One of the best things you can do for your child's future is to open a Registered Education Savings Plan for them. A good RESP can help you build up money for your child to attend university and get an education that will benefit him or her for the rest of life. Not only do these accounts grow tax free, but you can also receive government education grants to help with the balance. With the rising cost of college, it makes sense to save as much as you can beforehand, and if the government is willing to help you along with an advantaged account, so much the better.
However, it's important to understand that not all RESPs are that great. There are some RESPs that have come under fire in recent years. Group RESPs have been collecting a bad reputation, so it makes sense to carefully think through your decision before you invest your hard-earned money.
What are Group RESPs?
With Group RESPs, you are actually pooling your resources with other subscribers to grow your money. The popular companies are USC Education Savings Plans Inc., Children’s Education Fund, Heritage Education Funds, Canadian Scholarship Trust, and Children’s Education Trust Inc.
When you invest in a group RESP, you essentially agree to put in a regular amount of money over time. Your contribution is combined with other subscribers' contributions and, if you stay in until the end, you get a portion of the funds, which usually grow due to the help of low-risk investments like GICs and government grants designed to help augment RESPs.
What's Wrong With Group RESPs?
The risk comes if you drop out early. Many of these types of RESPs have high enrolment fees. It's not uncommon to pay up to $1,200 for enrolment fees. Of course, with Group RESPs, you don't pay that all up front. Instead, it is deducted from your returns when you close the plan early. If you withdraw from the plan before it matures, you could face big penalties — and even lose your contribution money to the fees.
One of the problems with group RESPs is their marketing. The risks are glossed over, and the Ontario Securities Commission published a scathing report 10 years ago about the way many group RESPs operate. Since then, there have been improvements, but this form of Registered Education Savings Plan are still considered somewhat suspect.
Group RESPs are often targeted by critics and some of these companies have been under investigation by the Ontario Securities Commission in the past, and have even been fined by the British Columbia Securities Commission. While a group RESP might seem tempting, there are other things you can do to save for your child's college education.
Better Options for Your RESP
You can open your own RESP with a reputable bank or broker; you don't need to go through a group RESP provider. I buy ETFs with Questrade for my family RESP. I also like the TD e-Series investments in an RESP, since they come with reasonable risk. With these options you have more control over where the money is invested. Plus, the enrolment fees are much lower with these types of accounts. And you won't have to worry about the hefty penalties if you can no longer make contributions on a specific schedule.
Before you make any investment, it's important to do a little research. Look into your RESP options before committing. In many cases, you are likely to be better off if you open your own account and have control over it.