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 born in the same year, and you’ll get a share of the investment when your kid ends up in post-secondary. The perk comes from any kids who don’t go on to university and therefore 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 beneficiaries who do go to school but without any added risk. 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 won’t have to worry about choosing investments if that’s not your thing as all the investment decisions will be made for you by the plan 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 growth your contributions have earned. Why is that a good thing? Well, it will make you think long and hard about missing any contributions. Basically, you’ll get back the money back that 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 impossible, but you’ll save yourself money by going it one your own.
- Annual investment returns can be quite small because group plans are tied to fixed income products; higher security but lower yields. There are restrictions in place as to what the administrator can and cannot buy, and this usually limits them to conservative, more secure investment options. Your additional return banks on a portion of the beneficiaries in your group not going to school.
- Additional restrictions on contributions and withdrawals may also exist. Most plans will lock you a set deposit amount that can either be made monthly or annually. There’s no flexibility if you lose your job or need to redirect savings temporarily. And when your child does start attending post-secondary schooling, the withdrawal rules can be equally as inflexible. Regular plans allow you to pull out funds for part-time or full-time students and you can even pull out more money than you might need. Withdrawals from group plans are often limited to only full-time students, and there are more limits on how much money can be taken out at one time. 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. Before signing up for one, you need to make sure you know all the restrictions and limitations before you start making deposits. You will likely figure out that you are better off just setting up and plain old individual or family RESP plan to give yourself more flexibility and control.