The RESP can be like a Money Tree for parents (and children) wanting to save for post-secondary education. If you invest your money, you can get:
- A CESG payment can be up to $1000 a year (if you deposit $5000 that year)
- If you are low enough income, you might get a Canada Learning Bond (CLB)
- The A-CESG ( Additional Canada Education Savings Grant) is also available for lower-income
All of this free money is there for the asking. Truly it is like having a Magic Money Tree, however, as with all orchards, you can lose some of your fruit due to worms.
In this case, the worms can be:
- High MER (Management Fee) Mutual Funds, are often hidden under the guise of Balanced Funds.
- Badly performing Mutual Funds, are usually pushed by an “Investment Person” who is making money on the purchase.
- Very low interest paying saving devices (e.g. Bond Funds, Money Market Funds, GICs and HISA).
These financial worms chew into the potential growth of your RESP. Remember that most RESPs can have about a 23-year lifespan. The government stops adding money after the child turns 18, but the money can continue to grow for a while after that unless the worms get in there.
Personal Experience
When I opened my kids’ RESPs (more than 23 years ago), I didn’t know much about investing, so I spoke to my Canada Trust “Investment Person”. This person warned me that this was a short-term investment, where I didn’t want to risk losing money, so I should put the funds in safe Mutual Funds. I didn’t know so that is what I ended up getting a small amount in a Balanced Mutual Fund (MER 2.8%) a larger amount in a Bond Fund (paying 1.2%) and a Money Market Fund (which paid 0.9%).
As time passed, I learned more about investing. I started looking at my, now, TD Mutual Funds and saw the High MER I was paying. I read about the E-series Funds from TD, and saw they had low MERs, so I went to TD to ask how to transfer to these Mutual Funds. You would have thought I was about to fall into an abyss, of the way the investment person reacted. All the needed forms were filled in and changed the RESPs so that I could purchase the E-series funds.
I changed my investment mix, to be more like my other Index Fund portfolios, while still holding all grant money in safe(r) funds (i.e. Money Market funds). I didn’t want to lose the grant money, so I figured they were safe in a Money Market fund. We were wrong, Money Market funds can lose value too.
I lost a great deal of possible growth during that time. We lost it to High MER funds and badly chosen Mutual funds as well.
Don’t let the worms eat away at the growth of your RESPs.
BCM 2020
My view is the ETF’s have far lower MER than mutual funds.
The relatively new “all in one†ETF’s are a good choice for those who do not want to tinker too much for their portfolio. The MER is “all in†and all are <=.25%
Here is a list of the “all in one’s†updated for the latest additions which are from TD. Format may not come through.
GROWTH :
MER
Vanguard Growth ETF Portfolio VGRO 0.25%
iShares Core Growth ETF Portfolio AOM 0.20%
BMO Growth ETF ZGRO 0.20%
TD One-Click Aggressive ETF Portfolio TOCA 0.25%
BALANCED :
MER
Vanguard Balanced ETF Portfolio VBAL 0.25%
iShares Core Balanced ETF Portfolio XBAL 0.20%
BMO Balanced ETF ZBAL 0.20%
TD One-Click Moderate ETF Portfolio TOCM 0.25%
CONSERVATIVE ETFS:
MER
Vanguard Conservative Income ETF Portfolio VCIP 0.22%
BMO Conservative ETF ZCON 0.20%
TD One-Click Conservative ETF Portfolio TOCC 0.25%
Before acting, review your willingness to be a “do it yourselferâ€.
Excellent points, and good choices. To buy these ETFs your RESP will need to be with an actual Trading Firm (e.g. BMO Investorline, TD Directline, etc., ).
I like the idea of MERs as worms. Once I tried to draw picture of a worm eating through an apple to symbolize MERs eating your portfolio, but my artistic skills were nowhere close to being up for the task.
I tried too, it looked somewhat disturbing, so I decided against posting it.