Group, Pooled, and Scholarship Trust RESP: You Should Avoid Them

You’ve probably seen them.  The eager young salespeople who stand beside a table with a fancy poster of a smiling, happy child wearing a graduate cap.  The young salespeople try to make eye contact with you and ask you very brightly how your day is going, while you yourself try and avert eye contact or try to strategically think of a way to walk past them without having to talk to them.  The sign that these salespeople are standing beside may say Heritage Education Funds, or Canadian Scholarship Trust (CST), or Children’d Education Fund, or Children’s Education Trust Inc.  These companies are some examples of Group RESP providers in Canada.

Initially when I was younger, I thought these were actual scholarships you could apply for, or a government initiative where they try and ask you to apply so you could get a bursary for your post secondary education.

You know without any strings attached.

Group RESPs are actually far from this in reality.  In this post, I’ll go over what an RESP is and what group, pooled, and scholarship trust RESPs are and why you might want to avoid them and go the self-directed RESP route for your child’s post-secondary education future.

This post will go over:

• What an RESP is
• What a Group RESP or Pooled RESP or Scholarship Trust RESP is
• Who some of the Group RESP Providers are in Canada
• Pros and cons of group RESPs in Canada
• And whether to to opt for a group RESP or individual RESP Plan

What is an RESP

An RESP is short for Registered Education Savings Plan.  It is a government initiative to encourage families to save money for their children for post-secondary education.  The money that you put into the plan grows tax free.

On top of that, the government matches your RESP contribution with 20% match from the Canada Education Savings Grant.  So if you contributed $2500 into your child’s RESP, you would get $500 from the government.

For us, opening up an RESP was a must on our financial checklist as new parents.

There are many different places you could open up an RESP for your child.  You can open up an RESP from a financial institution, you can do a self-directed RESP and open one up with Questrade, you could even open one up with a robo advisor.  You could also open up a group, pooled, and scholarship trust RESP.

Related: What is an RESP and How to Maximize the RESP Grant

Here is a breakdown (though it is data from 2007) of what Canadians have been using as their RESP provider, courtesy of Taxtips.ca.

This post contains affiliate links.  Please see genymoney.ca’s disclaimer for more information.

As you can see, Group Scholarship Trust Plans  (or Group RESPs) comprised of 29% of the total RESPs available in Canada, or had assets of $6.5 billion (and that’s only in 2007!).  $6.5 BILLION.

That’s second to investment banking and securities dealers, with 41% of the ‘market share’ of RESPs.  I would assume that the 29% share of RESP money is quite similar to today’s numbers, it might be less, since Canadians have more options with their RESP nowadays compared to 12 years ago.

This is a huge chunk of money that Canadians are putting into Group RESPs, over $6 billion in RESP money with scholarship trust RESPs!

Group, Pooled, and Scholarship Trust RESP

In a Group RESP, your contributions are mixed with other people’s contribution.

How much each child in the group plan gets depends on how much money is in the group account.  Each child is tracked by their birthday or birth year (and the money for your child is pooled with other kids in that birth year).

Typically, the money in group RESPs is invested in lower risk investments like government bonds and GICs.  Each group plan provider has different rules (and you will be penalized if you don’t follow their rules), but typically, if you don’t contribute on a regimented, regular basis, you will have to pay more in fees.

In addition, Group RESPs are usually sold by commissioned sales people (hence the smiling, eager faces at the shopping mall).  They also have ongoing fees such as enrolment fees, sales charges and account maintenance fees.  Scholarship Trust RESPs also have hefty transfer fees which discourage you from switching to a different RESP provider if you suddenly learned that you’ve been wasting money on the wrong RESP provider this whole time.

You would set up a contribution schedule with the Group RESP dealer.  Your enrolment fee is usually refunded at the end of the contribution period (either partly refunded or the whole thing is refunded).  Your child would have to indicate what their plans for studying are before they start and applying for scholarship payments before the year starts.

Apparently there are 80,000 Canadian families that sign up with a Group RESP plan EVERY year, and 40% of these families don’t make it until the end (e.g. 17 years, the time when you want to start withdrawing from your RESP), which means these families unfortunately lose out big time on their diligent RESP contributions for their child.

As an example of the monetary amount some families have lost not reading the fine print, this family lost $11,000 in fees and had contributed $50,000 towards the Group RESP.

As mentioned, there are charges in the fine print if you cancel early.  For example, with Heritage Education Funds, here are their charges on the initial fee if you cancel early.

A $100 per unit sales charge is deducted from early contributions, of which all or a part may be returned with the maturity payment or educational assistance payments (EAPs), depending on the scholarship option chosen, for plans with a maturity date of July 31, 2014 or earlier*. For plans with a maturity date of July 31, 2015 or later, up to 25%, up to 50% or up to 100% of the sales charges will be returned to you at maturity, depending on the scholarship option chosen. Sales charges are not refundable if you cancel your plan, transfer to another financial institution prior to maturity or if you select the self-determined option at maturity.

Group RESP Providers in Canada

There are a number of Group RESP dealers in Canada.

These are individual companies and are not affiliated with financial institutions or credit unions.

• Heritage Education Funds/ Knowledge First Financial (this is Canada’s largest Group RESP dealer)
• Canadian Scholarship Trust (CST) Fund
• Child Education Fund
• Global Education Trust Plan
• Children’s Education Fund Inc.

Some of these Group RESP providers also have a self-directed option.

The Pros and Cons of Group RESPs in Canada

Pros of Group RESP Plans

• Forced contributions to your child’s post secondary education (unless you miss a contribution, that is)- the frequency is set up by you
• Many Group RESP providers give you a 60 day window to get your money back after you buy the group RESP, but after this, you lose out on the enrolment fees among other fees
• It is considered a “Stable” investment, and low risk (as long as you follow all the strict rules) since they are invested mainly in government bonds and GICs.
• Some people prefer not to invest themselves in a self-directed RESP and don’t want to lose money in the stock market

Cons of Group RESP Plans

• The Group RESPs are usually sold by high pressure and commissioned sales people (this is usually not a good thing when they have to resort to high pressure tactics to sell you something- like a timeshare)
• Most of your early contributions to the Group RESP plan are paying for fees
• There are big penalties if you transfer out or make changes to the plan, or even forget to contribute on the previously agreed upon contribution schedule
• There are also restrictions when you redeem or withdraw them for post secondary education, for example, for some, if your child is not going to a 4 year post-secondary school full time, then it might be harder to get your RESP contributions that you contributed to so diligently, working for you

Group RESP vs Self Directed RESP

Personally, I am happy with our self-directed RESP.  We have no one to blame but ourselves should the money in the RESP not grow as well as it should by the time we need it for post-secondary studies.

When you have a self-directed RESP, you also have to make sure that after 14 years of the RESP plan we will have to de-risk it and take it out of stocks and into something more safe because at that point, the time horizon is very limited and you’ll need the money very soon.

We have a Family RESP which is not to be confused with the Group RESP.  A family RESP allows flexibility between the siblings, but they are still self directed and within a  financial institution.

If you want an easy approach without having to do asset allocation, rebalancing, and other things to promote the health of the RESP portfolio, I would recommend going for a robo advisor.

Some examples of robo advisors that provide RESP accounts are Wealthsimple (the largest robo advisor in Canada), or CI Direct Investing (a more personalized robo advisor service).

With a robo advisor, all you have to do is contribute to your RESP account when you can, or set up automated contributions. The robo advisor helps by investing that RESP money in ETF portfolios that are regularly rebalanced.  You don’t have to worry about missing contributions and forfeiting your grants.

Related: CI Direct Investing vs Wealthsimple Review: A Comparison of Canadian Robo Advisors

An alternative is to open up a DIY brokerage account with Questrade and buy a one fund Vanguard ETF and change it to make it more conservative as time draws near to withdraw from the RESP.  This takes a bit more investing finesse than sticking to a robo advisor though.

Finally probably the best solution for a DIY RESP is using a Justwealth RESP, which has Target Date funds.  Input when your child will start using their RESP and you just invest in the designated RESP fund.  Here’s a comparison between a Justwealth vs Wealthsimple RESP.

For both the self-directed and pooled RESP option, you do get your 20% matching CESG “RESP Grant” deposited no matter which one you choose (as long as you contribute for your child’s education).  That means if you do $2500 in RESP contribution the government will match $500.

Here is our family’s RESP funding and investing strategy if you are interested.

Pooled RESP Recap

Most parents don’t usually want anything but the best for their children, especially if their children’s future education depends on it.  If you decide to go  with a group RESP, make sure you read the fine print, follow exactly what is written. and are making a decision (for example, supporting a group RESP)  that you will be happy with for the next almost two decades.  I’m not saying that Group RESPs are completely bad, they can work for certain people who are really good at making regular payments and following rules. However, the many people, it seems, are dissatisfied with the group RESP they have chosen, like this lady whose first language is not English, who lost $26,000 that she contributed to her child’s group RESP with Heritage .

There are so many decisions you face as a parent, it’s easy to feel overwhelmed.  Here are some questions from Canada.com to ask when you are choosing an RESP provider.

You may also be interested in:

• RESP contribution limit

Do you have a group RESP for your child(ren)? 

What has been your experience like if you have a Group RESP?