By Keith Damsell
Mutual Funds Reporter
The Globe and Mail
Report on Business
Monday, September 5, 2005

Making sense of how to pay for your child's education will require homework. Registered Education Savings Plans are a complex and daunting business.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Clients want the flexibility. A restrictive group plan is like having one hand tied behind your back.”

"The average Canadian can be overwhelmed," said Michael Geraghty, president and chief executive officer of USC Education Savings Plans Inc. of Mississauga.

For starters, there are 58 competing firms offering RESP products, a list that includes education specialists, banks and fund companies. For self-directed plans, there are literally thousands of funds to choose from. Fee structures range widely.

An August survey by Investors Group indicates savings for education lag the real cost of schooling. Forty-five per cent of Canadian parents have less than $10,000 in RESP savings to send their child to university, funds that may cover only a single year of schooling away from home. And IG found 51 per cent of parents have yet to open an RESP account, sacrificing an annual contribution from the federal government. Prospective students can receive up to $7,200 in contributions from the Canada Education Savings Grant. All that is needed is the child's Social Insurance Number to register.

Canadians have more than $6.3-billion invested in RESPs, reports Investor Economic. Here's a snapshot of the two most popular savings plans, group or pooled plans and the self-directed RESP.

Group or pooled plans

Group plans are the oldest and largest players in the RESP business, administering about $4.2-billion in assets. The sector is dominated by three major providers: the Canadian Scholarship Trust Plan, USC Education Savings Plans and Heritage Education Funds Inc. Each firm operates nationally with a dedicated sales team.

Under the terms of a pooled plan, the contributor buys units to meet education needs based on a long-term schedule. Pooled plans are conservative investors with portfolios dominated by bonds, GICs and treasury bills.

"We don't have Nortel, Bre-X or WorldCom in your child's portfolio," said Jason Maguire, executive vice president of marketing at Toronto-based Heritage. "Why risk your child's future on the equity market?"

Investment dollars are pooled and when the child is ready to begin their post secondary education, he or she receives a sum dependent on the number of units purchased and the investment time frame. Enrolment fees are paid up front and deducted from unit costs. Depending on the provider, all or a portion of fees are paid back in the final year of schooling.

Pooled plans have been criticized as rigid in their structure and higher cost than self-directed plans, a reputation the industry is trying to shake. For example, group providers now market individual plans and will fold cancelled RESP plans into RRSP accounts.

"We are continually fighting the perception we are what we used to be . . . there is far more flexibility today," said Peter Lewis, vice-president of Toronto's CST Consultants Inc.

Self-directed plans

The 1998 introduction of the federal education grant meant an explosion in the number of self-directed RESPs, a do-it-yourself plan that a financial adviser or family member can administer.

The strategy means more freedom of choice but arguably greater investment risk.

The contributor can contribute what they want when they want and choose from a vast array of mutual funds with different investment objectives and fees.

"Clients want the flexibility," said Adrian Mastracci of KCM Wealth Management Inc. in Vancouver. A restrictive group plan is "like having one hand tied behind your back," he said.

A self-directed plan can give parents greater "control and clarity" when it comes to meeting their child's post secondary financial needs, said Michael Morrow of Morrow Financial & Insurance Services in Thunder Bay, Ont.

University cost projections
National average including incidental expenses

SOURCE: USC EDUCATION SAVINGS PLANS INC.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.