Every parent wants the very best for their child. Life changes as soon as a new baby comes into this world, and parents are on cloud nine (and probably sleep deprived).
There is so much to learn as a new parent and setting up savings plans for your new child’s future education is an important one. We urge you to do your due diligence before signing any contracts for RESPs or Scholarship funds. There are companies who obtain names of new parents/babies and call you to offer their help with setting up a new plan within weeks of your baby’s arrival.
This post will dig into the differences between those Group Scholarship RESPs and Self-Directed RESPs.
Group RESPs pool participant’s earnings and grants together. Self-directed RESPs are individually held and managed by you (with the help of your advisor) for the benefit of your child(ren) only.
There are three main differences between Group plans and Self-Directed plans. Each company has different plan rules, so the following information is generalized. It is important to ensure you understand the contract you are being asked to sign before you sign it. If you haven’t read the entire RESP or Scholarship contract do not sign it. Have a third party review it for you.
In a Group RESP, the earnings and grant money are shared between all the group participants. The kids who go on to post-secondary education get to withdraw their own earnings and grants, as well as a portion of the earnings and grants of the kids who do not pursue further education. Basically, if your child decides not to go to school, you may never see the grant money and growth from your plan. Self-Directed RESPs on the other hand are used for the benefit of your child(ren) only. If your child does not go on to higher education, only the grant money is returned to the government. The principle and the growth of your money is returned to you.
The investment choices within the group plans are much more restrictive, as are the contribution and withdrawal rules.
Investment Options
In terms of the investment choices in the two plans; the group RESPs usually invest in things like money market investments and bond type funds, both which have low rates of return (and thus are safer investments).
In a self-directed RESP, the investment choices are endless. Since RESPs can have a very long time horizon (as long as 18+ years depending on when you open the plan), investing in a more balanced portfolio of blue chip stocks and bonds will usually yield a much better return on investment. Mutual funds are ideal instruments for RESPs. You can benefit from professional money management at a reasonable cost.
Your Contributions
Group RESPs have very strict contribution schedules. You need to commit to a set regular contribution amount, and stick to it. You can always increase the amount you are paying into the plan on a regular basis, but you cannot stop or decrease the amount, or you risk losing your enrollment fees. These contributions need to continue on schedule until the plan “matures”, usually when the child is 18.
Self-directed RESPs are completely flexible, and allow regular contributions as well as lump sum contributions at any time throughout the year, within the maximum limits set by the government.
Fees and Penalties
There is usually a hefty enrollment fee to start your child into Group RESP plans. It can be paid up front, or it can be taken from the first several years of your contributions, so within the first years of the plan, you may not be saving as much as you think you are. We have seen plans that charge as much as $200 per unit when you purchase in the plan. This is usually thousands of dollars that the company uses to pay their salesperson and other costs. Some plans offer the enrollment fees to be refunded when the child goes to school.
Group plans charge the initial enrollment fees stated above, plus a variety of other fees. Annual service charges depending on how frequent your contribution schedule is, and management fees on top of that.
If you choose to withdraw, or transfer to another RESP before it matures, you will likely lose the growth and the government grant money (although both of those stay within the plan for the other group members). You can take your own contributions out, usually with an additional fee for cancelling the plan.
A self-directed RESP usually does not have any fees up front, and if invested in mutual funds the management fee is paid through the other assets in the mutual fund, not just your contributions. If you withdraw funds for any reason other than the child’s school, the grant is then returned to the government, and you can choose what to do with the earnings and contributions you made (but you don’t lose it). If you were to transfer the RESP to another RESP at a different intuition, you can do this easily with little to no penalties.
Conclusion
Group RESPs are very restrictive, and hard for parents to understand. They are convenient in that when your child is only a few weeks old, a salesperson offers to come to your home and sets the plan up with little effort by the parents. The main drawbacks of these Group RESPs are the strict rules imposed on top of the existing government RESP rules as well as extremely high fees, and limited investment choices.
If you want flexibility within the plan, and you have a trusted financial advisor who looks out for the best interest of your family now and for the future, a self-directed RESP is much more beneficial for so many reasons.
We welcome questions, as always, and hope that you share this article with friends and family.