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

by Mike Holman

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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?

Other resources

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{ 27 comments… read them below or add one }

1 Traciatim

I would really recommend against Group RESP plans for the sheer fact that they are designed to trap you in place through their entrapment fees that you have to pay up front. I hesitate to call them enrollment fees because their design is to use force to keep you in their plan, not to enroll you in their plan. Our family was burnt by some bad luck and had to collapse our RESPs. With our TD E-Funds account it was as simple as a phone call and a few days later we had our money out (Anything we were entitled to anyway). With CST it was a fight over multiple months, and we lost just under 40% of what we had put in to fees.

2 Mike Holman

@Traciatim – Thanks for the comment and I’m sorry to hear you had to collapse the RESPs. Hopefully you can get one started again sometime.

3 Canadian Couch Potato

Mike: We opened a Heritage RESP for our oldest child in 1996, before the grant was introduced, and before every financial institution started offering RESPs. We still have it, but only because they would have charged us at least $1,000 to get out. But we never increased the original contribution: we just opened a seconds self-directed RESP and made subsequent contributions there.

If the group RESP ends up paying out what it says it will, then the returns over the years have actually been quite good (it will mature in May 2012, so we’re almost done). And since we have stuck it out for the whole 16 years, the fees are pretty low, too. But I would not recommend this route nowadays. The plans are just too inflexible, and there are plenty of other better options, even for conservative investors.

4 Canadian Capitalist

I agree with you that there are better alternatives to Group RESPs. I never understand why investors pay thousands of dollars in fees to just buy RESPs. For that kind of money, they can hire a planner to work on all areas of their finances.

5 Mike Holman

@CCP – It would be interesting to analyze the final payouts and see if the extra money earned from participants who forfeit their earnings makes up for the net enrolment fees.

@CC – Good point that a lot of financial advice could be financed with enrolment fees.

6 Echo

I don’t really like the sales approach, I would never sign up for a financial product at a trade-show type of event where these commissioned sales people are selling group RESP’s or Life Insurance.

7 Mike Holman

@Echo – Although, I don’t think group RESPs are a good deal, they aren’t a scam either.

However, I’ve heard so many bad stories from people who were “sold” these products and it’s clear that some of the salespeople are indeed scamsters.

The other common theme of complaints is that sometimes companies will try to take advantage of any kind of change to prevent you from withdrawing money. For example if you switch majors or drop a course. It’s just anecdotal evidence, but it is up the RESP provider as to whether you have violated their contract.

Self-directed RESPs follow the federal rules exactly, so the financial companies don’t have any discretion over withdrawals (nor do they want any).

8 Echo

@Mike
I realize group RESP’s are legitimate products. So are home alarm systems, but I just don’t agree with some of the shady sales tactics these companies use to get people to sign up for their products, not to mention the restrictions to get out of the plan.

If a perfectly reasonable alternative exists with less restrictions, why would anyone purchase these products unless they are coerced by an aggressive sales person?

9 Mike Holman

People don’t just buy group RESPs because of the salesforce (although that is an important factor) – in a lot of cases, the new parents have no idea about RESPs and don’t realize there are other options.

My solution is that the government should give a copy of my book to every new parent. I’d be willing to work out a (small) discount for them. :)

10 Echo

Sounds like a good solution Mike :)

11 Sampson

I wonder what if enrollment rates have changed ever since the banks have started offering RESPs?

Parents in the past had no other options, and I can’t believe I’m saying this, but hopefully the banks are capturing more new clients.

12 Mike Holman

@Sampson – That’s a good question.

If you’re referring to overall RESP participation, I’m sure it’s gone way up. The banks etc started offering RESP account after the government introduced the RESP grant. So the grant made the accounts more attractive, plus every institution started offering them which meant higher enrolment.

13 Canadian Couch Potato

@Sampson: The popularity of RESPs has been climbing steadily for more than a decade. Here are the numbers:
http://www.hrsdc.gc.ca/eng/learning/education_savings/publications_resources/promoter/tools/asr2009/page08.shtml

14 Alex

As a past group RESP recipient and now a new parent I wanted to give my two cents. I received both a CST and USC while going to university, and even after switching schools, and even after taking an extra year. There were some hassles about switching, and you have to submit your proof of enrolment every year. My sister had similar plans, and was able to get full payout after changing programs and degrees over a long er period of time.

As a new parent we joined CST for a couple reasons. They do make it very easy to contribute, a set it and forget it mentality. They handle paper work. Rates of return have been fairly good, and stable. Return of contributions goes directly to the parents (not the student). Almost any type of educational program, both full and part time, in Canada and major ones globally, can be funded with CST. I should note that this is the only part of my saving/investing portfolio that I am not self-directing.

15 Mike Holman

Thanks for the comment Alex.

I tend to only hear from people who have had bad experiences with group RESPs, so it’s good to know you are happy with them, even when switching programs.

Regarding a couple of your points:

you have to submit your proof of enrolment every year

This is true of all RESP plans – not just group.

Return of contributions goes directly to the parents

This is also true of all RESP plans.

16 Alkesh

I havebeen stucked with group RRSP. The salespersons has no explaned that I will get money when your kid will 19 years old because at that time education system was 6+13. After 4 years I learned that I need to change my plan as now education system is 6+12. So I contacted the plan they charged me for giving quotation also charged me a panelty to change the plan. As I changed the plan, units have been also changed but if my daughter will go to school, I will get enrollment fee only for my current units, not which I paid. Main thing I do not like is my daughther will get more money if others are not attending school. This is not good.

17 Willis

Hi There,

I just talked with a parent recently who had CST and was incredibly happy with his choice. Both of his daughters graduated university debt-free because of thus savings plan. I have a self-directed plan at CIBC and have lost $12,000 in the past few years; and now my son is ready for university and I don’t have the money.

I think the purpose of an RESP is for education and the people who have the most difficulty with them are this who think it is a rainy day fund that they can tap into anytime the beer fridge is empty.

I think if you start to write an article with a predetermined bias you might as well state that in the opening paragraph so as not to deceive people. How are the “so called deceptive” practices of scholarship plans any different than the deceptive bias of a journalist? If you are going to write an article for the unassuming public at least have the willingness to do so objectively.

18 David

@Willis.

I do believe you need CST to help you out.

You apparently did not have enough investing knowledge to handle a self-directed RESP, thus losing $12,000 and got no money for your son’s education.

There is such a thing called asset allocation. You are supposed to move funds into safer assets as your son gets closer to going to university.

Bottom line, it is your own fault and no one else’s, and I feel sorry for your son because he has a father like you, assuming of course, you are not making the story up.

19 cannon_fodder

Unfortunately, my sister entered into one of the group RESPs before talking to me. Only when she had time to due some DD was she able to understand the restrictions that handcuffed her. I do hope that the “set it and forget it” will work out well for her even though I’d be happier if she had done a couch potato type portfolio using TD eSeries funds.

Having the self-directed option has worked out quite well for me compared to these plans but I have the knowledge, time and passion to look after the contributions and investments. Not every one does.

20 Mike Holman

@CF – Hopefully, your sister won’t have any problems.

21 ss

Hi GUYS

I keep seeing everyone is against group resp’s AND IT’S ENROLLMENT FEES. Have you ever calculated 3 to 4% MER per year on your money in self directed resp’s. Let me give you an simple illustration. for $2500 a year contribution in self directed RESP for new born so the plan is for 18 years means parents contributes 2500 multiply by 18 years is equal to 45000. They are eligible for full grant of $7200 so now their fund is 45000 + 7200= 52200. Now calculate even minimum MER OF 2.49% PER YEAR ON FUNDS FOR 18 YEARS is $16969 nonrefundable and you loose compounding income on that too. While this scholarship plan people charge you $100 per unit and this case it is 46.57 units means they have charged $4657 as enrollment fees and equivalent of it they will refund. Their Admin fees is 0.55% per year for 18 years = $3385 in this case. Depository fees is $130 so total one pays in Group plan $ 4657+3385+130=8172 and out of this almost $ 4657 will be refunded. So compare where you are paying high non refundable hidden MER of$16969 and $3385+130 in group plan.

22 Kevin

Group RESP has too many traps and hassle to withdraw money. For example, near maturity, you have to REMEMBER to switch to single plan if your child is not going to a FOUR year program. Otherwise, you will be lock in the group plan WITHOUT A SECOND CHANCE to switch. If your child happens to drop out from school, all GRANTS and INTERESTS go down the drain! Also, to get your further Education Assistance Payment, you need to send them paperwork every year, and you MUST REMEMBER not to MISS DEADLINE.

There are advantages and disadvantages to group plan, but I think with so much hassle and risk, you really need to think twice before signing up for this type of RESP.

23 stacey

I always find it interesting reading these comment threads on Group vs. Bank RESPs. The truth is most people lack the time and knowledge to be able to self-direct their investments. For those of us who want to be able to make regular contributions without self-directing, a group plan is a great choice. @ss, I don’t know that a 3-4% MER fee is a reasonable assumption, but even at RBC’s current rate of 1.84% you still end up paying twice the fees in the long-run for a 17 year investment than you would with a group plan. Why is this never discussed in the Group Plan articles? Consumers are often under the FALSE pretense that bank RESPs are “free”. Ridiculous. Any bank RESP has high fees hidden in the form of an MER, and you are paying to have your money at risk. Even a low risk mutual fund is still riskier than a bond. Why not look at RBC’s Education plans performance in 2008. How would you like to try and send your child to school in that time period? I’m sure for those parents a Group Plan wouldn’t have looked so bad. It would be refreshing to see an article showing both sides. Bank RESPs and Group Plans both have advantages and disadvantages. Its about finding a plan that works for your family.

24 Pierre

These Group RESPs should be banned from being sold, I have a friend that actually bought an RESP and her child decided to change what they are taking in university Mid year and they had to forfeit all their Interest and all they got back was the principal,
they did call the Ombudsman to complain and guess what? they are not regulated by any government body that protects the consumers

25 Krista

I have a plan for all three of my children through CST; eight, six and two. So at this point for me I think losing $800 per child isn’t worth moving my investment for a larger return. It is unfortunate about the extra rules that wouldn’t be there if I moved them to self directed, but it would be unwise to move them now I believe. I was told the plans are transferable between siblings. And also that a qualifying program doesn’t necessarily mean four years. Almost all community college programs qualify as well. With the attrition pot they have been 5-6% returns pretty consistently. I do like the minimal risk on principal.

26 Simonne

I really appreciate all this info. My son is almost 8 and I started a group RESP when he was born. I will be keeping a close eye on it and rereading ALL the fine print. His father now wants to start a second RESP that is self directed and I think that having options will benefit my son when he is ready for University.

27 Barbara

Some people have been asking, so here is my experience…
I have had RESPs with both CST, a group plan, and a self-directed plan at RBC. My boys were born in 1991 & 1993 and graduated high school in 2009 & 2011.
We signed up shortly after they were each born with CST, group plans seemed our only option at the time. I will discuss the details later.
Later we purchased GIC’s for RESPs with RBC, so had no fees to pay, hidden or otherwise. I was relieved when the stock market crashed in 2008/09 that we had chosen a conservative route for investment. Parents with grads in 2009 had lost much of the value in their stock based RESPs. I was impressed with our contact at the bank when we started to withdraw funds; they paid out the CESG grant money first, so we got the full benefit of it. All we needed to provide the bank was a proof of registration letter downloaded from the schools website. It has been simple to take funds as we needed whenever we chose. There was no penalty for early withdrawals of the GICs, although we never took advantage for that. The RBC RESPs have worked well for both our boys, even though they are on different paths in pursuing their educations. Our last GIC comes due this fall, just in time for winter tuition.
CST only offered “Founders” plans when we signed up, and thank goodness these are no longer sold. That plan is limited to university and college programs only. It pays back your contributions upon proof of registration in first year, and then makes 3 more payments with proof of registration for the next year and proof of completion of the previous year. This has worked well for our second son; he has taken a full course load at university and will graduate after 4 years in 2015. He has received all 3 payments now, each year after the first year, of 1/3 of his CESG money, 1/3 of his income on his grants, plus the EAP (education assistance payment) which is his portion of the “investment pie” for his cohort. Note: There has been no refund of enrollment fees.
However for our first son, who completed his first year of university, and has since dabbled in work, travel, and only part-time studies, and is now pursuing a Trade, we have only been able to take advantage of one of the 3 remaining payments for his “Founders” plan. He would need to complete his second full year of studies at university, provide the proof, and then register for the same or another full-time program of 6 months of more for any further payouts. If he were to take a second Trades course of 6 months, he might be able to collect the second of 3 payments but time is running out for that, and he would prefer to finish all of the work to complete his apprenticeship prior to starting another Trade.
What I am most disturbed about is the CESG money we earned by making contributions to the CST “Founders” plan, that they are not prepared to release, due to the stringent rules for this particular plan, even though he has been registered in eligible courses for their other plans. They say they will return the unused grant money to the government after he turns 24. And I assume keep all the money they have made on holding that money for themselves. Not sure how I could pursue this issue if I wanted to.
“Luckily” for us, our CST salesperson approached us after many years of monthly contributions, and suggested we stop paying into the “Founders” plan (apparently we had contributed enough at that point) and start a new “Group Savings Plan” for each of the boys. These are the plans they continue to sell and they offer much more flexibility for education options, and they payout 4, not 3, times, so you receive money the first year, as well as get your returned contributions. They also return your enrollment fees divided up in your 4 payments. Our oldest son has just applied for his final payment from this plan for the Trades program he is enrolled in this fall for 23 weeks full time. In fact he will be receiving 2 payments in 2014, for 2 different programs he has been enrolled in, one in January, one in September.
Over the years our CST Rep has been in pretty regular contact with us, always looking to add to what we had, but we never took them up on it, we diversified to the RBC instead. We were sometimes provided with CSTs projected earnings, which it turns out were overstated, and I believe we missed the ‘glory’ days with CST. I do need to mention that CST has made some administration errors once the payouts began. I discovered I was short paid on the refund of my contributions for my first son, and was sent more money once I brought the details to their attention. For my second son, I was only refunded my contributions for 2 of his 3 plans, his first year. I missed the error due to being distracted by a family illness, and when, the next year, they discovered their error and forwarded my money, I had to pursue them to get all the interest that had accumulated in the meantime on the late refund of “my” contributions, I had a little fight on my hands not to have it paid out over time. I did get the additional $500. Always a good idea to keep an eye on your money!
In closing, at CST it is a slow start (with enrollment fees paid up front), but the low monthly contributions were manageable when our family was young. There is more paperwork with CST to complete for each payment, than for the bank. In both cases, CST & RBC, the saving worked well for us by the time the boys graduated high school. If they had both pursued a university degree it would have worked out better for us, but thanks to the CST Rep making our change to contributing to their Group plan, when it first became available, we did not take a big as hit as could have been. What a gift we have been able to give the boys, a debt free education!

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