Group/Pooled/Scholarship RESP Plans – How Are They Different?

by Mike Holman

Group RESPs are RESP accounts where the earnings and grants of all the participants are grouped together. The plans are set up by birth year, so if your child was born in 2006, they will be grouped together in a plan with other kids who were also born in 2006.  One third of all RESP assets are with group plans.

It should be noted that most of the companies that offer group RESPs also offer non-group RESPs as well.  This article is only going to focus on the group RESP plans and differences between these plans and self-directed RESP plans which are the type you would have if you set up an RESP at a bank or through a financial advisor.

Here is a list of some of the companies offering group plans:

  • Canadian Scholarship Trust (CST)
  • Heritage Education Funds (HEF)
  • USC Education Savings Plans Inc (USC)
  • Children’s Education Fund (CEF)
  • Children’s Education Trust Inc. (CEFI)

Differences between group RESPs and regular self-directed RESPs

**Note – the rules and differences mentioned here are somewhat generalized.  Each company has it’s own rules so it’s important to read the contract before signing.***

Group RESPs have two main differences compared to self-directed RESP accounts.

  1. The earnings and grants of group participants are shared.  The kids that go to school will be able to withdraw their own earnings and grants as well as a share of the earnings and grants of the kids that don’t go to school.
  2. Group plans have more restrictive investment choices, contribution and withdrawal rules.

What do they invest in?

Group plans invest in fixed income investments – namely bonds.  The idea is that they go for a lower rate of return with increased safety.  Investing in a group RESP is similar to investing in a bond mutual fund.

Self-directed plans have a more investment choices and can also invest in equities.  It’s important to note that a self-directed RESP can be invested in a safe bond fund or even GICs if 100% safety of the principal is desired.  See How to set up the Safest, Simplest and Easiest RESP account.

Enrolment Fees

Group plans are marketed by commissioned salespeople. There is a steep cost to joining a group plan which can be as high as the first 2.5 years of your contributions.  You don’t see this amount coming out of your pocket, since it is deducted from your contributions for the first year or two.  There are annual account charges as well as management fees applied.

The initial fee is usually refundable at the discretion of the RESP provider.  This is typically paid back once the child starts going to post-secondary education.  The problem of course is inflation and lack of earnings on the enrolment fee.  If you pay $2,000 in fees and then get back $2,000 18 years later – if inflation is 3% – in today’s dollars you are actually only getting $1,156 dollars returned.  That means the net fee (if the child goes to school) is $844.  Plus, that money is not earning you anything since it’s not invested in your account. Another issue is that if you will lose some or all of the enrolment fee if you don’t keep up with your contribution commitment.

Self-directed RESP accounts have varying fees and costs depending on the type of account you choose and the investment vehicles you choose.

Contribution schedules

Group RESPs have strict contribution schedules. If you commit to contributing $50 per month, you had better keep paying $50 per month or you might forfeit your enrolment fee.

Self-directed RESPs have no contribution commitments.

Eligibility for post-secondary

Generally, group RESPs can only be used for full-time study.

Self-directed RESPs can be used for part time study as well as full time.

Withdrawal schedules

Group plans have restricted withdrawal windows so if your child changes their plans, it could affect the amount of money they can withdraw all the money out of their RESP.

Self-directed RESPs have very little withdrawal restrictions – namely the $5,000 limit on non-contribution withdrawals in the first 13 weeks.

RESP grants

Both group and self-directed RESPs are eligible for the same government RESP grants.  There are no differences here.

Shared earnings

Group RESP plans disperse the earnings of participants who don’t use their money to other kids in the same group who do go to school, thereby boosting their return.

Self-directed RESPs have no such sharing.

Withdrawal penalties

Typically, if a kid quits a group plan or doesn’t use the money when they are supposed to – only contributions will be returned minus enrolment fees.

In a self-directed plan, if certain conditions are met (student is 21+ and plan has been open for 10+ years), contributions as well as earnings (minus a heavy penalty) are returned.

Sharing RESP money between siblings

Group plans typically don’t allow sharing of RESP money between siblings.

Self-directed plans do allow sharing.

Conclusion

Group RESPs are a very convenient way to set up an RESP since the salesperson will visit your home to help set up the account and you don’t have to worry about making any investment choices. The main drawbacks of group RESPs are the extra rules imposed on top of the existing federal RESP rules as well as high fees. These extra rules and restrictions mean that the odds of your child being able to use all their RESP money are less than if you set up a self-directed RESP account.

If you can keep up the contribution commitment and your child goes to school when they are supposed to – you’ll probably be satisfied with a group RESP.  However, if there are any problems such as changing the contribution amount or schedule, or if your child doesn’t attend school right away after high school – you might be very unhappy with the group RESP.

I don’t recommend group RESPs because there isn’t really any reason to take on the risk from extra restrictions imposed by these plans.

Do you have any experience with group RESPs?

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