Group RESP plans may not have your child's best interests at heart
Jeff Dewsbury thought he and his wife were being smart when they signed up for a registered education savings plan. But now the Vancouver writer and stay-at-home dad wishes they had studied the fine print a little more closely.
That’s because they signed up for a special type of RESP called a group, or pooled, plan. These plans account for a third of the $18 billion that Canadian parents have socked away for their kids’ postsecondary schooling since the federal government created the RESP program in 1998.
They are run by nonprofit organizations that manage the RESP assets on behalf of parents, with names like the Canadian Scholarship Trust Foundation and Heritage Education Funds.
The catch: the pooled plans, which have had a reputation for aggressive marketing campaigns, including ads in hospitals and dentists’ offices, come with long lists of fees and complicated rules. The plans are now the subject of a growing wave of complaints from parents and scrutiny by regulators.
But back in 1999 or 2000, Dewsbury and his wife were new parents and too frazzled to read the dozens of pages of prospectus material from the group plan. The sales rep won them over by telling them about exploding tuition costs and the risks of gambling their savings in the stock market, which was then just peaking in the dot-com bubble.
In contrast, the group plan’s assets were held in conservative investments like government bonds. Yes, that made the plan’s returns lower, but Dewsbury reasoned that this would be offset by the federal RESP program, which tops up parental contributions with 20 to 40 percent in additional grants, depending on a family’s household income. And the money in the plan would grow tax-free.
It didn’t take much convincing before Dewsbury and his wife started contributing $50 a month for their first son; a couple of years later, when baby number two was born, they boosted the amount to $100 a month.
But now they have misgivings. They’ve watched better-performing mutual funds leave their plan’s low returns in the dust. And after all these years, they still don’t understand the plan’s byzantine fees and rules.
"I just never felt like I could get a bottom line for all those things where I understood them," Dewsbury said on the phone from his home.
In fact, until recently, Dewsbury was under the mistaken impression that only group RESP plans are eligible for the federal RESP grants. "They really didn’t bring up the fact that that comes to everyone," he said.
Unfortunately, Dewsbury and his wife are now a little stuck. The group plans typically include significant barriers for those who want to stop contributing, including a sharp reduction in the final payout from the plan toward a child’s postsecondary education.
Parents may transfer their RESP to another dealer, such as a bank, but most group plans will first deduct all the profits made on the parents’ contributions, which can grow to a substantial sum over the years. Those who want out also typically have to pay other fees, like an enrollment fee that often amounts to hundreds or thousands of dollars, a "depository" fee, and a transfer charge.
Dewsbury isn’t the only parent with concerns about the group plans. In May, a string of complaints prompted Human Resources and Social Development Canada, the federal department that runs the RESP program, to launch a review of the entire RESP sector in conjunction with the Financial Consumer Agency of Canada and the Ontario Securities Commission.
"We’re working with FCAC and the OSC to examine the complaints we’ve received and see what we can come up with," said Marc LeBrun, director of program design at the federal Canada Education Savings Program, from his office in Ottawa.
"So far it’s been buyer beware."
The review will look at the restrictiveness of RESP plans, their fees, and rules on changing the level of contributions or getting to your assets.
The pooled RESPs are also facing a lot of other scrutiny. Another examination of the sector has been going on since last year, this one by the Canadian Securities Administrators, which represents all the provincial securities regulators.
As well, the B.C. Securities Commission plans a compliance review of group plans in coming months. This review will follow up a 2004 nationwide study of the sector by provincial securities regulators, including that of B.C.
The earlier review concluded with a damning report that revealed a litany of serious shortcomings, including: poor oversight of salespeople, who didn’t disclose fees properly and passed themselves off as working for a nonprofit organization when they actually worked for commissions; deceptive marketing material that falsely suggested government regulators had endorsed the plans; inflated rates of return that relied on "creative calculations to make the returns appear higher"; and lax record-keeping.
"Certainly there were industry-wide deficiency trends," said Sandra Jakab, director of capital-markets regulation at the British Columbia Securities Commission, on the phone from her office in Vancouver.
Despite the findings, regulators didn’t file any disciplinary sanctions. "It is important to keep in mind that that kind of activity gets placed beside theft and out-and-out fraud," Jakab said. "When you are making choices as regulators, you need to keep in mind which are the most egregious cases. We don’t have endless resources."
However, the B.C. Securities Commission and other provincial regulators did require group-RESP dealers to change their sales and marketing practices.
"We worked very closely with securities regulators to meet those concerns," said Peter Lewis, vice-president of operations and business development at the Toronto-based Canadian Scholarship Trust Foundation. It’s Canada’s oldest and largest group-RESP provider, with $2.3 billion in RESP assets. Lewis is chair of the RESP Dealers Association, which represents four of the six pooled-RESP providers in Canada.
Even after the reforms, however, the grumbling from parents didn’t go away. At the Financial Consumer Agency of Canada, an Ottawa government regulatory agency that investigates complaints against federally regulated financial institutions, spokesman John Kane said a growing number of Canadians are calling to complain about RESP dealers of all stripes. Complaints have risen from 13 in the 2004 fiscal year to 20 in 2005, 37 last year, and 19 so far since the beginning of the current fiscal year in April. "We’ve had a steady increase each year so far."
The issues most commonly raised are the usual sore spots involving the group plans: fees and problems with accessing funds in a plan. (Bank-based RESPs typically involve minimal or no fees and impose no restrictions of their own on getting to the funds, apart from those of the federal RESP program.)
In Toronto, where most of the group-plan companies are headquartered, the Ontario Securities Commission said in 2002 that it was issuing a brochure to warn parents about the fees and aggressive marketing tactics of group plans after it had received 120 complaints from parents in the previous two years.
But now, spokeswoman Carolyn Shaw-Rimmington said, the OSC no longer has a breakdown of the number of complaints involving group RESPs. And another spokeswoman, Laurie Gillett, said the OSC is satisfied the group plans have mended their ways since the 2004 report.
The B.C. Securities Commission’s Sandra Jakab said her agency receives only a handful of complaints about the plans, but she wouldn’t disclose actual numbers.
The CSTF’s Lewis, for his part, said group-RESP companies "welcome" the outside scrutiny. He said the group plans are open about all their fees and rules and are, in fact, more "transparent" than banks, which, he said, aren’t open about the full cost of management fees charged for mutual funds. "We actually tell people what they are paying," he said.
Lewis said group RESPs are best suited to parents willing to commit to long-term savings, "someone looking for a decent return and low volatility".
But some financial planners steer clients away from group RESPs. "We don’t like them at all. With full knowledge and awareness, I think most people would go another route," said Doug Macdonald, a prominent Vancouver investment counsellor.
Macdonald is a former president and chair of the Canadian Association of Financial Planners. He is currently chair of the board of regents of the Institute of Advanced Financial Planning, based in Delta.
"You lose a lot of flexibility [in the plans], and flexibility is very important in this world," he said.
Another problem for Macdonald: the lack of transparency. "It’s very hard to look inside these plans. It’s really hard to get a handle on the costs."
Instead, Macdonald advises clients to open a self-directed RESP at a bank or other financial institution.
Netty Vogels, a Vancouver financial planner, gives clients the same advice. She also raises another common concern with the group plans: what happens if your child doesn’t go on to postsecondary education or quits before finishing her entire course of studies? Vogels said her sister was enrolled in a group plan and lost much of her investment because her child didn’t complete postsecondary education.
"The reality is life throws financial hurdles at you," she said. "It would be nice to commit $100 a month for 18 years and never stop, but that’s just not real."
At some group-RESP companies, parents whose kids don’t go on to higher education get back their contributions to the plan but not interest and other profits earned on those investments. Parents also lose some of their funds if their children don’t finish all four years of higher education or aren’t enrolled full-time.
At the CSTF, Lewis said parents whose kids don’t go on to post-secondary schooling can switch from the foundation’s group plan to its individual plan. This allows them to get their investment income along with their contributions. But there are still a few hitches with this option: parents can only switch plans before their kid hits 18; the CSTF’s individual plan pays out about 40 percent less to students than the group plan; and only members of the CSTF’s group plan have a chance of getting their enrollment fee refunded. The fee usually works out to six or seven percent of the final payout.
All these rules mean plenty of parents still don’t get the full payout from the group plan. The lost income goes into a pool for other eligible kids. About one out of every six dollars in payments that the CSTF has made to students since 2002 came from forfeited funds lost by other parents.
"You could luck out and have a year when a lot of people don’t go [to postsecondary education]. Or it could work out the other way around," Macdonald said.
Derek Moran, a Kelowna financial planner, also criticized the group RESPs as being "very fee-intensive" and too complex. "Even for advisors, they are difficult to understand. The reporting is so sparse you need a Philadelphia lawyer to figure it out."
He also raised another beef: in-your-face marketing. When Moran had a child born at Kelowna General Hospital five years ago, he said, he was surprised to find brochures from a group-RESP company in the recovery room.
A spokeswoman for Interior Health, which oversees 22 hospitals, including Kelowna General, said group-RESP brochures may have appeared in the hospital through Welcome Wagon promotional packages that used to be handed out there to new parents.
The packages were discontinued four years ago because of complaints from parents, said Alison Paine, speaking on her cellphone while on the road in Kelowna. "It became a nuisance."
At Welcome Wagon, a private company based in Toronto, Sandra Conley, director of business development, said her company makes donations to "probably a hundred" hospitals across the country in exchange for access to distribute promotional material from its clients, like USC Education Savings Plans Inc., a group-RESP foundation, and diaper and baby-formula companies.
Moran is perturbed that hospitals would allow the brochures. "They get mothers when they’re pretty rattled up. It scares me that they are that far in the system."