During the COVID-19 pandemic, FAIR Canada, a not-for-profit organization that advocates for the rights of investors, is asking regulatory agencies, including the Ontario Securities Commission (OSC), to waive or impose a moratorium on cancellations, penalties and forfeitures to which group RESP (Registered Education Savings Plan) contributors are usually subject to if they miss a monthly contribution or make changes to their accounts.
“It is our job to represent the interests of investors and with the coronavirus there has been a major economic impact, including mass unemployment,” said Ermanno Pascutto, executive director of FAIR Canada. “Exemptions of every sort are being granted by regulators, but many of the groups who are asking have loud voices. We are advocating for investors in group RESPs because these plans tend to be targeted toward lower- or middle-income people, precisely those who have lost their sources of income.”
In group RESPs, investments for children of the same age are pooled together and their money grows together, theoretically amassing greater interest than the funds would if invested individually. Unlike single or family RESPs, group RESPs are generally sold by private companies, however, and “tend to have higher fees and more restrictive rules,” according to the OSC.
One of these rules usually requires investors to make a monthly contribution of a specific amount. The penalty for missing a contribution can be cancellation of the investor’s membership in the plan. Since these plans generally require large sales fees that are front-loaded, an investor whose plan is cancelled will get back the investment, minus sales fees and penalties. This could mean a significant loss of money for the investor. Hence, FAIR Canada’s efforts to prevent investors with little free cash to spend from being tossed from a group RESP during COVID-19 unemployment.
“No one came to us to request this,” said Pascutto. “We want to try to head off problems before they happen. It’s not onerous for these companies to stop their fees and forego cancelling accounts for now. It would be a magnanimous gesture.”
The group RESP rules and penalties are detailed in a prospectus, which generally isn’t available to the investor until after the group RESP is purchased. It is often a lengthy document unintelligible to the average person. Given that the sales forces often target vulnerable customers, such as exhausted new parents or recent immigrants eager to better the lot of their families, it’s not surprising rules often aren’t properly understood.
“The people who sell them are usually incentivized to sell them to any warm body,” Pascutto said.
“In addition, the way the product is structured, it isn’t investor-friendly. Regulators tend to rely on disclosure, but their prospectuses are very complex — you’d probably need a university degree and a law degree on top of it to understand them.”
The OSC also cautions prospective purchasers that “group plans often have additional rules about how much and how often your child can take Educational Assistance Payments (from the RESP) and which education programs are eligible. Know the rules before you open a group plan.” If a student chooses to attend a vocational program, rather than a university, for example, there is a chance the plan provider will deem them ineligible to receive the money invested.
Shawn Todd, an Ottawa-area certified financial planner with ECIVDA Financial Planning Boutique, says he finds that these pooled plans “have restrictions that mean people could be excluded or discounted.” He generally doesn’t recommend group RESPs, but wants consumers who are considering them to be aware of what they are buying.
“Clients need to understand the difference between single, family and group RESPs,” Todd said. “They should understand the rules of how these programs work; it’s important to educate yourself.”
Before a consumer invests in an RESP, he suggests consulting with a certified financial planner (CFP) for some unbiased advice on the products under consideration.
“You want to deal with a CFP or someone qualified to give impartial advice,” Todd said. “In some cases, you can be the recipient of some very sales-like advice.”
The RESP, generally, is an excellent savings vehicle for parents or family members. The money invested in an RESP is allowed to grow tax-deferred while in the plan, and each beneficiary (child) is also eligible for a federal government contribution of up to $ 7,200 over the lifetime of the plan.
“Even if you don’t invest in a vehicle that offers good returns, over time your money will still grow due to the government grant,” said Todd. “That alone is a compelling reason to invest in an RESP.”
Family members or other contributors may invest up to $ 50,000 per child over the lifetime of the plan. Group RESPs are sold only by scholarship plan dealers, while individual and family plan RESPs are available from banks, credit unions, investment dealers, trust companies. and mutual fund dealers. A plan may stay open for 36 years; the beneficiary can withdraw money from the plan once enrolled in a college, university or other qualifying/specified higher education program.
Todd generally recommends a family plan for young families who may have more than one child, since the money can be transferred between them. Funds in the individual plan can only be used by a single beneficiary. However, whichever plan parents choose, they should understand how those funds will be invested.
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“They need to see what they can achieve depending on the time horizon and their risk tolerance,” Todd said.
The Ontario Securities Commission offers additional useful information about RESPs (https://www.getsmarteraboutmoney.ca/invest/savings-plans/resps/).