Group RESP plans may not have your child's best interests at heart

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      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."


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      Jan 8, 2010 at 8:53pm

      All the fees are taken from the early payments. In very small print the CSTF promotional material says it works on the "Rule of 72", which all "sharp" financial companies use. I.E. If you are unable to contribute after 3 or 4 years you have no asset. The salesman was aggressive to the point of having to be told that he was bordering on harassment. We want a RESP but these two facts make us not trust this industry leader at all.


      Feb 6, 2010 at 4:29pm

      Wow, this sounds like us. We have been contributing to my oldest daughter's plan for 8 years and in that time we have paid almost $3,000 in enrolment fees which accounts for almost 30% of our contributions! We're cutting our losses and pulling our money out. It was a very expensive lesson but we won't do it again for our younger daughter. Read the fine print and then go to your bank and open up an RESP there. CSTF is a scam as far as I am concerned.


      Feb 8, 2010 at 4:21pm

      My husband can no longer work and I am on disability since 2008. We wanted to stop payments on his grandson and on mine. We have received 3 letter for us to sign and sent them back as requested. 2 months later we are sent a bill. For the 4th time I have been sent a bill. I speak to an individual who speaks my language very poorly. It takes 40 minutes on my cell phone to get another 2 letters sent to us for us to sign. I say that if this doesn't work I will be contacting government securities. I am then told that when I get the letters I am to send them to our agent to sign, otherwise the payments do not stop. Then I am to phone them (long distance) on my cell to see if they received the letters from our agent. The pressure and stress is so bad that my particular disability gets worse. This has been a nightmare!

      Sandra KV

      Feb 10, 2010 at 11:41am

      I recently made a call to my RESP company. Some years ago we had to stop contributing due to financial hardship, but had already made 6 years of contributions. We always intended to start contributing again, but life being what it is, didn't do that. Now, since more than 3 years have passed we have been told that the RESP account has been closed and that we cannot have our money back as the time limit for claiming it has expired. WHAT??? We scrimped and saved to make what payments we did, based on them marketing aggressively to tell us they were BETTER than just putting money in a bank account. Now they say that some where in the prospectus that all of this is clearly explained. Like other parents listed in this article, we had a new baby and acted in TRUST Thinking that this company wanted to help us... I don't understand pages of prospectus and fine print. We would have been better to just put our money in a ZERO interest account, at least nobody would tell us that it's not ours because we forgot we were supposed to claim it by a certain date.


      Feb 11, 2010 at 11:48am can these people sleep at night???

      Nick M.

      Mar 8, 2010 at 3:34pm

      The first year (1993) the projected post secondary allowane was 28,250$ today in 2010 the allowance is 9,900$ total. Knowing this then I surely wasn't going to subscribe. I agree it is a scam and the sooner we acknowledge it the better it will be for all of us and the next generation of parents.

      Nat M.

      Mar 19, 2010 at 10:17pm

      When examining the fees of plans you have to look at the total fees charged over the life of the plan, and not just the front-end load fees. The MER, or Management Expense Ratio, of Mutual Funds is taken out over the lifetime of the plan, and can actually dampen actual interest earnings.

      That aside, most people that work at a call center for these types of operations barely have a highschool education. If they can understand these plans, there is no reason for people that sign there name on a document not to have fully read through the documentation they are signing and understand what they are getting into. It doesn't take a chartered accountant to figure these things out, it just takes a little patience on the part of anyone wishing to get into it.

      More recently as this article states, Group RESPs have undergone changes that have increased transparency and there are specific regulations in the Income Tax Act of Canada, updated in 1998 and amended in 2007 (not an RESP company's invention, this is government legislation) that defines many of the regulations that all Group RESP companies follow.

      All this boils down to is that if you pay attention to what you are getting, you won't be surprised. Most of the group RESPs are very upfront about the front-end fees that are charged, forcing you to sign in multiple places and acknowledging the EXACT amount that you will end up paying in registration fees when all is said and done.

      And as for all of you cancelling out your plan, once you've already paid up most or all of your fees, doesn't it seem a little rash to just pull the plug, and lose the service that you just paid for? If you've already paid your up front fees, a Group RESPs ongoing fees are minuscule compared to the MERs of most mutual funds.

      But, as always it is up to the consumer. Sometimes we feel like these "Big Bad Companies" are beating up on us. But we really have nothing but our own selves to blame because we don't read the fine print or ANY print for that matter. We expect life to be handed to us on a silver platter, and that everyone is going to be nice to us, and we deserve a life of benefits without hard work. If the general, non-post-secondary educated call center representatives understand these plans there is no reason for someone who isn't just too darn lazy to actually pick up one of these company's prospecti and actually care and try to understand what they are reading. They all state each company's rules and regulations quite clearly. There is a reason that companies like USC Education Savings Plans INC have been around since 1965 and still haven't been shut down. These companies know what they are doing. Clearly the general public is as ignorant as always.

      David Holyoak

      Mar 22, 2010 at 8:59pm

      I enrolled my son at 2 in the USC RESP, we have contributed about 50 dollars a month, the fees were up from, only 200, he now has about 8600 dollars in amounts, so if he can get into a four year program and pass each year he should end up getting this money for 4 years to help with university, almost 33000 for a 8600 dollar investment, i thought is was a good deal 18 years ago and it still seems like it is

      Ron Rust

      Mar 28, 2010 at 7:44pm

      We signed up 18 years ago. How ever since our daughter is not enrolling for a 4 year term at a reconized College we got back Our original investment less there fee and no intrest, a $600.00 loss. 2% intrest savings acount would have netted more return.. Thanks USC good work.


      Apr 17, 2010 at 7:54am

      I also lost 5 years of contributions totalling close to $5000 because nobody clearly explained to me that if I did not re-instate my plan (catching up on all missed payments AND interest that would have accrued) by a certain date they would just cancel my account and keep my money! I am so upset about this. Should they not have to at least send you a letter or a phone call saying that my account is about to be cancelled and CLEARLY state what that means?? Now they tell me I can write a letter to their committee giving them "extenuating circumstances" as to why THEY were not notified before the time limit. If anyone has gone through this your information would be greatly appreciated. my email is Thanks so much!