Group RESPs: reading the fine print

Group RESPs charge heavy penalties for early withdrawal — something that has led to a push for clearer disclosure of the plans' risks, costs and benefits.

Popular plans aren't for everyone

Canadians have opened more than a million group Registered Education Savings Plans for their kids. The industry's marketing efforts often begin right at birth. ((iStock))
Lauren Cosford got a nasty surprise last January when she opened her first annual statement from Children's Education Fund, an organization that markets group RESPs  — a type of Registered Educations Savings Plan. 

Like many Canadians, the Winnipeg single mom had heard that RESPs were a good way of helping to pay for those big tuition bills down the line. Contributions build tax-free and along with federal grants that can add thousands of dollars, RESPs can produce quite a nest egg over time.

Cosford had been contributing $65 a month to build an education fund for her son — a major investment for someone who at the time was working at two low-paying, part-time jobs.

But when she looked at the statement, it said the principal in her account was just $66, even though she'd contributed $568 to the plan.

 Types of RESPs:
 Individual plans
 Family plans
 Group plans
 Look here for more information on RESPs, how they work, and the different types of plans

She wondered what had happened to all her money and phoned the agent who sold her the plan. She said he told her not to worry, that it would all work out in the end.

Costly withdrawal

Cosford wasn't convinced and eventually wanted out. That's when she found out that she would be hit by a host of charges and early withdrawal fees.

"I did not realize that most of the money was going to go to the company and very little coming to my son for his savings," she said.

Cosford now calculates that by the time she withdraws from the plan, she'll get back $300 at most. The rest of her contributions — more than $700 — would stay with the company to pay for front-loaded enrolment fees.

If she'd stayed in the plan until maturity, she could have had that money returned to her. But as with many cellphone contracts, early withdrawals from group RESPs carry big penalties.

Lack of understanding  

It's a complaint financial counsellor Jen Bogoch has heard many times. Bogoch is a manager at SEED (Supporting Employment and Economic Development) — a Winnipeg organization that helps low-income families with financial problems.

'Cooling off' period
Anyone can withdraw from a group RESP contract and get all of their contributions back in the first 60 days after receiving a prospectus.

Bogoch says at least three dozen of her clients have complained about group RESPs in the last two years.

"What I hear from people often is that they just don't understand how the plan works and if they had the knowledge at the beginning … they never would have signed up," she said.

"They're very, very difficult to understand. The rules and fine print are really beyond an average person's understanding and whether it's unintentional or not, people have a misunderstanding of what it is they're signing up for."

Long-term contract

What they're signing up for is in reality an exceptionally long-term contract.

Group RESPs — also called group scholarship trusts — aren't like the RESPs that banks, mutual fund companies or credit unions offer. With a group RESP, you aren't just opening an education savings plan — you're also agreeing to a specific contribution schedule that lasts up to 18 years.

 By the numbers
 Number of group RESPs under administration: 1.35 million (Dec. 2007)
 Assets under management: $7.6 billion (Dec. 2008)
 Percentage of RESP assets held in group plans: 33.6%
 Sources: RESPDAC, Canadian Securities Administrators

Those contributions, which are conservatively invested in GICs and other low-risk products, are pooled with the contributions of other subscribers with children of the same age. They grow tax-free over time, thanks to steady infusions of subscriber money, investment returns and federal grants. Eventually, that pool of funds will be divided among those still in the plan at maturity to provide annual payments for up to four years of post-secondary study.

That kind of forced savings schedule is part of what has made group RESPs successful. A lot of people like the discipline the plans require.

But what catches some subscribers off guard is that closing the plan in the first few years is exceptionally costly, as early contributions go toward enrolment fees, which average $800 to $1,200 for typical plans.

Early dropouts pay

Those enrolment fees are refunded in whole or in part at the plan's maturity. But for those who withdraw early or have their plans closed because they can't keep up the monthly payments, most of their early contribution money is gone forever.

"Enrolment fees make the cost of failure in the early years of a plan very high in relation to contributions, especially in the case of RESPs with a long term to maturity," warned a 2008 study of RESPs done for Human Resources and Social Development Canada. 

"There is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation," it said.

Over the years, various regulatory bodies have worked with the group plan providers to improve disclosure. A critical 2004 report by the Ontario Securities Commission highlighted numerous examples of misrepresentation by salespeople, high-pressure sales tactics, and "creative calculations" in some of the marketing material.

Even the critics acknowledge that some improvements have been made since then and complaints to regulators have dropped in recent years. But many financial counsellors say they're still getting earfuls about the plans.

"Salespeople aren't always upfront about all the risks," says Adam Fair of the Canadian Centre for Financial Literacy. "Lots of people are still hearing about the benefits [of group plans], but not the drawbacks."

He doesn't refer clients to group RESPs. Fair quickly adds that he doesn't think they're a scam — far from it. He thinks they work well for many people, including himself. His parents set up one for him and it allowed him to pursue post-secondary studies. But he thinks the products need to be changed to make them more suitable for low-income people.  

Rules differ

Critics say insufficient disclosure isn't the only problem.

The degree of flexibility offered by group RESPs is different from the individual or financial plans offered by banks and credit unions.

For instance, group RESPs tend to be more restrictive in what kinds of post-secondary education they will fund. For instance, federal RESP rules say part-time studies qualify for payments from an RESP. But group RESP plans often give payments only for full-time attendance. (Even among the various group RESPs, the rules vary. The federal study compared the various group plans' features and fees here.) 

Critics also complain that group RESPs are often aggressively marketed to low-income and immigrant communities.

RESPs critical  

That's a big problem, according to May Wong of the Omega Foundation, which works to increase knowledge of RESPs among low-income families. She says it's critical to get more people to start saving for their kids' future.

"Children who have savings for their education — from any source and any amount — have a 50 per cent higher likelihood of pursuing post-secondary [education] than children who have no savings," she says. 

Federal figures show that subscribers of group RESPs are much more likely to be from lower-income families than those who have individual or family RESPs.

 RESP checklist
 1. Have you compared the different types of RESPs?
 2. What fees are you expected to pay, and when?
 3. Do you have a choice about when and how much you contribute?
 4. What kinds of post-secondary programs qualify?
 5. When and how will you receive payments from the plan?

 6. What happens if the student does not go on to post-secondary education, or does not complete their program?

 7. What happens if you sign up for a plan, but change your mind?
 Source: Ontario Securities Commission

"The people who are using these plans often have the least understanding of what other options might be available," says SEED's Jennifer Bogoch. Those options of course include the individual and family plans — the only kinds of RESPs offered by banks and credit unions.

Banks charge no enrolment fees for their plans and there's no requirement to contribute on any set schedule. But it will come as no surprise that new parents won't hear about the competition from salespeople from the group RESP providers. And since banks don't actively promote their own RESPs, people may only hear about the group plans. 

That's especially true because the group providers do a much more active job of marketing. It's not uncommon for new parents to be contacted by group RESP providers just days after bringing home their newborns.  

Full disclosure

That 2008 federal study found the financial disclosure given to group plan subscribers when they sign up is "less effective than it might be" and said the prospectus for each of the group plans (the document that details the various fees, risks, and rules) is "lengthy and difficult" — frequently running to more than 100 pages in length.

The providers of group plans say it is securities legislation, not their own wording, that forces "much of the lack of clarity." 

Currently, regulators are thrashing out disclosure improvements with the main providers of group RESPs.

"We know that many investors have trouble understanding the unique features and complexity of scholarship plans," said Jean St-Gelais, CEO of the Canadian Securities Administrators, the umbrella group for the country's various securities commissions.

The CSA modernization effort is aimed at creating a summary document that will be no more than three pages long, highlighting the risks, benefits and costs of investing in group RESPs. 

The group plan providers say they welcome the updating effort and are working on better disclosure. And they agree that their plans aren't for everyone.

 Five main providers of group RESPs:
 Canadian Scholarship Trust Foundation
 Universitas Foundation of Canada
 Heritage Educational Foundation
 USC Education Savings Plans Inc.
 Children's Educational Foundation of Canada

"This is not a product for someone [who's] going to go in and out of the product over time," says Peter Lewis, chair of the RESP Dealers Association, which represents four of the biggest suppliers of group plans. "It's ideal for families who are prepared to commit to making regular contributions over time."

Is there any confusion out there? "Yes, there are individuals who do not fully understand that," Lewis acknowledges. 

The industry says they train their salespeople not to allow subscribers to commit to contribution levels they're unlikely to be able to maintain.

They also bristle at suggestions that their products are "riskier" than mutual funds — pointing out that many stock-based mutual funds that people held in their bank RESPs lost half their value during the 2008 market meltdown. No group RESP has ever had losses like that.     

The industry also notes that mutual funds — especially stock-based equity funds — have annual management fees that often top two per cent. To say bank-sponsored equity funds have no fees is not accurate, they say.

Success stories

Notwithstanding the unhappiness in some quarters, it's not hard to find people who are more than happy with their decision to opt for group plans. After all, there are more than a million group RESP accounts in Canada and comparatively few official complaints (only 12 of 599 files opened by the Ombudsman for Banking Services and Investments in 2009 targeted group RESP providers).  

Tracey Robb, a mother of two girls in Cambridge, Ont., is one of those firmly in the pro-group-RESP camp.

"There's no high-risk, high-volatility type [of] investments in the plan," she says. "It's bonds and T-bills and all the type of fixed income investments where things are safer.

"I sleep very well knowing that when the time comes, the girls' education … will be well on its way to being paid for."

Unhappy people like Lauren Cosford — the single mom at the start of this story — are certainly the exception. But they are a big PR problem for an otherwise successful industry. When low-income families lose money they'd put aside for their children's future because they didn't understand a 100-page financial document, or couldn't keep up their payments, or didn't understand their options to convert to individual or family plans, the public notices, as do the regulators. 

So make no mistake. Change is coming in RESP-land, even as the specifics remain a work in progress.

Regardless of what gets hammered out, experts say anyone looking to open an RESP should shop around for the education savings vehicle that best meets their personal circumstances — and their children's needs. 

With files from the CBC's Havard Gould, Sophia Harris, and Karin Marley