With the increasing popularity of RESPs, there is a huge proliferation of new companies offering RESP products. Like the RRSP, there is a list of eligible investments and more financial institutions have jumped on the RESP bandwagon.
With more products, comes more confusion and clutter. Investors can become increasingly confused about what kind of RESP plan to choose. Lets walk through some of the different types of plans that you can choose from.
Group Scholarship Trust Plan
In a ‘group' or ‘pooled' plan, all contributions are pooled for the benefit of all plan members. Generally, the investor has little to no say as to how the money is invested. Instead, investors buy shares of a pooled investment plan. Since the investments are made for you, the trust is limited in their investment options. These pooled trust plans must invest in fixed income securities such as bonds, T-bills and GICs. This is ideal for the conservative investor.
With respect to group plans, according to the Investor Education Fund established by the Ontario Securities commission, “Salespeople may get incentives like vacations for selling a certain number of plan units. The returns for pooled group plans depend on attrition. If you drop out of the plan, other investors benefit because you forfeit your earnings to the plan. Pooled group plans can be risky because if you miss a contribution, your account may go into default and you may lose your plan membership. If you miss a contribution and are allowed to stay in the plan, you will have to pay interest on the missed payment. The interest owing can grow over time to an amount that is difficult to repay.”
Investors should also be aware of the different fees charged by these group plans. Often enrollment fees are paid up-front and can be relatively high. Finally, be sure to check on the rules for the types of post-secondary education eligible under the RESP that you choose. Sometimes the plan may insist on continuous studies. Scholarship funds may cease if the student takes time away from school.
Mutual Fund RESP Plans
Mutual fund companies, banks, or trust companies generally offer mutual fund RESP plans. You can pick and choose from a variety of mutual funds offered by that company. Most mutual fund companies now offer RESPs so shop carefully.
The main advantage to mutual fund RESP plans is the flexibility. You have the flexibility to make investment decisions. You can move from one mutual fund to another. Unlike the group or pooled plans, you have flexibility to make contributions whenever you want. You can contribute monthly or on an irregular basis.
GIC RESP Plans
GIC RESP plans are mostly offered by banks and trust companies. Similar to the mutual fund RESP, the plans are somewhat flexible. All you have to do is choose the term and you get a guaranteed return over that time period. Most plans will allow you to choose multiple terms and ladder your investments. If you are buying a GIC RESP, make sure you shop around for the best interest rates. You may be surprised how different these rates can be from one institution to another.
The other type of plan is an individual self-directed plan. Sometimes the terminology can be a little confusing because mutual fund RESPs and GIC RESPs can be called self-directed RESPs. In this context, however, the self-directed RESP is much like the self-directed RRSP plan where you can mix and match different types of investments like GICs, mutual funds, bonds, stocks and other qualified investments.
Self-directed RESPs offer the greatest flexibility and choice of investments. However, they will often have an annual trustee fee if your plan does not meet certain required minimums. Self-directed plans are better suited for accounts with more money.
Which plan is best for you?
There is no single plan that is universally superior. It depends on your circumstances and needs. Some of the differences between the varying types of plans are the fees, investment choice, flexibility, and details of the contract. Make sure to take your time and choose the right plan. There's no reason to rush because you can usually carry forward the contribution to the next calendar year.