Seven Things to Remember When Considering a Group RESP
A Registered Education Savings Plan (RESP) is one of many ways to save for your child’s education. When choosing an RESP it is important to shop around and to understand the range of different RESP types available in Canada. RESP types include individual plans, family and group plans. Banks, credit unions, investment firms and scholarship plan dealers provide RESP plans and investment products. However, group plans are only offered by scholarship plan dealers and they have very different restrictions and fees than other RESPs. If you are considering a group RESP there are a few things you should keep in mind.
1. The difference between a self-directed and group RESP. A self-directed RESP, which can be an individual or family plan, lets you decide how much money to save, when to save, and how to invest. The funds contributed to a self-directed RESP can be invested in guaranteed investment certificates (GICs), mutual funds, and stocks.
A group RESP – also called pooled RESP or a Scholarship Trust Plan (STP) – pools together all plan members’ funds including contributions and any government grants. The plan dealer makes the investment choices, and there are contribution schedules and unique fee requirements that can be substantial.
2. The group RESP fee structure. The fee structure for group RESPs from scholarship plan dealers is different than most plans set-up by banks, credit unions, and investment firms. Group RESPs usually have enrolment fees (also known as sales charges) that reduce the earning power of your investment in the first few years. That's because these fees may not be refundable and are usually taken from your early contributions. Fees are outlined on the account-opening documents, and are based on how much you will contribute over the lifetime of the plan. Be sure you understand how these fees work before you invest.
3. The contribution schedule and its requirements. With a group RESP, you can contribute a single lump sum or you can make regular contributions over a predetermined length of time. If you choose to make regular contributions, make sure you can afford them. Once you have selected your contribution schedule, you are required to stick to it. If you miss payments, your participation in the plan may be in danger. You may be allowed to reduce your payments in the future, but there could be costs if you do.
If you don't think you'll be able to contribute regularly for the long term, consider a self-directed RESP, which does not have a required contribution schedule.
4. Payout restrictions. With a group RESP, the payout to beneficiaries depends on the investment returns and the number of beneficiaries in the plan that qualify for post-secondary education in a given year. Only beneficiaries who are enrolled in a qualifying program receive a share of the group plan’s income pool. Beneficiaries who are not enrolled in a qualifying program will not share in these investment returns. Any government grants you receive are kept separate for each beneficiary. If your child does not pursue a post-secondary education, their grants are returned to the government.
5. Leaving the group RESP early. If you leave your group RESP before your child begins post-secondary school, you don't get refunded for the fees you've already paid. This includes the enrolment fee, which could be substantial, and there may also be additional tax implications. If you move your RESP from the SPD, you usually lose the investment income earned on your contributions. Make sure you understand what could happen if you need to leave the group RESP early.
6. Education requirements. All RESPs have criteria determining when money can be withdrawn and what kind of post-secondary education qualifies for Education Assistance Payments. While most group RESPs follow the Income Tax Act (Canada) qualification requirements, some group RESPs may have additional rules about how and when payouts are made. For example, to get the full benefit of your plan, your child may be required to enroll in a qualifying program full-time for four years. If your child is not enrolled for four years, they may not receive the full benefit of a group RESP.
7. You have 60 days to change your mind. If you join a plan from a scholarship plan dealer but change your mind, you have the right to receive all or nearly all your money back within 60 days. Make sure you carefully read all documents provided before that period ends. If you change your mind after the 60 days, you will have to pay cancellation fees.
Additional Resources: This article covers the seven issues regarding group RESPs that OBSI sees most often. Your bank, credit union, investment firm, or scholarship plan dealer should be able to answer any questions you may have.
Regulators have developed online resources to help inform you of what you need to know before choosing a RESP:
Ontario Securities Commission: GetSmarterAboutMoney.ca
Financial Consumer Agency of Canada: Registered Education Savings Plans (RESPs)
Smart Saver: Understanding Group Plans