RESPs: Get facts before investing

Ever since the federal government unveiled the Canada Education Savings Grant (CESG) a few years ago, there’s been a lot more interest in registered education savings plans (RESPs).

That’s understandable. Any time people hear that money is being given away, they pay attention. When the money is earmarked for helping kids go to college, the antennae really go up.

The CESG is worth up to $400 a year and is payable for as long as 18 years. That’s $7,200 in government money, just waiting to be scooped up. Plus the income you earn on the invested capital compounds tax sheltered until it’s withdrawn.

Find details of the CESG
All you have to do to qualify for this bonanza is to put money into an RESP. Ottawa will contribute 20 per cent of the amount you invest each year, up to an annual maximum of $400.

I won’t go into all the details here. You can get them at:
www.hrdc-drhc.gc.ca/cesg/006_e.shtml.

Or you can order a copy of my book Head Start: How to save for your children’s and grandchildren’s education
<A href="http://ww.builingwealth.ca/bookstore/productdetail.cfm?product_id=185″>here although the supply is limited.

Some programs are marketed by sales people
Although RESPs have become more popular, there is a lot of confusion about the various types of plans. This isn’t helped by the fact that some of the programs for saving available are aggressively marketed by sales people who not only stand to earn large commissions but also receive special incentives like vacations if they attain specific targets.

To help people who are interested in opening an RESP, the Ontario Securities Commission has published a new brochure titled Saving for your child’s education: Get the facts about RESPs before you invest. It outlines the risks, return potential, costs, and cancellation policies for various types of programs including self-directed RESPs, individual or family scholarship trust plans, and pooled group scholarship trust plans.

High costs associated with scholarship trust plans
One of the issues that has always concerned me is the high costs associated with the scholarship trust plans. The OSC zeros in on this.

Here’s what the brochure has to say about the expenses associated with the pooled group plans: “You can expect to pay enrolment fees, administration & management fees, sales incentive fees, trustee fees, advisor fees, custodian fees and transaction costs such as commission on the purchase of securities. Fees are paid up front from your contributions; you don’t earn any interest on your investment until the scholarship trust company gets paid.”

Based on personal past experience, I suspect that the scholarship trusts, which are highly sensitive to any criticism either specific or implied, are not going to be happy with comments like this. It will be interesting to see if they publicly take issue with the OSC on the brochure’s contents.

The brochure also offers several specific tips, including:

• Read the prospectus. If you don’t understand it, don’t invest.
  
• Understand how salespeople are paid and where those payments come from.
  
• Know what fees you are expected to pay, and when you will pay them.
  
• Don’t fall victim to aggressive marketing techniques. Take your time and do your research.

The brochure is available in several languages. To read the English-language version, go here.

Adapted from an article that originally appeared in the Internet Wealth Builder, a weekly newsletter that provides investment advice from some of Canada’s top financial experts on topics ranging from stocks to income trusts. For subscription information, go to: www.buildingwealth.ca/Newsletter/