RESPs: How to invest in your children’s future without being fooled

While you and your spouse are leaning over your little cherub’s crib with adoring gazes, the proud parents that you have already become begin to imagine what he could become. A doctor? A lawyer, or a senior executive? A parliamentarian, or even a future Prime Minister of Canada? No, all these professions are well below the potential of this genius in the making who, for the moment, only knows how to cry, to eat, to fill his diaper, to cry again and to sleep (rarely). He will become the Leader of the World. Now that you’ve realized this, you must now determine the best way to help your future Leader of the World fulfill his destiny.

There’s no need to look at historical precedents (fortunately) to come to the conclusion that a Leader of the World must have at least have a Bachelor’s degree in an appropriate discipline and most likely a Master’s degree. How much will 5 (or 6, or 7) years of university cost in 17 or 18 years? Will you have the means to afford this for your Leader in training? What if he considers enrolling at a prestigious European school? Or gets accepted into an Ivy League university in the United States?

You’ve just moved into your new home and you’re wondering how you will manage to save for your child’s future between your mortgage, your bills, groceries, your school and municipal taxes, all from a net family income which will undoubtedly represent a decreasing fraction of your gross earnings in the future. You need a plan, a solid plan.

The RESP, a good recipe in theory

You’ve made your decision. You’re going to contribute to a registered education savings plan. In addition to your monetary contribution, it is normal for a future Leader of the World to benefit from government grants to help him achieve his full potential.

You’ve done your research. A contribution of $100 per month for 17 years (or a net contribution of $20,400 out of your pocket) should put more than $40,000 at your little one’s disposal when he is ready to leave public school for the sometimes-rickety chairs of a university. On top of this you’ll get the 20% Canada Education Savings Grant (CESG), to which in Quebec a 10% provincial equivalent called the Quebec Education Savings Incentive (QESI) is added, plus your investment returns, all make it hard to beat an RESP as the best way to invest in your children’s future.

You and your spouse have had your noses buried in the documentation for several days now, and you’re comparing the different options. You could choose to manage your investment independently or entrust it to a regulated fund by subscribing to a group RESP.

Investing through an RESP account

Most major banks let you subscribe to an RESP at their establishment through a discount broker or an advisor. However, in recent years there is also the option of going through a robo-advisor. Firms such as Wealthsimple or CI Direct Investment offer their clients an attractive alternative to traditional channels. Their main advantage is the absence of management fees, an important detail if you’re not rolling in gold and want to get the most out of your investment for one or more of your children.

Individual RESPs help you plan for the education of a single child, while family plans are ideal for people who want to provide for more than one of their descendants (biological or adopted children and grandchildren, but not nephews or nieces). Group RESPs, on the other hand, offer a much more rigid approach.

Investing through a Group RESP provider

During your research, you will invariably come across at least one group RESP provider. The fact that they exist and people of healthy body and sane mind subscribe to them is because they offer a handful of additional benefits compared to individual and family RESPs. However, their strengths can also objectively be viewed as serious constraints. A group RESP imposes an iron discipline on you in the regularity and amount of your payments. If you don’t anticipate any unforeseen events over the next 17 or 18 years, this first point is really an advantage. It assures you that all your co-investors also have a crystal ball and that they are ready to stake their full contributions, in some cases, on its strength.

Pooling participants’ savings also gives the fund greater leverage and helps it maximize its return on investments. This rule is pretty much always true when it comes to investing, but if your child doesn’t wish to pursue post-secondary education, you will have literally lost money (the value of the inflation and interest that you would have earned by putting your money elsewhere, as well as your subscription costs, which we will come back to). Why that? In the case mentioned above, the sums contributed by the parents are returned to them, but the increased interest and government contributions remain in the fund for the benefit of the other beneficiaries.

Lastly, investments made by group RESPs are subject to very strict regulatory rules in order to protect parental contributions. This is only of benefit if your risk aversion is very high. It goes without saying that even without the regulatory body’s hand on their shoulders, individual or family RESP providers are not going to gamble your contributions at a casino.

Membership fees: the fundamental problem

If nothing you’ve read so far has turned you away from group RESPs for good, give me a few more paragraphs to talk about membership fees. In the case of Universitas, which remains one of the best-known providers of this type of plan, these fees represent much more than a year’s worth of contribution! In fact, if you intended to contribute up to $100 per month, know that your membership fees will amount to almost $2000! 

The first year’s worth of contributions goes directly into the sales representatives’ pockets and only half of your contribution over the following 15 months will end up in the fund for the benefit of your child. This is 100 * 12 + 0.5 * 100 * 15 = $ 1950. We are therefore talking about a full-time session and about 1 or 2 books…at today’s costs. Add to that the lost returns on that money over a 17 or 18-year time horizon, and you’ve probably just thrown a full year of education (books included) into the trash.

Don’t panic! Universitas says that your membership fees will be refunded. Is that so? How can this be possible, since they would have been paid to representatives as a bonus? There is only one way to succeed in this sleight of hand: by digging into the fund intended for other people’s children, or into your own if you are contributing for all of your toddlers. Does this go against your personal ethics? Take comfort, you have surely contributed to reimbursing the fees of parents who’ve been there before you…you’re just returning the favour.

Should I address the question of management fees? No, you already know enough about that? Ok then.

Individual, family or group RESPs?

It’s difficult for an impartial person to recommend a group RESP over an individual or family RESP. Group RESPs are big machines that fund their operating costs out of your contributions, period. Not all RESPs are created equal and even if you expect that your child will end up being the Leader of the World in the years to come, signing up for a family plan now or a second individual plan later seems much more reasonable.