What's the difference between a pooled or group plan RESP and a self-directed RESP plan at a bank?
What about fees and costs? How do they compare?
|With a group plan such as the Heritage Plan RESP, all contributions are pooled and invested together - along with the applicable Canada Education Savings Grant (CESG) contributions for each member.
||However, in a self-directed RESP account at a bank, your money is invested independently from any other account. Also be aware that not all RESP promoters will apply for all available grants, for example some companies will not apply for the additional CESG and the Canada Learning Bond.
By pooling your money with other investors, you can access a wider range of investment options than if you were investing on your own. For instance, a certain government bond may only be available in denominations of $1,000.
On your own, it could take almost a year of monthly $100 payments to reach that minimum. With a pooled fund, your contribution will participate in that investment immediately.
Your child's share of the pooled fund is based on the number of units you have purchased and their value. A number of factors will affect the value of units at the time of maturity, including interest rates and the number of students pursuing post-secondary education each year.
While most bank plans have no up-front fees, there are significant management fees associated with the investments in the fund. These fees are called the Management Expense Ratio (MER) of the fund. The average MER for Canadian bank funds is 2.49% - and is charged regardless of the performance of your investment. In contrast, Heritage Education Funds charges a one time membership fee of $100 per unit. The ongoing administration and management fee is only .56%! What about investment performance? Which type of plan does better?
Because RESP plans have a limited time period in which to grow (up to 18 years), you want to make sure your savings work hard for you. Most plans invested with a bank, trust company or life insurance company, or even through a financial advisor, are invested in stocks, bonds and mutual funds. As these tend to be more volatile investments, your funds run a higher risk of diminishing if the market happens to be down at the time your child enters post-secondary school. As well, the higher fees associated with these investments tend to significantly reduce the potential for returns. Other RESP enhancements:
These are other key advantages to pooled funds. In a self-directed plan, the plan matures when the child reaches age 18 and all the money in the plan is paid out. In the Heritage pooled plan, you may choose from several options for paying the money out - in some cases it is paid out over several years, for each year of schooling. The funds which are not yet paid out continue to earn interest, in an "enhancement fund" which students may also benefit from. As well, contributions unclaimed by members after 3 years beyond the termination or maturity of their plan are added to the value of the plan. Of course, none of these benefits are possible in a self-directed RESP plan. Contribution insurance:
As an option, some plans offer contribution insurance. For a small additional fee, you may purchase insurance that will continue to make the contributions to the pooled RESP plan in the case of death or disability of the contributor. Investment safety:
The Heritage Plan RESP invests your contributions in safe, low risk investments like Guaranteed Investment Certificates, Federal and Provincial Bonds, Corporate Debt Securities, Term Deposits, Government Treasury Bills, Mortgage-backed Securities and Variable Rate Securities. The fund is invested according to guidelines of National Policy 15, which regulates RESP providers of pooled funds. Safe investments are nice, but don't they bring lower average returns?
Considering the impact of fees and management expenses, as well as the benefits of attrition through the pooled plan, pooled plans such as the Heritage Plan RESP generally returns superior investment results with very low risk.