Remember a few weeks ago when I briefly touched on Group RESPs and mentioned how they can be pretty controversial? If you have no clue what I’m talking about, just CLICK HERE for a quick refresher.

Well, today we’re diving into exactly why that is.

Group RESPs, also known as scholarship trust plans, might seem like a great way to save for your child’s education at first glance. But once you dig into the details, the story gets a bit more complicated. From strict contribution schedules to hefty fees, and the risk of losing your money if things don’t go according to plan, there’s a lot to consider.

In this article, we’re breaking down everything you need to know about Group RESPs—the good, the bad, and whether they might be right for your family.

What is a Group RESP? 

A Group RESP, also known as a scholarship trust plan, is a type of education savings plan where contributions from multiple families are pooled together into one big fund. These plans are usually managed by scholarship plan dealers and are often promoted as a disciplined way to save for your child’s education. 

How Group RESPs Work 

When a family enrolls in a Group RESP they commit to making regular contributions according to a predetermined schedule. These contributions are used to purchase plan “units”, which represent the family’s share of the pooled funds. The contributions from all subscribers are combined into this single pool, which is then invested by the scholarship plan dealer.  Investment earnings get added back into the pool, and the growth is shared among all the participants based on the number of units they own.  

When the beneficiaries reach the age to attend post-secondary education, their contract matures and funds are ready to be disbursed. In a Group RESP, the amount each beneficiary receives can depend on several factors, including the performance of the pooled investments and the number of plan members whose beneficiaries did not pursue post-secondary education.  

Sounds like a fine enough system, until you read the fine print. 

For example, If you miss payments to a Group RESP, you may incur late fees and penalties, and your plan’s units could be reduced, decreasing its overall value. Repeated missed payments can lead to plan cancellation, resulting in the loss of government grants and forfeiture of contributions. These forfeited amounts are typically redistributed among the remaining plan members. 

Also, if a subscriber’s beneficiary does not go on to pursue post-secondary education, their contributions (after fees) and any investment earnings are often forfeited. These forfeited amounts are also redistributed among the remaining plan members. This redistribution can potentially increase the amount received by beneficiaries whose families remain in the plan and continue their education. 

Ruth Saldanha, editorial manager at Morningstar.ca said it well in her 2021 article: “If you participate as planned, and see the plan through to the end, and then your child pursues a post-secondary education as expected…and all this happens in the time-frame you expect when you initially invest in the plan around a decade before all of this comes to pass, then sure. They work well.” 

But Ruth goes on to say that this is exactly the problem, and she’s right. Group RESPs are highly inflexible and if everything doesn’t go according to plan, you could be out a lot of money.

I don’t know about you but when I look at my own life so far almost nothing has gone according to plan (and it’s been wonderful!).

Fees 

The other thing that differentiates Group RESPs from self-directed plans is their fee structure. High fees, including enrollment fees or sales charges are often deducted upfront. This means that a significant portion of your initial contributions goes towards paying these fees before any real value is accumulated in the plan. For instance, if you contribute $2,500 initially, a large percentage could be taken as fees, leaving only a small portion actually invested in units.  

HERE is an example of how sales charges typically work (taken from SEED Winnipeg).

You purchase one unit in the group RESP. The sales charge for this unit is $200.00. Until half ($100.00) of that $200.00 is paid off, all of your contributions will go toward this and will not be invested. Once you have paid off half of the sales charge, the balance of the sales charge will be paid by taking half of each of your ongoing contributions. This will continue until the sales charge is fully paid off. Depending on your payment schedule, this could mean that 60% of your payments will go toward fees and only 40% is invested into your plan for approximately three years.  

When you join a Group RESP you have 60 days to change your mind and receive a full refund of your contributions. But, if you withdraw from the plan anytime after the 60 day grace period, or your plan is cancelled, you will lose all of the contributions paid toward the sales charge, the earnings on your contributions and government grants.

On top of sales charges, Group RESPs can hit you with a variety of fees. These might include opening fees, management fees, maintenance fees, and transaction fees. You could also face fees for withdrawals, transfers, and even changes to your contributions or beneficiary details.

Questionable Disclosure Practices 

It would be one thing if everyone who entered a Group RESP contract knew exactly what they were getting into (and what they stand to lose), but I’ve had enough of these accounts cross my desk to know this is seldom (if ever), the case.   

Group RESPs tend to be invested conservatively, meaning investment returns are often on the lower end of what investors could find elsewhere. For this reason a number of clients have brought me their Group RESP statements wondering if they could do better elsewhere. When I explain to them what it would cost to leave their plan their reaction is always the same: shock and frustration.  

In a Globe and Mail interview from last year, my colleague Jason Pereira got it just right when he said, “People don’t understand what they’re getting into. I’ve rarely had a client, once I explain how they work, who has not felt cheated.”

It’s worth mentioning here that this quote is taken from an article about a class action lawsuit that was recently launched in Quebec against major group RESP providers, alleging that the per-unit upfront sales charges violate a Quebec provincial securities regulation and the Quebec civil code. You can view the full article here.

If you’re considering a Group RESP, it’s clear there’s more to the story than meets the eye. While these plans promise a structured approach to saving for education, the reality often includes hefty fees, strict rules, and significant risks if things don’t go as planned.

From the potential for losing contributions and grants to the numerous fees that can eat into your savings, it’s crucial to understand what you’re signing up for. As Ruth Saldanha pointed out, Group RESPs can work well if everything goes perfectly according to plan, but flexibility and unexpected life changes can quickly turn this promise into a losing situation.

If you’re considering joining  a Group RESP, make sure you’re prepared for the required commitment, and read the fine print. 

If you find that the fine print is overwhelming or suspect that there might be better options out there, it’s worth exploring alternative savings plans that might offer more flexibility and fewer fees. Your child’s education is too important to leave to chance, so do your homework and choose the plan that best fits your family’s needs.
Need more guidance on Group RESPs or exploring other education savings options? Feel free to reach out for a personalized consultation.