Saving for a child's college education is no easy task, considering that the all-in cost of a four-year degree while living at home tops $50,000 these days.
For young families, it's an even bigger challenge. Tuition, room and board and other expense will exceed $100,000 in 18 years, according to a TD Economics report from last fall.
But Canadians haven't been idle in setting money aside. As of 2011, they've saved more than $31 billion in RESPs.
And many have chosen group RESP plans to save for their children's education.
These plans -- sort of like being part of a pension plan, only for college instead of retirement -- make up almost 33 per cent of all RESP savings, the federal government reported for 2011.
Many are non-profit corporations, including two of the biggest providers: the Canadian Scholarship Trust Plan and Heritage Education Funds. Both manage billions of dollars, providing the power of the herd while offering low-cost investing on contributions of less than $10 a month, says Peter Lewis, chair of the RESP Dealers Association of Canada.
"We work with our money managers so that your money is invested to produce a stable and positive return over time," said Lewis, also a vice-president with the Canadian Scholarship Trust Consultants, which manages the Canadian Scholarship Trust Plan (CST). "We're not the types of organizations that will deliver double-digit returns on a consistent basis, but we'll also not produce negative returns either."
Another upside is discipline -- albeit of the forced kind. That's because members must keep making payments or risk losing grant money and investment earnings. They can pay significant penalties, too.
"What our experience has been is when people make that conscious decision to invest with us, it actually is far more likely they will follow through," he said.
And when they do stick with the game plan, they have the potential to receive even more money for their child's education because earnings of those who drop out or stop making payments are pooled with the earnings of those who stay with the plan.
While the industry heralds these unique characteristics as benefits, critics consider them reason to think twice about signing up.
"We do think more substantive regulation is needed in this area," said Ilana Singer, associate director of the Canadian Foundation for Advancement of Investor Rights -- or FAIR Canada.
"There's a real problem with respect to investors understanding what they're getting into."
FAIR recently submitted recommendations to Canada's securities regulators regarding proposed amendments to regulations for group RESP plans. Among them is a call for increased disclosure.
In particular, FAIR wants more transparency about enrolment or membership fees. These are often up-front payments that partly compensate plan salespeople.
Lewis, speaking specifically for CST, says the enrolment fee is $200 per plan unit.
One plan unit can be purchased for a monthly contribution of about $10 until the beneficiary is enrolled in a post-secondary institution. For members with a newborn wanting to get the entire $500 annual grant from the federal government, they'd have to contribute about $208 monthly. That's a purchase of 23.8 units with a one-time enrolment fee of $4,760, he says.
Plans do reimburse some of the fees.
"With the CST plan, we guarantee a minimum of 50 per cent of the enrolment fee is returned to beneficiaries when they draw on the plan."
Yet figuring out the enrolment fee on your own is quite difficult because, for example, CST's prospectus -- a mandatory document detailing the investment -- provides a confusing explanation of how the fee is calculated.
In fact, the prospectuses for group plans are generally complex, said Mike Holman, a personal finance blogger and author of The RESP Book: The Simple Guide to Registered Education Savings Plans for Canadians.
"I went through one of those prospectuses at one time to help someone out and it's complicated," he said.
Lewis said the industry also welcomes new regulation because providers are mandated by existing rules to provide the long-form prospectus.
"We believe it needs to be made much simpler," he said, adding many providers already give investors additional documentation outlining the costs.
But critics point to other issues, including the way enrolment fees are paid by members. Members' initial contributions pay only the fees for the first several months of enrolment.
For example, CST plan members' contributions go toward only the enrolment fee until 50 per cent of it is paid. That's almost a year of contributions. Afterward, half of the contributions pay off the remaining fee while the other half is invested.
FAIR recommends new regulations mandate plans spread out fees over a longer period so investors earn on contributions from the get-go.
"There should be a maximum that 10 per cent of the contributions in any one year go toward fees," Singer said.
But FAIR argues plan salespeople also need stricter guidelines.
"There really should be a requirement a salesperson selling a group savings plan must disclose there are other types of RESP savings plans available," Singer said. "Otherwise, plans can be aggressively sold as 'the way' to save for your child's education as opposed to one of several options."
FAIR has also heard complaints of salespeople 'targeting' low-income families, young parents and new Canadians who may have low financial literacy, she said.
"Lower-income families are not likely to benefit from the plans because they are more likely to default."
Lewis said the accusation is untrue, arguing the majority of group plan members are university-educated with good incomes.
Yet group plans are sold to many low-income families. About one in five RESP investors are low-income and about 40 per cent of them are members of group plans.
"What this indicates is we are committed to helping all Canadians," he said.
Still, Winnipeg-based certified financial planner James Kirk said families, regardless of income levels, can likely find more flexible, low-cost options. "A bank or a credit union would set one up for free," said the adviser with Sweatman Insurance and Retirement Services.
You can also start and stop contributions without consequence with individual and family plans, and they don't charge enrolment fees.
"The only fee would be the cost of managing the assets."
That is the management expense ratio (MER) associated with owning a mutual fund.
Group plans also charge MERs, but they are typically less than one per cent of assets a year, in part because they invest in mostly bonds.
A similar mutual fund in an individual RESP would likelycharge a slightly higher MER, Kirk said.
"But I don't think the potentially lower cost of investing for group plans is going to outweigh their lack of flexibility."
Holman said he also doesn't recommend group plans for similar reasons.
"For someone who wants to set up an account and doesn't really know what they're doing, the simplest strategy is a GIC RESP," he said, adding this generally involves no fees.
But existing group plan members shouldn't panic either. Holman said they should stay put. In fact, he knows of people who did just that and were happy with the outcome.
"The reality is once you're in you should probably stay in because the penalties to leave can be quite high."
A look under the hood
Group RESP plans have many elements you should understand before climbing aboard. Here is a look at aspects of the Canadian Scholarship Trust Plan (CST).
If you default: Group plan members must maintain payments to continue to be part of the plan. If you default on payment after 30 days of receiving written notice, CST can terminate your plan. But if you've been a member for three years, you are automatically transferred to CST's individual plan. And you can transfer back to the group plan prior to the beneficiary attending school if you catch up on payments. If you don't draw on the plan at all, it will be paid out to other plan beneficiaries.
What if you want out? You can terminate membership after 60 days and get back your money, including enrolment fees. CST will return the grant money to the government. After 60 days, only your contributions will be returned. You lose the enrolment fee and your earnings on contributions and grants. Earnings will be invested in the Educational Assistance Payment Fund, which will be paid to members' children who stay in the plan and enrol in a qualifying school.
What about transferring to another provider? After 60 days of enrolment, members can elect to transfer to another provider. Contributions and grant money can be transferred, but not earnings. You also lose your enrolment fee.
How it's paid out: Once the beneficiary is enrolled in a qualifying school, the contribution money, excluding grants, is returned to the contributor for education costs. The student will also receive four Education Assistance Payments (EAPs) over four years while attending school. These payments comprise a return on investment and the Canada Education Savings Grant from the federal government. Students must enrol in a four-year program to receive all four payments. If the students enrol in a two-year program, for example, they only receive two EAPs and lose the other two. Students can also receive enhanced payments from earnings on contributions from members who have left the plan, or from students who did not take all EAPs. CST also donates revenues designated for managing the plan that are unspent. Donations are made annually to increase EAPs -- though they are not guaranteed. "The last few years, we've been putting back about $4 million or so into the plan every year to increase the value of the money that's paid out to the students," says Peter Lewis with CST.
Switching within the plan: CST will let you transfer to a self-determined RESP it provides. Lewis says this is helpful for members whose children will not attend four years of school or who delay education past age 24. By transferring to an individual plan, they can control how the EAPs are paid. When transferring to a CST individual plan, you can move your contributions, grant money and earnings to the individual plan. But you lose the right to receive 50 per cent of the enrolment fee.
What's up in Manitoba? The new regulation for group RESP plans is in the works, including increasing disclosure requirements for fees. Manitoba Securities Commission spokesperson Ainsley Cunningham says its investigators get a couple of calls annually about group plans. To find out more about RESPs, check out the MSC brochure Investing in Your Child's Future: The Basics of RESPs, available on its website.