RESP Education Fund Mistake

[Four Pillars]

In very general terms, I think the fees on these plans are more or less similar to a regular retail RESP (ie high priced mutual funds), the big difference is the lack of flexibility and the penalties if things don't quite go according to plan when it comes time to attend post-secondary school.

Yes - there are benefits for the "surviviors" who make their planned withdrawals, but I don't think these pluses outweigh the risk of the extra restrictions.

Here is an article I did on the differences between group plans and self-directed plans:

http://www.moneysmartsblog.com/group...s-differences/

[Cpt. Fantastic]

The issue with the group plans is that all the fees (and they are monumental) are front-loaded. For the first few years, only a very small fraction of your payments go into the actual plan; the vast majority are paying off the fees associated with the plan (in one plan I looked at, 94% of contributions in the first year went to fees. This is not uncommon). So you can't really "freeze" contributions because (in essence) you haven't made any yet (depending on where you are in the contract cycle).

Some plans let you transfer out whatever your actual contributions are to a non-group plan. This will be detailed in the group plan prospectus. Another criticism of these group plans is that they tend to have incredibly dense and long prospectuses, i.e., 200 pages of detail.

That's where I'm stuck. The damage seems to have been done, a lot of the money that has been given covered mostly fees, etc. So I'm wondering, since the damage has been done, would it make sense to move the money out into a self directed RESP? I haven't yet fully read the PDF that GoldStone has provided, but based on what was quoted, my sister and her husband are low income earners, with no post secondary education, no savings and growing debt. Which from my reading so far seems to be exactly who these RESP group/scholarship plans go after. What would you all do in this situation?

[Cpt. Fantastic]

In very general terms, I think the fees on these plans are more or less similar to a regular retail RESP (ie high priced mutual funds), the big difference is the lack of flexibility and the penalties if things don't quite go according to plan when it comes time to attend post-secondary school.

Yes - there are benefits for the "surviviors" who make their planned withdrawals, but I don't think these pluses outweigh the risk of the extra restrictions.

Here is an article I did on the differences between group plans and self-directed plans:

http://www.moneysmartsblog.com/group...s-differences/

Thanks Mike, I'll give it a read!

[Four Pillars]

What would you all do in this situation?

I'd be inclined to leave it alone.

One the plan has been active long enough - at that point you might as well just move forward with it. If the child goes to school when they are supposed to then the parents will likely be quite happy with the RESP.

I don't know the length of time that is the "turning point" for this decision. Four years is probably in the grey zone where they could probably cancel and then do better on their own for a small positive result. If it was only a year or two and they were keen on diy investing, then I would say canceling might make sense.

For all the bad press these plans get (or more accurately - their salespersons), most of the people who use them are quite happy with them. The plans themselves are not a scam. I don't recommend them, but most people who have signed up for them should probably just stay in them.

That said - most if not all these plans have a 60 cooling off period - if you know someone who has signed up within that time frame, they should consider cancelling.

[Cpt. Fantastic]

I'd be inclined to leave it alone.

One the plan has been active long enough - at that point you might as well just move forward with it. If the child goes to school when they are supposed to then the parents will likely be quite happy with the RESP.

I don't know the length of time that is the "turning point" for this decision. Four years is probably in the grey zone where they could probably cancel and then do better on their own for a small positive result. If it was only a year or two and they were keen on diy investing, then I would say canceling might make sense.

For all the bad press these plans get (or more accurately - their salespersons), most of the people who use them are quite happy with them. The plans themselves are not a scam. I don't recommend them, but most people who have signed up for them should probably just stay in them.

That said - most if not all these plans have a 60 cooling off period - if you know someone who has signed up within that time frame, they should consider cancelling.

Thanks Mike and everyone else for the great advice.

[HaroldCrump]

What would you all do in this situation?

You could, of course, open an RESP account for your niece at an institutution of your choice, and contribute to it.
There is nothing stopping you from doing that, unless your sister has already maxed out the $50K limit.
That way you get the best of both worlds.

[Cpt. Fantastic]

You could, of course, open an RESP account for your niece at an institutution of your choice, and contribute to it.
There is nothing stopping you from doing that, unless your sister has already maxed out the $50K limit.
That way you get the best of both worlds.

Ya, while doing lots of reading the last few days, I realized that was an option. Thanks

[MoneyGal]

FWIW, I think there's a huge element of survivor bias in evaluating these plans from the POV of someone for whom the plan "worked." Is this not similar to the thread in which SquareRoot is putting forward the position that bank stocks are great investments, and others are pointing out that this is the classic definition of "survivor bias?"

For a group RESP plan to work for some, it must (by definition, given how these plans are structured), have NOT have worked for many others.

So it is difficult for me to say that these plans are "not bad" whether we are comparing them to non-group RESPs populated with high-fee MFs or not.

I despise the way these plans are structured and how apparently vulnerable parents are hooked into participating. From a classic microeconomic standpoint (which I realize! no one here may give two hoots about!) whether or not the OP's sister should continue to participate is a "sunk costs" problem: the contributions made to date are likely lost. Should the sister continue to participate in the program with the hope (not guarantee) her child will be one of the "winners" for whom the program works? A rational microeconomist would say no: the impact of past decisions should not flow over to future dollars, and each future dollar spent must be evaluated on its own merits.

Well, anyways; I have to make dinner, because even rational microeconomists (as well as those who portray them on internet message boards) must eat.

[Four Pillars]

FWIW, I think there's a huge element of survivor bias in evaluating these plans from the POV of someone for whom the plan "worked." Is this not similar to the thread in which SquareRoot is putting forward the position that bank stocks are great investments, and others are pointing out that this is the classic definition of "survivor bias?"

For a group RESP plan to work for some, it must (by definition, given how these plans are structured), have NOT have worked for many others.

No. By success, I mean someone who makes all their contributions and gets out most if not all of the scheduled withdrawals.

By that definition, even if there are no losers, all the survivors can still "win". It's not like all the payments to the winners come from the losers' losses.

For the record - what big Canadian banks have failed in the last 20 years?

So it is difficult for me to say that these plans are "not bad" whether we are comparing them to non-group RESPs populated with high-fee MFs or not.

For someone who is not yet enrolled in an RESP plan, it's an easy choice to choose the non-group RESP. They are superior by a long shot.

However, for someone who is already in a group plan - from that point forward, the difference isn't as significant, especially if they have been enrolled for a number of years. This is the scenario put forth by the OP.

I despise the way these plans are structured and how apparently vulnerable parents are hooked into participating.

I think they should be banned. There is no reason for them.

From a classic microeconomic standpoint (which I realize! no one here may give two hoots about!) whether or not the OP's sister should continue to participate is a "sunk costs" problem: the contributions made to date are likely lost. Should the sister continue to participate in the program with the hope (not guarantee) her child will be one of the "winners" for whom the program works? A rational microeconomist would say no: the impact of past decisions should not flow over to future dollars, and each future dollar spent must be evaluated on its own merits.

The problem is that not all the costs are completely sunk. The absolute value of the initiation fee should be returned to the owner if things go well. Of course, after inflation - the real value of this amount will be less than when it was paid - so there is some guaranteed sunk cost, but not all.

The other thing is the earnings + grants in the account. They will be forfeited if the plan is cancelled. This is also not a sunk cost.

The longer a group plan has been active, the less sense it makes to cancel it. After four years, normally I would advise to cancel it, but that would be in the case where the parents are angry about the plan and want to diy.

In this case, I'm saying leave it alone, mainly because from the description - it sounds like the parents are not very financially aware.

If they did cancel the plan, the question would be - what do they do next? Will the OP run the account? Can they understand why they would get such a small amount after four years of contributions?

The math might easily support cancelling the account, but there are plenty of potential problems if they do.

[GoldStone]

The OP mentioned the parents have a growing debt problem. We don't know what kind of debt it is.

If the interest on the growing debt is reasonable (e.g. HELOC at prime), you can make a case they should stay enrolled.

If it's bad debt (read: credit cards), what then? Can you justify staying in the plan?