I think we can all agree that there is no greater dream that parents have today for their young children than they one day will go to college or university. Movies and TV tell us that once a kid gets into college, everything will be all right. They will find a good job, marry a good spouse, and be able to provide a good living for their family... and live happily ever after.
One investment product that is sold to parents in Canada to exploit this dream is the Registered Education Savings Plans (RESPs). An RESP is, simply, a tax-sheltered method of saving for a child's post-secondary education. The government of Canada even kicks in 20% matching contribution to get parents to invest.
What a scam.
What parents need to look out for is fees. Two in particular: enrollment fees, and early termination fees. Look at these fees, and look hard. Sit down with a calculator and figure out what will cost you. Don't rely on what the sales agent says, demand a written document. Because nothing a sales agent “says” (that isn't written down) matters. I am tempted to remove the phrase “that isn't written down“ from the last sentence -- nothing a sales agent “says” matters.
Only 25% of Group RESP plans survive until maturity. The rest are cancelled early (either transferred to another company, or the family finances change, or they move out of the country, or any number of reasons...) So when you do your calculations, figure that it is more likely that you will cancel than you will ever see the scholarship. They sell the dream of the scholarship, but the big trap is when you cancel.
Let me give you an example. Let's say you agree to buy 5 units of a group RESP. Each unit pays $1,700 per year at maturity, so your savings should provide $8,500 per year which is what Canadian university might cost in 18 years. A plan such as this might require $100 per month invested towards the plan.
Enrollment fee: 5 units @ $200 per unit = $1,000
At $100 per month, the enrollment fee alone will be 10 months of your investment. After 15 months @ $100 per month, you will only have $500 in savings.
OK, let's say you continue on for 10 years. After that time, you have invested $12,000. But after 10 years, you wish to switch you plan from the original company (who has had lousy customer service during this time) to another company who treats you better. So you intitiate a transfer. After the original company does all the calculations, they send $6,000 to the new company, after all fees have been deducted (annual fee, management fee, transfer fee, termination fee, forfeit of interest earned, etc.).
Do you see? You invest $12,000 expecting a decent annual return, and you end up with only $6,000. So you can expect to lose almost all your money if you terminate within 5 years, and half your money if you terminate within 10 years. Great investment, huh?
But they advertise these things as a great investment - 13% annual return. That's only if you stay til the very end. Despite how bad the company treats you, and how they waste everyone else's money... if you stay til the end, you will get your scholarship and do pretty well. But remember, less than 25% make it til the end.
The real shame is that I have seen at least one case where a customer does stay til the end. And only after the final payment has been made, and it comes time for the company to cut the first check. The company, of course, does an audit of all the payments and fees made to the account, and informs the family that they missed a payment 6 years ago. And although they made up for the missed payment, they did not pay the late payment fee ($10). And unfortunately, it is now too late to pay the fee (as the plan as entered maturity), and so the company will NOT pay the scholarship and simply refund the original investment (minus fees of course). And so you pay money for 18 years, make it til the very end, enroll in univeristy and wait for your RESP to pay out, find out you missed one fee of $10, and at the end of the day, you are worse off than if you simply stuffed the money under a mattress for 18 years.
So, buyer beware. Beware of RESP companies, and their hidden fees. Stick with the big banks if you must. The government should do something about these RESP scams.