The case for RESPs: Industry defends education savings plans

(December 19, 2002) The umbrella group representing Canada’s registered education savings plan providers has firmly rejected a call to scrap the popular program. The RESP Dealers of Canada says a report released last week criticizing RESPs is a step backward for the Canadian public.

University of British Columbia associate professor Kevin Milligan called RESPs “needlessly complex and poorly targeted” in a study sponsored by the C.D. Howe Institute.

“This report really doesn’t address the needs of the average Canadian who finds the RESP to be a very useful way to save for their children’s post-secondary education,” countered Paul Renaud of the RESP Dealers of Canada.

Milligan argued that RESPs are missing the mark, targeting high-income earners, who have already maxed out their RRSP contributions. But Renaud says the evidence suggests the program’s appeal is much wider.

“The average Canadian uses RESPs to the extent of about $750 to $1,000 a year,” Renaud told Advisor.ca. “So to say that the utilization of the program is limited to high-income Canadians is not necessarily the case.”

Stanley Shoolman, who has been selling RESPs for 16 years, agrees. “Most of the families that I have enrolled are not in the higher income category and this is precisely why they started a savings plan,” Shoolman wrote in Advisor.ca’s Talvest Town Hall, adding he was “shocked” by the report.

Milligan’s main recommendation, that RESPs be replaced by RRSPs, is based on academic theory, Renaud says, and has little practical application.

The RESP Dealers of Canada has been lobbying the federal government to make the program more accessible to low- and middle-income Canadians, Renaud says, by topping up the Canada Education Savings Grant (CESG), currently limited to 20% of RESP contributions, to a maximum of $400 a year.

“We suggested that the structure of the grant be changed from a straight 20% across the board to 30% for the first $1,000 for contributions and 10% for the next $1,000,” said Renaud, vice-president with USC Education Savings Plan.

The influential Commons finance committee accepted the recommendation and has proposed that the grant increase be included in the next federal budget.

Since the CESG was introduced in 1998 — with support, Renaud notes, from the C.D. Howe Institute — RESPs have enjoyed increased popularity and are now used by an estimated seven million Canadians.

A survey released today by BMO Mutual Funds suggested that nearly half of Canadian parents are using RESPs to save, and 69% said they would be more likely to contribute to a RESP because of the federal grant program.

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But most advisors aren’t selling the product, Shoolman says, mainly for economic reasons.

“It’s commission generated but the most you can invest in one year is $4,000,” Shoolman told Advisor.ca. After the mutual fund dealers’ cut, an advisor collecting 4% commission on an RESP would end up with $128, he says. “For an advisor, that’s not good money. You need thousands of customers to survive.”

Despite the financial limitations, it makes sense for advisors preparing a complete financial plan for families to consider RESPs, says Shoolman, who works with Children’s Education Trust. “This is an ideal product for advisors because it’s easy to speak to clients about saving for their children’s education,” he says. “It’s a relatively easy sale.”

Shoolman says he’s keen to promote RESPs to advisors and is getting more interest. “Now that we can do multiple licensing, it’s an incentive for someone who has an insurance licence to go out and get an RESP licence as well.”

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What do you think of RESPs? Are your clients asking about them? Join in the conversation already started in the “Free For All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(12/19/02)

Doug Watt