealthsimple.

Helping your child with the costs of their post-secondary education is a generous and powerful gift that they will reap the financial benefit of for years to come. For this reason, it’s even more important that you choose an RESP that maximizes your contributions and ensures all your savings go directly to your child.

Want more? You might like this post by fellow blogger Boomer & Echo, Group RESPs: Why You Should Avoid Them

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

16 Comments

  1. Hi Bridget – thanks very much for this timely article! My husband and I have been following your blog and videos for 3 years. We had a baby last year and I have also been researching what the best vehicle is for an RESP. We were shown a quick presentation which compared investing with the bank vs. a group plan and of course this showed that at the end of 18 years you would have paid more in bank fees than the fees with the group plan. Is this necessarily the case if you put your RESP into mutual funds with the bank? I suppose what I want to be clear on is if I invest with a group plan, commit to $20 a month and did the same with the bank – what are the factors that would determine at the end of 18 years where would I have more money? A side question – with the banks – if you decide that you need the money 5 years in for something more urgent – can you access this money? Thanks in advance!!

    • A group RESP sucks, even if they claim the returns are better. You’re trapped in it, a lot of money goes to fees instead of your child, etc.

      You’d do better with an RESP mutual fund with your bank than a group RESP.

      If your RESP is with a bank, you can definitely access the RESP at any time. You lose the government contribution (the CESG) but you’re allowed to withdraw your money at any time for any reason!

  2. Hi Bridget, Thanks for the excellent article. I am expecting my first baby this July and I have been pestered by salespeople of group RESPs… Never trust sales people that appear out of nowhere with “the solution for you”.
    Could you explain a bit more about the benefits/drawbacks of contributing over the $36,000? Since that’s when the Government stops giving you the grant.
    Also, what are the options if your child decides not to go to post-secondary education?

    • You definitely want to save more than $36,000 even if the government stops the grant — because it’s more likely than not your child’s post-secondary education will cost more than $36,000! (especially 18 years from now!)

      If your child decides not to go to post-secondary you can do one of three things:
      1) leave the money in the RESP in case they change their mind. RESPs can be open 36 years, so even if at 18 your child decides not to go to university, they might want to at 22 or 28 and they can access the funds then.
      2) transfer the money to a sibling who has contribution room in their RESP.
      3) transfer the money (minus the grants) to your RRSP if you have contribution room.

      No matter what, the money you save in an RESP always belongs to you and your family, which is what makes it so great. It will either be used for your child’s education or your retirement — so no harm in saving as much as you can!

  3. Victoria Nickerson on

    Thank you so much! Baby due shortly after your bundle, this really helps when my head is already so full.
    Have an awesome pregnancy, girl!

  4. Bridget
    While I agree with your comments about group RESPs investment advisors and Financail Planners out side of the banks also sell personal RESPs and Family RESPs.

  5. Mathieu Yelle on

    Good article, we came to the same conclusion just 1 year ago. Further i would steer clear of banks, who charge 2-3% fees and are full of conflicts of interest e.g. their plans hokd alot of bank stocks and industries they most profit from, and not a single option for precious metals (a must have in every savings plan).

    FYI the grant is equal 20% of your contribution, which actually means once you apply it to your childs account it equals only about 16% growth…this shocked me as i had interpreted it as 20% growth as Im sure most Canadians do.

    • Mathieu Yelle on

      I forgot to recommend an alternative to banks…we opened a self-directed resp w questrade and invest in 4-6 etfs which are free to buy, no annual fees w questrade once you hold over 5k, and only pay 0.3-0.9% fees via etf and 5$ when you sell. So each erf you liquidate costs 5$ (likely to go up in 18y but etfs are growing and fees dropping)

      • I have been investing with Questrade for more than 6 years! Not sure if that’s where I’ll be putting my baby’s RESP, but we’ll see =)

    • I have never understood while someone would invest in precious metals using any kind of brokerage. I would much rather hold on to them myself and it is much harder for the government to track them this way. If you are investing in things such as Maple Leafs or American Eagles, they don’t take up much space so storage isn’t really an issue.

      Just my thought.

      I also find it interesting how low the contribution limit is compared to the 529 plan in the US.

  6. Hi Bridget, would you be willing to share the RESP account you finally settle on with readers?

    • Hi Amanda! Ideally, I would like to manage my baby’s RESP as an ETF portfolio in my brokerage account. However, where and how exactly we invest is a decision I’ll be making with the father. We’ll see what we decide!

  7. Saving for children’s education is one of the greatest gifts ever. Many institutions are more worried about their commissions rather than the value they are delivering to their customers. I plan to use a 529 college saving plan for my future children. Thanks for the great article.