Beware when choosing your child’s RESP

I remember a few months ago I was contacted by a couples. They have already setup a group RESP for their eldest son through another company. However,  they are dissatisfied with the investment results, and wish I could provide some advises regarding this plan. During the meeting, I went over their contract details, and found out the following:

1) No Control Over Investment Decisions: Although the investments did not meet their expectation, they cannot make their own investment choices. This group RESP provider has total control on it.

2) Management Expense Ratio (MER) is relatively high: It is over 3% per year. Some people would argue that there is principal protection in this setup. However, from my professional experience, given such a long investment duration, while being invested in a very conservative portfolio, it is very rare that this protection would be exercised.

3)  High Enrollment Fee: They paid over $2,000 in enrollment fee. If they terminated the contract in early years, majority of their savings would be taken away. Although there are cases that this fee is being reimbursed when the child is enrolled to post-secondary school, from what I read in their contract, it is not 100% guaranteed.

4) Transfer Restriction: Yet, they could transfer this account to another financial institution, but huge deduction would be involved. Upon transfer, the previous mentioned enrollment fees and all the years of growth cannot be carried to the new plan.

I have also encountered some RESP plans where there would be hefty penalty not only when you make early withdrawal, but also when you cannot complete all the scheduled contributions.

Going back to this client’s case, since they would lose a very significant portion of the savings upon transfer, I advice them to stick with their existing RESP provider. However, for their other children, I help them to set up another RESP account which have a lot more flexibility.

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