A study prepared for the federal government on registered education savings plans has served up a fresh round of criticism of a particular type of RESP, the group scholarship trust.
Scholarship trusts were targeted by the Ontario Securities Commission several years ago as a result of their business, sales and disclosure practices. The sector has reformed itself to the point where its members are no longer receiving direct scrutiny from the OSC. But the study, written for Human Resources and Social Development Canada by Informetrica Ltd., offers another reason for parents to think carefully about using scholarship trusts to help their children pay for university or college.
Simply put, people forfeit the financial benefits of using an RESP if they start up a scholarship trust and then bail out before it matures. "In all, there is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation," the study says.
There are two ways to take advantage of RESPs, which are an essential savings tool because Ottawa matches contributions with grants of as much as 20 to 40 cents per dollar invested. One is to open an individual or family plan with a bank, credit union, securities dealer or financial planning firm. Another is to use a group scholarship trust, which is a pool of money invested conservatively in things like bonds and guaranteed investment certificates. In both cases, savings are ultimately channelled to students through what's known as an Education Assistance Payment, or EAP.
The Informetrica study says scholarship trusts do some good in that they actively market their products and encourage people to save so their kids can pursue a post-secondary education.
"However, [scholarship trust] plans also cause some savers to lose money and deny EAPs and government subsidies to students who are entitled to these benefits under government rules," the study says.
The structure of scholarship trusts is partly at issue here. Participants must pay an enrolment fee and make contributions according to a preset schedule. Someone who closes a plan before maturity will forfeit the enrolment fee plus any investment gains and government grant money. Some of the forfeit money may then be distributed to people who stay in their plans until they mature.
A similar danger applies to someone who is a member of a scholarship trust that is shut down by the providers. The study said this happened to 1.9 per cent of group plans in 2006, which suggests people should investigate the track record of any scholarship plan before they contribute to it.
The RESP Dealers Association of Canada, a group representing scholarship trusts, has issued a statement saying the study's comments and conclusions require further consultation. The group was to meet today to discuss the report as a lead-up to a meeting with Human Resources next month.
The government commissioned the Informetrica study more than a year ago, in part as a response to complaints from RESP holders. The study highlights three types of complaints, two of which are especially applicable to scholarship trusts. One is that people can withdraw their contributions from a plan and receive much less than they paid because of high upfront fees. Another is that people cannot transfer their investment income from one plan to another.
A third complaint has to do with problems in getting specific courses of study recognized as being eligible for EAP money.
One area where scholarship trusts seem to have improved is disclosure of matters such as fees. The Informetrica study said the industry is now on par with the broader financial sector for the most part, although it still found scholarship trust prospectuses to be thick and unwieldy.
Another shortcoming was in corporate governance. At two scholarship trusts, a majority of directors had financial ties to a division of the trust. The study says the standard for good governance is that independent directors should form the majority of every board.
The study offers three recommendations for improving RESPs, one of which is for the government to work with the RESP industry to raise awareness of how plans work and how it's possible that members will end up with less money than they expected. Another recommendation is for the government to establish minimum corporate governance standards for RESP providers.
A final recommendation calls for Ottawa to talk with the financial sector about doing more to promote the benefits of RESPs. This is aimed at banks, brokers and other non-scholarship RESP providers, which were deemed to be too passive in marketing RESPs (reason: They're expensive to administer).
The RESP Dealers Association took some comfort from this backhanded endorsement in the study. "We are particularly pleased that the authors noted the degree to which group RESP providers promote savings plans and associated government grant programs to consumers far more pro-actively than do other financial institutions."
Where the RESP dollars are
There was $25.5-billion sitting in registered education savings plans at the end of last year. Here's where the money has been invested:
| Type of Financial Services Business | Share |
| Investment banking and securities dealers | 41% |
| Group scholarship trust plans | 29% |
| Portfolio management and investment advice | 16% |
| Personal banking industry | 12% |
| Other | 2% |
THE GLOBE AND MAIL
SOURCE: HUMAN RESOURCES AND SOCIAL DEVELOPMENT CANADA
