Friday, 9 September 2016

Are Group RESP's a Good Thing?

I've talked on the blog about RESP's before (you can find that here) but one thing I haven't discussed is whether or not you should do your RESP saving through one of those Group RESP programs that are floating around. Short answer...not so much, but let's talk about why. 

The basic premise (aka the sales pitch) actually sounds pretty good. You invest your money with a whole bunch of other parents who have children the same age and you'll get a share of when your kid ends up in post secondary. Your perk will come from any kids who don't go on to university and forfeit their share of the profits for everyone else to split. Hopefully that's not your kid ;) Those extra shares mean a higher overall return for the kids who do go to school while keeping investment risk low? Sounds too good to be true...and it certainly can be. There are a couple of perks for pooled plans that we should talk about. First off, you wont have to worry about choosing investments if that's not your thing as all the investment decisions will be made for you by the administrator. Second, once you sign up you are committed to making regular contributions to the plan. If you miss a deposit or want to stop altogether you can face pretty steep penalties and will often lose any money your contributions have earned. Basically, you'll get back the money you put in (minus fees and penalties) and have to start from scratch. 

Next up, the not so great. There are a few cons you should be aware of before signing up. 
  • Higher fees than a family or individual plan set-up at your regular financial institution. Most group programs function through direct sales so to cover the commission costs you will be paying high start-up fees. Avoiding fees altogether is nearly important but you'll save yourself money by going it one your own. 
  • Annual investment returns can be quite low because group plans are tied to fixed income products; higher security but lower returns. Your extra return really banks on a portion of the beneficiaries in your group not going to school. 
  • Additional restrictions on contributions and withdrawals. Most plans will lock you in to a minimum monthly or yearly contribution and when it comes to withdrawing the funds for your child's education you can face even tougher rules. Regular plans allow to pull out funds for part time or full time schooling but a group plan may limit withdrawals to only full time students. Withdrawals can (with some plans) even be declined if your child doesn't go to University right after high school. What the what? You NEED to read the fine print before signing up for anything. 

Although RESP group plans can be quick and easy to set-up and will force you into saving the lack of flexibility and high fees outweigh any pros and you need to make sure you are aware of any restrictions before signing up for anything. 


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