Question. I have an RESP with another company. We signed up and opened the account when my daughter was born. Last week, I contacted the company to initiate a transfer, and I was told that I would be charged over $4,000 in fees! I feel like I’ve been totally misled and I’m furious. Why is this happening? Are all RESPs like this?
Answer. First and foremost, all RESPs are not like this, and ModernAdvisor does not charge those fees. The root issue here is the type of RESP you have – a group RESP, also known as a group scholarship trust. Before we dig into specifics, let’s have a quick overview of the different types of RESP plans.
Types of RESP Plans
RESPs are quite complex, and with many different features, benefits, and rules. However, not all rules are universal, as many rules are specific to the type of RESP.
There are 4 different types of RESP plans:
- Individual (non-family) plan – there is a single beneficiary (child) in this type of plan. The person who opens the plan (the subscriber) does not have to be related to beneficiary.
- Family plan – there can be multiple beneficiaries (children) in a family plan. Each beneficiary must be related, by blood or adoption, to the person who opens the plan (the subscriber).
- Group plan – group plans are significantly different from both individual and family plans. They involve specific contribution schedules, and tend to be much more restrictive, with higher fees and a plethora of rules.
- Specified plan – this is essentially a special type of individual (non-family) RESP where the beneficiary is disabled and is eligible to receive the disability tax credit (DTC).
Given that the issue of excessive fees and penalties is unique to group RESPs, let’s take a closer look at these group plans.
Group RESP Plan
Also known as a group scholarship trust, a group RESP is significantly different than other RESP plans. Note that a group RESP is not just an education savings account but is also a contractual agreement requiring a specific contribution schedule. One key risk in this structure is that, if for any reason (such as financial difficulty or otherwise) the contractually agreed payment schedule is not met, a hefty penalty can be applied. Worse yet, if funds are required earlier than expected, exorbitant fees are often levied. In fact, fees are often so excessive that years’ worth of contributions may be forfeited.
In 2008, Human Resources and Social Development Canada (HRSDC) commissioned a study of group RESP plans. The study warned that “Enrolment fees make the cost of failure in the early years of a plan very high in relation to contributions.”
Not only are fees and penalties excessive, but group RESPs are also much more restrictive in terms of the types of post-secondary schools they will fund. For example, although the Government of Canada official RESP rules indicate part-time studies are eligible for RESP funding, most group RESP providers will not allow the funds to be used for part-time studies and will only provide funding for full-time students.
Lack of Control
With individual or family RESPs, the account operates much the same as any other account – you can contribute how much you want, and you can make contributions whenever you want. Furthermore, you can generally invest the money in the account however you want, typically in line with factors such as your own risk tolerance, and the timeframe for when your child is planning to attend school.
Not so for group RESPs. With a group RESP, you have no control over the investments whatsoever. Instead, savings from many different investors are pooled together, and your child shares in the pooled savings of investors with children the same age.
How much does your child receive? That depends on how much money is in the group account, the performance of the fund, and the number of children in the group who will be starting post-secondary education.
The CBC recently published an article highlighting a case of excessive fees in a group RESP plan. According to the article, the mother of two wanted to transfer approximately $3,000 from her group RESP and was told she would be charged around $2,000 in fees for the transaction.
In some cases, the penalty is even higher, up to 100%. In other words, you can lose everything you’ve ever paid into the plan.
Last year, the Toronto Star conducted an investigation into one group RESP provider in particular – Heritage Education Funds. The article, titled They thought they were saving for their kids’ education but were shocked to learn their money was gone, uncovered almost 500 complaints from customers who lost all or some of their contributions for violating contribution rules.
As reported by the Star, one client had contributed $8,300 to her child’s RESP, but was then told that 100% of her contributions were gone, because she had violated a contribution rule which she wasn’t even aware of.
As mentioned in the article, another client had contributed almost $26,000 to their child’s RESP. Likewise, they were told that 100% of their contribution was gone, because they had violated plan contribution rules.
Astonishingly, in just a short timeframe from 2014 – 2018, there had been close to 500 complaints lodged against Heritage Education Funds from clients who had lost some, or all, of their contributions.
Case in Point
A client came to us recently, asking for guidance with his RESP plan, which was held at another institution. For confidentiality reasons, we will simply assume the name the client is Joe.
Joe had no idea what type of plan he had. Unfortunately, as we soon discovered, Joe had a RESP group plan.
For his son, Joe had paid a total of $18,000 into the plan. However, Joe was charged an “Enrollment sales charge” of $4,800. In addition, he was charged several other fees and premiums which totalled over $1,000.
In the end, despite paying a total of $18,000, into the plan over the last few years, Joe had less than $12,000. The rest, over $6,000, was taken in various fees and charges.
You might think, “Who would ever sign up for that? And why would anyone agree to those terms?”
The reality is, if the terms and conditions were properly and clearly explained, virtually no one would. But while group RESPs are still legal, they are often sold through very dishonest and misleading sales practices. The document outlining the various fees, risks, and rules, is known as the plan prospectus. As the HRSDC study found, such documents are extremely “lengthy and difficult,” often more than 100 pages in length.
In this article, titled Group RESPs: reading the fine print, the CBC highlights many of the dangers of group RESP plans, including:
- costly enrollment fees;
- difficult to understand;
- complex contract;
- very long-term commitment;
- stiff penalties for early withdrawals;
- complicated rules and conditions;
- poor disclosure.
Before opening an RESP, or any type of investment account for that matter, it’s important to read the fine print, and ask questions. For RESP accounts in particular, the Ontario Securities Commission (OSC) provides this useful checklist of questions:
- Have you compared the different types of RESPs?
- What fees are you expected to pay, and when?
- Do you have a choice about when and how much you contribute?
- What kinds of post-secondary programs qualify?
- When and how will you receive payments from the plan?
- What happens if the student does not go on to post-secondary education, or does not complete their program?
- What happens if you sign up for a plan, but change your mind?
Keep in mind that, while RESPs are still the best way to save for a child’s education, not all plans are equal. In particular, group plans are not advisable, and most investors will be far better served with an individual or family plan.
At ModernAdvisor, we have no commissions, no hidden fees, and no conflicts of interest. Indeed, transparency and simplicity are at the core of our client service philosophy. If you’re interested in learning more about our RESP plans, or would like to have a discussion with a Portfolio Manager or Certified Financial Planner, just contact us.