The expert

Jay Nash

Jay Nash, vice president and portfolio manager, Roberts Nash Advisory Group, National Bank Financial, London, Ont.

Client profile

William, 39, and Teresa, 38, are married and live near the Alberta oil patch. They have twin girls aged 10. William is an independent contractor providing trucking services to firms in the oil sands, and Teresa teaches high school chemistry part-time. Their combined annual income is $150,000.

The problem

When the kids were born, a sales rep convinced them to enroll in a group RESP. For five years, they met the rigid monthly contribution schedule. But when the meltdown hit, William’s business suffered, so from 2008 to 2012 they were unable to make contributions.

William’s business has recovered, so he and Teresa are ready to resume saving. They’ve hired a financial advisor to help.

Since they didn’t keep up with RESP payments, the couple had to forfeit their enrolment fee, gains on their invested capital, insurance and other fees. Now $2,200 remains in the plan.

Read: Up the risk in TFSAs

They’ve told their advisor they want a flexible self-directed RESP. Even though William’s business is thriving, it faces stiff competition and doesn’t always win contracts, so his income stream remains unpredictable.


Degree of difficulty

6 out of 10. The toughest part is deciding what to do with the residual amount in the group RESP. The complexity of these plans, and the fact that firms typically deal only with clients, make identifying the best option a challenge.

Creating an investment strategy for the remaining contribution period is easier. Tax-efficiency isn’t an issue because the funds are sheltered. But the limited time horizon curbs the types of investments the clients can take on.

The advisor has to determine what to do with the $2,200 in the group plan and formulate a new savings plan for the next eight years, before the girls go to university.

The solution

For the residual amount in the group plan, the couple could either pull the money out now, or wait to withdraw when the kids enrol in university.

Jay Nash, a vice president and portfolio manager with National Bank Financial, notes these plans’ terms are highly complex and vary from company to company. Account statements can be difficult to decipher. Also, group RESP firms prefer to deal directly with clients—not their advisors.

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“In some cases there are ongoing administration fees on top of the enrolment, insurance and other fees,” Nash explains. “But some plans trigger administration fees only with incoming contributions. In the first case, complete withdrawal may be the best option; in the second, leaving the funds in the plan could be better to avoid additional withdrawal penalties.”

Next, the advisor needs to create a strategy to fit William and Teresa’s objectives and shorter time horizon.

Nash suggests tapping unused government grant room. The government matches 20% of RESP contributions, to a maximum of $500 each year.

So for the next five years, they can make contributions large enough to earn both the grant for the current year and the unused grant room from one of the previous years. In 2013 they can contribute $5,000 per child. The first $2,500 gives them the maximum grant of $500 for the current year; the other $2,500 secures the unused grant from 2008. This continues through 2017.

Once they’ve caught up, William and Teresa should scale their contributions back to $2,500 per daughter, per year.

Any additional money they want to set aside for the twins’ educations should be placed in TFSAs, which are less restrictive. With an RESP, they can only withdraw $5,000 in the first 90 days of the drawdown period. This amount may cover tuition, but the girls could incur other expenses, such as residence fees and meal plans. William and Teresa can place the remaining savings in their TFSAs.

Investing the funds

Nash suggests a defensive strategy.

On the fixed income side, “I wouldn’t take on anything riskier than investment-grade corporate debt,” he says.

Read: Pay for the grandkids’ education

Government bonds won’t be in the mix. In fact, Nash says he’s more confident in high-quality corporate bonds than sovereign debt. He suggests the BMO Mid Corporate Bond Index as a low-cost way of getting this exposure.

Balanced mutual funds will round out the fixed income allocation, and provide a stable equity component. Nash suggests the Manulife Monthly High Income Fund, and the Sentry Conservative Income Balanced Fund. The Manulife offering is about 60% equity—half U.S., half Canadian—with a heavy allocation to corporates on the bond side. The Sentry fund has a more defensive equity weighting of 30% to 40%, with just more than half being Canadian.

Tuition rates are rising as much as 6% per year. So Nash suggests an overall equity weighting of 50% in 2013 that will gradually fall to 30% when the twins enter university in 2021. Then, the couple should convert enough investments to cash to cover the first year’s tuition.

“Don’t do this a week before school starts. At the annual review, lay out the cash needs for the year and make sure it’s available well in advance—in April or May if school starts in September,” Nash says.

Read: RESP? There’s an app for that

Client acceptance


William and Teresa miss their money, but knew they’d face penalties for not contributing to the group plan. They were glad, however, to know they’d still have enough to send their girls to school. They placed $5,000 for each twin in self-directed RESPs, and withdrew the remaining funds from their group plan. Once they catch up on their unused grant room, they’ll use TFSAs for additional savings.

Dean DiSpalatro is the senior editor of Advisor Group.